Archive for July, 2010

Upon Further Review

Thursday, July 29th, 2010

I spent several hours traveling yesterday and was pondering the blog post I made prior to leaving town.

The increase in rail traffic could also reasonably be explained by China having successfully achieved an economic soft landing and avoided a recession from the monetary tightening they’ve employed.

The basis for this is that the Baltic Dry Index has stopped it’s contraction and that their stock market is at a two month high as long time readers know the BDI is an index that tracks shipping to Asia and is a good early indicator of economic activity there.

Our increased rail traffic might just be due to goods moving to the coast the be loaded onto ships bound for China.

Well enough of this. The markets opened positive so I’m getting away from the iPhone -it’s tough to blog by phone- and I think I’ll head to the pool weigh a book that’s been on my list for a long time, The Confederacy of Dunces.

I’ll be back at the blog as things in the market warrant it.

Mark

Hidden Economic Activity

Wednesday, July 28th, 2010

rail-traffic

I really like this chart. It is supplied by a hedge fund manager I read, and it is pretty telling.

Rail traffic is booming which implies that the US economic recovery is stronger than the leading indicators show (many indicate a new recession looms ahead). Increased rail traffic indicates increased manufacturing. If manufacturing is increasing, it is due to orders for goods that need to be shipped via railroad. That implies that there is economic activity that isn’t being picked up by the government’s statistical data collection methodology.

It gives me some comfort that increased rail traffic indicates that we won’t see a double dip recession, but rather just a slowing to the 1.5% GDP Growth level I’ve written about here in past posts. In those posts, I noted that I thought we would see a slowing of economic activity as the Fed reduced the monetary stimulus from its quantitative easing program (ie, its a fancy way of saying the Fed printed money and injected it into the financial system by buying investments on the open market).

The 1.5% was derived from reducing normal 3% economic growth due to:

1. structurally high unemployment that keeps an above average number of consumers from spending at previous levels

2. increased taxes (States will have to increase taxes to cover deficits, look for a serious discussion of a VAT tax after elections, increased payroll taxes to pay for health care, increased income taxes on those making > $250K who also happen to be the people that hire employees, increased taxes on dividends and capital gains, increased corporate income tax rates, etc — don’t get me wrong, we will likely need higher taxes to pay down the national debt, but we need to reduce our spending at the same time)

3. interest rates will likely have to be higher over time as our national debt heads toward $20 trillion

4. increase government regulation that requires resources to be spent on compliance and not on production

5. the continuing residential real estate problems which some statistics show is getting better and some show is going to drag along the bottom for some time to come

So, I think we are in the process of slowing to that 1.5% level, which will at some point drive the stock market back toward the low end of our trading range. Right now, corporate earnings being better than expected are driving stock prices higher – look for the move to 1140 on the S&P 500 before we either move into a new trading range or move back toward the previous trading range (you can scroll back to earlier blog posts, fin the graph with the boxes, and click on it for a current version of the graph to see how we have broken out of the green box and are moving toward the pink box near 1140).

I’ll be back on the blog with more on that as we move through earnings season. Until then, I’ll keep you in the loop on the things I am watching that give me a feel for where things are headed.

Mark

The Rollercoaster Continues

Thursday, July 22nd, 2010

sp-500-today2

The chart above shows the past 10 days on the S&P 500 Index. I’ve drawn a pink line on the chart showing the market’s attempt to break above the 1100 area, only to have the bears take a stand and push the market back down.

This has been a very volatile period, with big swings up and down that have had investors on a sentiment rollercoaster. The key to this will be if the bulls can push the index up through the 1100 resistance level. If so, and if earnings continue like those announced this morning – we can see a move to the 1140 area that should cause the market to move into a trading range pending further news.

Earlier in the earnings season, I gave you my view on this blog that based upon the Harpex Shipping Index which tracks movement of goods across the Atlantic, we would likely be surprised on the upside by business activity in Europe in spite of all the negative news on the Euro. Well today, we had that surprising news: European PMI (an index that tracks manufacturing activity) was well ahead of expectations; Retail Sales in the UK were ahead of expectations, particularly in big ticket electronics; and as more and more banks pass European stress tests, investors are believing that the debt crisis is contained.

Earnings overall have been good so far this earnings season, in spite of the fact that the minority that have been less so are getting so much press. Thus far, 85% of companies reporting earnings have been ahead of analyst expectations with average earnings growth of 55%. This is the sort of thing that makes stock markets go up.

I really wanted to include the Red Hot Chili Peppers official video version of this song from the Beavis and Butthead movie, but upon seeing it again after all these years I decided it was a bit edgy even for this blog. If you’d like to view it yourself you can easily find it on YouTube.

