Archive for June, 2010

Market Hits Bottom of Trading Range

Tuesday, June 29th, 2010

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It was one of those days.

News of a slowing economy in China sent markets around the world down today, and you can see that we dipped slightly below the bottom of the trading range as depicted by the green box but were able to close just above the critical 1040 level.

Tomorrow will be a key day as we won’t have news on unemployment until later in the week, so absent news to drive the market its in the “hands” of the computers trading programs that have been whipsawing the indexes of late.

I’m going to be reviewing some market scans tonight to see if anything presents itself that would lead me to change my mind that the start of earnings season next week is the real key to the future of the market.

Return to the Trading Range

Monday, June 28th, 2010

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In our internal meetings I advised everyone that I was looking for the market to make an interim high in the pink box, and that we should use that to raise some cash. You can see that we had one day of trading where the market moved into the box very briefly – but moved back into the area of the green box.

I have to say, this is one weird market. The best that I can discern is that the investing public is waiting for earnings season to start before it makes the move up to the pink box (1140 area on the S&P 500 Index). If earnings do not come in as anticipated, look for a move downward out of the green box area toward 850 or 900 on the index.

The economic numbers that have been announced recently all point to a slowing economy. This has investors questioning whether equity securities are the place to be – or whether something that pays a stream of income might be better.

As readers of this blog know, we have been under-weighted in equities with an allocation to equity equivalents (high yield bond and floating rate loan funds) and to some government bond funds. As the market pulled back, we took some out of our fixed allocation to put into the market based upon improved valuations.

As we wrote, we anticipated a move up to the 1140 area – even if just a technical one – as market valuations had gotten to well below average levels. What we will be watching for is whether the recent softness in the economy will pick up speed. If that is the case, the current 12+ forward P/E Multiple is likely to drop further. If earnings season shows that economic activity is better than the indicators show, then the 12+ forward P/E Multiple will likely move toward the 14+ historical average.

Within the earnings reports that start in the next few days, we will be looking for signs that earnings come from the US and Europe Vs. Asia and other developing markets with better economic fundamentals than G-7 countries.

Our thesis is that the economic momentum in Asia and South America with comparatively little national debt will drive investment returns for a generation to come, while the economic malaise in the US/Europe/G-7 (less Canada, Australia, and Switzerland) will keep a lid on economic activity and earnings growth in those countries.

So, for now, we are doing our research and reviewing the earnings streams of companies derived from various economically vibrant areas of the world. This is strategic since P/E = M, and if M (the market multiple) is in a downward trajectory, the only way mathematically to make P (the price of your investment) increase is for E (earnings) to increase.

Economic growth is the path to earnings growth, and that will be found in areas outside the G-7 (less Canada, Australia, and Switzerland).

Things in the broader US market will continue to be cloudy until earnings season. As things become clearer, I’ll keep you informed here on the blog.

The World Just Moves Faster Now

Tuesday, June 15th, 2010

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Yesterday I wrote that the green box on the chart above would tell the tale for the market. I didn’t think we’d move up through the top of the box AND the 200 day moving average so quickly, but we did.

It looked like a lot of people were caught on the wrong side of the market (lots of short positions that had to be covered), thinking that we’d hit the 200 day moving average and be turned back again as has been the case several times in the past couple of weeks.

However, today was the day to break higher – but the volume looks pretty anemic, just fractionally higher than yesterday’s down day.

From a technical indicator standpoint, the MACD at the bottom of the graph has decidedly broke into a positive move. It is still below the 0 center point, and it would need to move above 0 for this to show we have traded our way into an intermediate term up-trend (that elusive Summer Rally), but we will take the positives when we can get them after the ugliness that was May.

With the broad market truckin’ higher, I thought I’d give you an update on the purchases we made in the “Buy Zone” (the purple box on the graph above) that I described a few posts ago. As of close of business today, we are up 1.47% on those buys that we started at the beginning of May compared to the S&P 500 that is down 5%.

So, we are pleased with the execution of our plan.

The next critical level is the blue 50 day moving average. We’ll see if the momentum from crossing the 200-day line can get us there. Expect us to retest the 200-day average – its a typical technical move to have a down day that settles around the 200-day line – if the 200-day line holds, we can then try for the 50-day line. More on that, though, as things progress.
Mark

The Breakout Will Govern The Market

Monday, June 14th, 2010

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You are probably familiar with the chart above if you’ve been reading the blog for the past six weeks.

Initially, I drew the blue box and told you we had determined this was a topping pattern and that we were using that as a selling point to raise 10% to 15% cash in client accounts.

Then, when the market fell, I drew the purple box and told you that this range was where we saw value (at a P/E of 12 on the S&P 500, a below average level) in the market and were adding to positions.

Now, I’ve drawn the green box on the chart to show you how the market is in transition. You’ve seen that over the past several trading sessions (as shown by the Newsweek Indicator saying that the Euro was history – fyi, our stock market trades in conjunction with direction of the Euro at this time as both are “risk” assets) that the stock market has solidified just a bit.