Mark

Purchases

Tuesday, July 20th, 2010

sp-500-today

In the blog post the other day, I mentioned that I thought we would see a buying opportunity if the market pulled back to the 1055 level. As you can see on the chart above, the market did in fact pull back to that level at the open this morning after the initial reading of earnings reports from IBM, Texas Instruments, Johnson & Johnson, and Goldman Sachs disappointed investors.

We used the opportunity to buy some Intel, Old Republic, Hawk Corp, Petrohawk, and Novo Nordisk. As investors digested the earnings reports, they appear to have come to the conclusion that maybe the forward projections are not as dire as first read, and they have moved the market back higher to the point where we are positive on the day.

This is one of the craziest markets I’ve ever been a part of and it requires that you pick you entry and exit points with care. Stay tuned to the blog and we’ll do our best to help you understand the points we choose and our reasoning behind them.

Earnings season has been rocky so far, but probably better than anticipated. We just seem to be getting some sell-the-news reactions that started with Intel late last week. The goal is to survive and make money in spite of the irrational reactions by the fast money crowd.

Mark

Invest What You See

Sunday, July 18th, 2010

sc3

A few mediocre earnings reports and a disappointing consumer sentiment survey knocked the stuffing out of the market on Friday. It is easy to see why that level was going to be trouble if you look at the horizontal volume bars on the left side of the chart.

You’ll notice the overpowering green portion of the volume bar on the left side of the chart right at Friday’s turning point – this represents a lot of previous buyers at that level who heard the news and decided to cut and run. In other words, they exhibited normal behavior – they rode their investment down during the swoon, got back to break-even, heard the mediocre earnings news and bad consumer sentiment, and sold in order to get their money back. Nothing surprising there.

Technically, however, there are some worrisome aspects to this market, in spite of the early positive earnings reports. I’ve drawn a number of lines on the chart above that I’d like to discuss, but primarily the two orange line have me concerned.

You’ll notice the orange lines are indicative of a series of lower highs and lower lows on the index. This generally indicates that the bears are winning the battle and overpowering the bulls in each standoff. Additionally, this is confirmed by the relative strength indicator dipping below 50 and the MACD indicator not being able to move above 0 in the recent six-day rally.

I’ve also drawn a series of blue retracement lines that mark the late June to early July swoon in the index. Its is not uncommon and in fact can be healthy for the index to recover from a low to a high and then pull back 1/2 way or so before it makes the next move higher. You can see that we moved more than half way back, so my best guess – until we see Monday’s action – is that we’ll move back to the 1055 level before news of positive earnings turns us higher again and we move up toward the 1140 level.

And finally, the diagonal purple line at 1040 is really the last level of support if we don’t get positive earnings surprises fairly soon and the 1055 support level doesn’t hold. You’ll also notice that the volume bar on the left at 1040 is all red meaning we have only previous sellers at that level. That makes 1040, along with the other instances where the market reversed at 1040, a fairly strong support level.

If the market backs up to 1055 and especially to 1040, we’ll be putting some cash into the market that we continue to hold in client accounts in anticipation that later earnings announcements will surprise on the upside.

Remember to invest what you see based upon what is happening in the market. And I see a temporary retracement based upon a lumpy economic recovery that is showing up in uneven earnings growth (not so hot in the financials but much better in export driven industrials), but that will ultimately turn higher as other multinational companies report (you can see it in the graphs of the TED Spread and the Harpex Shipping Index from an earlier blog post that business activity in Europe should lead to positive earnings surprises for our multinationals).

We’ll continue to watch the charts for signs of investor behavior that we can use to guide the timing of our actions. Be sure to return to the blog to see what we are doing and the logic behind it: there’s so much confusion and we are here to help.

Mark

Long Term Trend Being Tested

Wednesday, July 14th, 2010

Long Term Trend

I periodically post this chart of the long term trend of the market. It is the monthly chart of the S&P 500 Index compared to the 200 day moving average. You can see that we are bumping up against the 200 day average and that historically whenever there are crosses (see the pink circles), we have a trend that lasts for a bit.

If we see a cross of the 1100 level on the index, we are likely to move higher for several weeks.

The catalyst for the change in direction has definitely been earnings surprising to the upside. We’ve had some big ones, but maybe the key for the entire earnings season is tomorrow: JP Morgan. It is the go-to bank on Wall Street, one that was able to weather the financial collapse, didn’t need TARP but was forced to take it, and paid it back once it was allowed to do so.