What I also see here is a range that has been erratic within a tight range of 1110 and 1040 on the S&P 500 index. Its possible we will move within this box for awhile, but eventually we will break either up through it or down through it. But whichever way it breaks, that will likely be the direction of the market for at least a several session move.

Gut feeling: we will break to the upside once earnings season hits and have a Summer rally that, while maybe not a once in a life time investment opportunity like the March 2009 post-crash lows, could provide an opportunity to move up toward the upper end of our trading range. But that is still over two weeks away.

A lot can happen to spook investors and drive down prices until something fundamental like earnings become known. So, we are trading carefully and not chasing the market at the top of the green box.

What will be of particular interest is earnings from multinationals that do business in Europe. Pre-announcements of companies that have a significant business presence in Europe is that the negatives are being touted much wider than they really are – that economic momentum is not as bad as TV would have you believe.

But, that is all just speculation until the actual numbers are announced. Until then, keep an eye on the green box – if we break out, the direction will give you the interim direction of the market.

Into the blue, after the money’s gone…only David Byrne could tell us what that means…

Mark

London’s Financial Times Weighs In

Thursday, June 10th, 2010

You probably read yesterday’s rant that I wrote when smacked upside the head with the US Treasury’s graph of the national debt.

Well, one of the world’s most respected newspapers has weighed in on it, and they blame that most-damaging of economic schools of thought, Keyensian Economics.

Being from Illinois and attending an Illinois-based university, we were taught Keynes compared to the Chicago School of economic thought. The Chicago School (also known as Classical Economics) always made more sense to me. Clearly, the FT writer in the story below buys into the Classical School (or perhaps into the Austrian School, who knows) – its clear he points out the fallacies in the actions that our government adopted under advice from advisers/believers in the Keyensian School.

You can’t spend your way to prosperity – we should have learned that over the past decade, but clearly not. It will be an expensive lesson to go back to the Clinton-Gingrich years of balanced budgets and matching expenses with revenues, but it has to be.

Time to plan for post-Keynesian era

By Jeffrey Sachs

Published: June 7 2010 22:22 | Last updated: June 7 2010 22:22

Mainstream Keynesian economics is facing its last hurrah. The global fiscal stimulus championed last year by the Obama administration is coming undone, repudiated by the same Group of 20 that endorsed it last year. Now, against a backdrop of a widening sovereign debt crisis, we need to abandon short-term thinking in favour of the long-term investments needed for sustained recovery.

Keynesian stimulus was premised on four dubious propositions: that it was needed to prevent a global depression; that a short-run fiscal boost would jump-start the economy; that “shovel-ready projects” could combine short-term cyclical and long-term structural agendas; and, last, that the rapid rise of public debt occasioned by stimulus need not be a concern. That these ideas were so widely accepted was a testament to the perennial political attractiveness of tax cuts and spending increases.

In fact, the ubiquitous references last year to the Great Depression were glib; the policymakers had panicked. Adroit central banking could and would prevent depression. The hastily assembled stimulus packages were a throwback to naive Keynesianism. The relevant fact was that the US, UK, Ireland, Spain, Greece and others had over-borrowed for a decade, so a decline in consumption after 2007 was not an anomaly to be fought but an adjustment to be accepted.

Certain counter-cyclical spending is vital on social grounds. But stimulus measures such as temporary tax cuts for households or car scrappage schemes were dispiriting wastes of scarce time and money. They reflected a hope that a temporary fiscal bridge would carry us back to consumption and housing-led growth – a dubious proposition since the old “normal” had been financially unsustainable.

The talk of a green recovery, in which the fall in consumer spending would be offset by investments in sustainable energy, made sense and still does. Yet it was quickly undermined by the politicians’ insistence on “shovel-ready” projects. The shift to sustainable energy systems is a vital but long-term task. It could never be a short-term jobs programme. Maybe in China there are shovel-ready projects of sufficient scale, but not in the US.

Taking office in January 2009, President Barack Obama inherited the largest peacetime budget deficit in US history. By increasing it further, he made it his rather than his predecessor’s. He and his advisers ignored one of the key insights of modern macroeconomics: that the result of fiscal policy depends not only on current taxes and spending but also on their expected trajectories in the future.

The US was not in a credible position to raise an already enormous deficit “temporarily” because the prospect for future deficit cutting was and remains extremely clouded. America has absolutely no consensus on how to restore budget balance, as it is trapped between a federal government that provides too few public investments and services and a public that is almost maniacal in its opposition to tax rises. One cannot build a credible long-term fiscal policy by starting off in the wrong direction, with larger rather than smaller deficits.

Now we face a world economy with weak aggregate demand in the US and Europe, bulging budget deficits, sovereign debt downgrading and consumers unwilling to borrow. Governments are fighting for market credibility via draconian cuts in spending. This too is the wrong approach. We should avoid a simplistic austerity to follow the simplistic stimulus of last year. Here are some suggested guidelines.

First, governments should work within a medium-term budget framework of five years, and within a decade-long strategy on economic transformation. Deficit cutting should start now, not later, to achieve manageable debt-to-GDP ratios before 2015.