If they have a positive earnings announcement tomorrow my best assessment is that we’ll see the bulk of earnings be better than anticipated. I think investors will continue to move the market higher in the near-term through earnings season – and we will likely have an earnings hang-over in August that may give back some of the gains, but that will be a reassessment point for us to determine where the market is headed.

I know one thing, after two months of the market grinding lower, these last several days of positive earnings and market action sort of feels like the first time in a long time that investors have a positive feeling toward investments: positive sentiment = higher prices.

I first saw Foreigner when I was 16 at the Assembly Hall. I came to town with the girl I was seeing (yeah, this was “our” song – how teenager is that?) and we went to Garcia’s on Green Street – it was a big deal because they served us beer and we thought we were hot stuff. Since I turn 49 tomorrow, I’ve been in sort of a reflective mood and Foreigner is playing on my stereo while I write this blog and prepare for various board meetings tomorrow.

Enjoy your week and dig out those Foreigner LP’s, 8-tracks, and maybe even those new fangled CD’s. Give them a listen and remember what you were doing and with whom 30+ years ago. And, if you weren’t born yet, just wait until after tomorrow to tell me.

Mark

Earnings Season Kicks Off, Plus the Story You Haven’t Heard

Monday, July 12th, 2010

Earnings season kicked off tonight with Alcoa reporting better than expected earnings and stronger demand. Was it from a stronger than expected Europe? A China that has engineered a soft landing? Not sure as I won’t look the report over until tomorrow. Alcoa is not the biggest company in the world, but they are always the first to report which makes them one that everyone watches.

Even more important is that CSX, the rail line, reported much stronger than anticipated domestic demand. Maybe that double dip recession everyone seems to have written into our future is not as much of a sure thing as everyone has us believing.

But its early in earnings season and two reports do not a season make.

However, much more interesting are these two stories from AP and Bloomberg out of China of the downgrade of the US Dollar from AAA status to just 13th most safe currency and treasury debt in the world. This is a fairly critical story, and one that you aren’t hearing much about yet, but keep an eye on it as it could have as-yet unknown impact on foreign currency relationships.

Chinese credit firm says US worse risk than China
By Joe Mcdonald
July 11, 2010

BEIJING (AP) —
A Chinese firm that aims to compete with Western rating agencies declared Washington a worse credit risk than Beijing in its first report on government debt Sunday amid efforts by China to boost its influence in global markets.

Dagong International Credit Rating Co.’s verdict was a break with Moody’s, Standard & Poors and Fitch, which say U.S. government debt is the world’s safest. Dagong said it rated Washington below China and 11 other countries such as Switzerland and Australia due to high debt and slow growth. It warned the U.S. is among countries that might face rising borrowing costs and risks of default.

The report comes amid complaints by Beijing that Western rating agencies fail to give China full credit for its economic strength, boosting borrowing costs — a criticism echoed by some foreign analysts. At June’s G-20 summit in Toronto, President Hu Jintao called for the creation of a more accurate system.

Dagong, founded in 1994 to rate Chinese corporate debt, says it is privately owned and pledges to make its judgments impartially. But in a sign of official support, its announcement Sunday took place at the headquarters of the Xinhua News Agency, the ruling Communist Party’s main propaganda outlet.

Dagong’s chairman, Guan Jianzhong, said the current Western-led rating system is to blame for the global crisis and Europe’s debt woes. He said it “provides the wrong credit-rating information” and fails to reflect changing conditions.

“Dagong wants to make realistic and fair ratings,” he said.

Beijing has more than $900 billion invested in U.S. Treasury debt and has appealed to Washington to avoid hurting the value of the dollar or China’s holdings as it spends heavily on its stimulus.

Dagong’s report covered 50 governments and gave emerging economies such as Indonesia and Brazil better marks than those given by Western agencies, citing high growth. Along with the United States, some other developed nations such as Britain and France also received lower ratings than those of other agencies.

Dagong rated U.S. government debt AA with a negative outlook, below the firm’s top AAA rating. It warned that Washington, along with Britain, France and some other countries, might have trouble raising more money if they allow fiscal risks to get out of control.

“The interest rate on debt instruments will run up rapidly and the default risk of these countries will grow even larger,” its report said.

Dagong said it hopes to “break the monopoly” of Moody’s Investors Service, Standard & Poors and Fitch Ratings. Their reputation suffered after they gave high ratings to mortgage-linked investments that soured when the U.S. housing market collapsed in 2007.

Manoj Kulkarni, head of credit research for SJS Markets in Hong Kong, said that despite the possibility China’s government might try to influence Dagong’s decisions, there is room in the market for a Chinese agency because Western firms’ credibility is badly tarnished.