Second, governments should explain, and the public should learn, that there is little that economic policy can do to create high-quality jobs in the short term. Good jobs result from good education, cutting-edge technology, reliable infrastructure and adequate outlays of private capital, and thus are the outcome of years of sustained public and private investments. Governments need actively to promote post-secondary education.

Third, governments must of course also ensure social safety nets: income support for the poor, universal access to basic healthcare and education, a scaling up of job training programmes and promotion of higher education.

Fourth, governments should steer their economies towards needed long-term structural transformation. External-deficit countries such as the US and UK will need to promote exports over the next few years, while all countries must promote clean energy and new transport infrastructure.

Fifth, governments and the public should insist that the rich pay more in income and wealth taxes – indeed, a lot more. The upward re-distribution of the past 25 years has made our economies into extravagant playgrounds for the super-wealthy. Politicians of both the mainstream left and right in the US and UK have fawned over those who pay their campaign bills in return for low taxation. Even playgrounds should collect tolls – when it is billionaires in the sandpit.

We need, in sum, to reset our macroeconomic timetables. There are no short-term miracles, only the threat of more bubbles if we pursue economic illusions. To rebuild our economies, the watchword must be investment rather than stimulus.

The writer is director of The Earth Institute at Columbia University

Asian Strength

Thursday, June 10th, 2010

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Last night I wrote that we were waiting on the stock market to make a turn to invest in the stronger economies in Asia, Canada, Australia, et al.

I didn’t think it would be so quickly that we’d get news out of China that their economy is likely to hit that ever-elusive soft landing (an economic slow down that avoids rampant inflation but that continues economic growth). The news today indicates that they may have actually engineered it – their exports were up 50% indicating that the European problems so prevalent in the news are not negatively impacting economic activity on a world-wide basis as most economists think, and that their bank loan growth has slowed to 21% Y-O-Y which is higher than they want but definitely down from past readings.

This good news has sent the stock market in general up > 2% so far today, but the sorts of Asian-centric investment I mentioned in yesterday’s post are up even more: Norfolk Southern (transporter of commodities that ship to Asia) up 3.9%, Australia ETF up 4.76%, Canadian ETF up 4.97%, Brazil ETF up 3.73%, Mosaic (fertilizer imported for Asian Agriculture) up 4.96%, National Oilwell (Chinese oil imports were up 4.5% last month) up 4.18%, Owens Illinois up 4.45%. The list goes on.

So, one day does not a trend make – but it can mark a turning point. It will certainly take more than a couple of positive economic reports out of China to make a change in the recent correction-trend.

As things progress, I will keep you informed of what we are doing and how it is working – so in that vein, I want to update you on the status of the buys that we made in the “Buy Zone” that I showed you on a graph a few posts ago. You’ll recall that I wrote that our plan was to put some cash to work in some of our favorite names when stock market activity was within the purple box that I drew and named the “Buy Zone.”

Today, those trades on average are up 2.57% while the market is up 1.84% at this second, or about 40% better than the market. Focusing on the growing economies and those companies that benefit from economic growth pays off.

Mark

Total Public Debt Forecast

Wednesday, June 9th, 2010

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The US Treasury released its forecast of US Public Debt and the graph above. I am stunned to say the least by the amount of debt we are taking on due to spending money we don’t have.

The US GDP for 2009 was $14.2 trillion (the chart and this fact are from Tyler Durden’s blog but taken from a US Treasury report) yet our debt is going to grow to $20 trillion in five years and a doubling from 2008.

The current weakness in the Euro Vs. the Dollar will subside and the Dollar will be in the trash heap. An economy cannot spend at this pace while revenues are down. Europe understands this and across the board they have begun to cut spending. We have to do the same or we will be in dire straights.

As the current weakness in the stock market plays out, smart money will flow to where economic fundamentals reflect: sound economic policy and economic growth — Canada, Australia, Switzerland, Singapore, South Korea, Vietnam, Taiwan, India, Brazil, and China. The US, Europe and Japan will be burdened with debt for an extended period of time and have slow economic growth.

If we apply a VERY GENEROUS 2.5% growth rate to US GDP, we come up with 2015 GDP of $17.28 trillion, or nearly $3 trillion in national debt greater than GDP. If we use a MORE REALISTIC 1.5% growth rate for GDP, 2015 GDP is only $16.45 trillion. This ratio is worse than Greece’s today – and we’ve seen what happened in Greece.

If you are managing your own portfolio, look to commit money to the strong economies either through ETF’s, ADR’s of companies in those economies, or domestic multinationals that derive a significant share of their revenues in those economies. That is our plan – we are developing our Buy List right now and will commit funds we currently have in cash/short-term bonds when the time is right.

Maybe Congress needs to take the following advice…

Mark

The Newsweek Indicator Strikes Again

Tuesday, June 8th, 2010

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Newsweek has an uncanny ability to publish something at the peak or trough, just as the trend comes to an end.

Is that the case today? No one can be sure, but the Euro was up 2% today.

Long live the Newsweek Indicator!

Mark