“As long as there is another opinion and it is backed up, I don’t really think a China-based company will have an incentive to rate, say, Indonesia any better than a U.S.-based rating agency,” Kulkarni said.

“If it comes to Chinese government-related companies, maybe there might be a conflict of interest, and investors would have to be aware of that fact,” he said.

Chinese leaders have appealed repeatedly to Washington to safeguard their country’s U.S. holdings and avoid taking steps in response to the global crisis that might weaken the dollar or the value of American assets.

Dagong rated China AA-plus with a stable outlook — higher than Moody’s A1 and S&P’s A-plus — due to rapid growth and relatively low debt.

Ahead of it were seven countries including Switzerland, Australia and Singapore that received the top rating of AAA, the same as those from Western agencies. Canada and the Netherlands also ranked above China…

Bloomberg
China Wins Higher Rating Than U.S. in First Ranking
July 12, 2010

July 12 (Bloomberg) — A Chinese company gave its own government a higher debt rating than the U.S., U.K. and Japan in the nation’s first sovereign ranking because of widening deficits in the developed world.

Dagong Global Credit Rating Co. rated U.S. government debt AA with a negative outlook, and China AA+ with a stable outlook, the company said in a report covering 50 nations published on its website. The yuan-denominated rating is higher than Japan’s AA- and the same as Germany’s, Beijing-based Dagong said…

Dagong’s rating report gave “markedly” different valuations to 27 countries compared with those of Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, the statement said. The euro has slumped 12 percent this year on concern that Europe’s fiscal crisis may expand beyond Greece and Spain to Germany and France.

“This marks a new beginning for reforming the irrational international rating system,” Chairman Guan Jianzhong said in a statement. “The essential reason for the global financial crisis and the Greek crisis is that the current international rating system cannot truly reflect repayment ability.”…

Don’t be blinded by the main stream media – the dollar bear market is alive – it was just sidelined by the sovereign debt crisis in Europe.

Mark

Earnings Season Is Upon Us

Friday, July 9th, 2010

In recent posts, I’ve told you that earnings season will determine if the stock market breaks up or down from our trading range:

sp-500-boxed

As you can see, we have rallied up about half-way from the bottom of the trading range identified by the green box on the chart. We rallied in anticipation of good earnings, but there is not a crystal ball. There is, however, two indicators I follow that have led me to say to you that we MAY have seen the lows in the market for the year (subject of course to all the many issues that could raise their ugly heads).

The big thing that weighed on the market since April was the impending bankruptcy of Europe. All over the media we heard that Europe was imploding and that the Euro would crash, causing a second financial system meltdown much like we had in late 2007 when Lehman Brothers failed. I have written on the blog many times that the indicator I follow of systemic risk, the Ted Spread, just was not showing the same level of risk as it did immediately before and then during the market crash.

ted-spread

You can see that current levels on the indicator are consistent with historic averages prior to the subprime crisis and the stock market crash. Longtime readers will recall that when this indicator moved up in the Spring of 2007, I let you know that we were getting out of all financial industry stocks at that point since the indicator was telling us that there was something fishy in the financial system. That turned out to be a good move. However, we do not have the same reading today, so the financial system is not in the same state that it was in 2007. That is very positive for the future of equity investors – removing the uncertainty surrounding the European financial system means that investors should feel more optimistic about the future and increase the amounts they are willing to pay for future earnings (ie., P/E ratios should expand).

Additionally, if the European financial system is healthier than assumed, maybe corporate earnings will be positively impacted by increased business from Europe. To check this out, I like to follow a shipping indicator that shows goods being shipped across the Atlantic.

Harpex Shipping Index

You can see that the Harpex Shipping Index has turned decidedly up, indicating that business activity in Europe has increased. If business has increased, then corporate earnings of US companies that do business in Europe should also increase, yielding positive earnings surprises when the earnings season begins.

Based upon these two pieces of data, I think we will see earnings surprises and expanding P/E ratios that will drive us upward out of the trading range (green box) toward the level where we’ll likely pause and move sideways in a new trading range (the pink box). At that point, we’ll make a decision on whether to raise some cash or to move additional cash into the market.

Be sure to check back next week as earnings season gets underway and I’ll keep you up-to-date on what whether we will be retuning to the safety of cash and short-term fixed income investments sooner than expected or whether equity investments will likely dance their way toward the new trading range.

Never a dull moment :)

Note: this video is for my friend Jon who works for FoxTV and is a big Glee fan.

Mark