Archive for May, 2011

Copper Follows Emerging Markets Higher

Friday, May 27th, 2011

copper

As I’m working on my thesis that the Emerging Markets may have bottomed, I have been looking for support from other related investments.

In the chart above, you can see that Copper – a leading economic indicator – has turned up at the same time as the chart of the emerging markets I showed you in the previous post.

Copper usage is so closely tied to industrialization and growth of the middle class in the developing world that its price turning upward is supportive of the prices for emerging markets stocks to be moving higher.

Commodity Index ETF

This chart of the Commodity Index exchange traded fund shows that it is also moving higher as other commodities besides copper (Ag and other industrial metals) have also begun to move up.

The defensive stocks have started to sell off as investors begin to shift from consumer durables – like Procter and Gamble in the chart below – to investments with growth potential.

P&G

US Industrials that have significant sales to the emerging markets have also turned higher as you can see in the chart of Cummins Engine below.

Cummins Engine

So what’s it all mean? If the emerging market stocks are forecasting an end of monetary tightening and subsequent economic stabilization in the emerging economy, then the investments that are connected to those economies should lead the markets in coming months.

Its too early to go all-in on this thesis as we are only seeing the technical signs that its happening – from a fundamental standpoint, emerging markets are still in monetary tightening mode. However, the stock markets always react first and move higher in anticipation of easier monetary policy and we may be seeing that reaction now.


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Mark

Emerging Markets Showing Signs of Life

Thursday, May 26th, 2011

Emerging Markets ETF

This is sort of a busy chart, but I think an important one that you need to see.

The chart shows the price action of the Emerging Markets Index exchange traded fund (Ticker: EEM) for the past six months.

The big price chart in the middle shows that the ETF has bounced off the 200 day moving average (always a point you like to buy stuff if you believe in the fundamentals of the investment) as you can see from the circle, as well as bounced off the bottom of the blue price channel. The price channel represents two standard deviations from the 20-day moving average, which generally shows a price move that is getting tired. If you look at the top section of the graph, you can see that this also happened at the same time the Relative Strength Indicator was bouncing along the bottom and has started to strengthen.

In the section of the graph with the black candle sticks, this is the same EEM graph, but without the trend lines. Instead, I’ve drawn in the channel so you can see what has been happening to its price. Its important to note that after bottoming at the 200-day moving average, it has now broken above the channel.

I’ve also annotated the Accumulation/Distribution Line for you showing that even during the price correction, the trend of money flowing into EEM was still positive. You can also see that the despite the price sell off, the Money Flow (CMF) indicator has stayed above the zero line.

I’ve also annotated the Stochastics indicator, showing where it has turned positive at the bottom of its range, and the MACD Indicator at the bottom showing that the histogram in the middle is trending up and looks like it might move on up into positive territory.

What all of this is telling me is that we have the potential for the Emerging Markets to lead us out of the current market correction.

The question that needs to be asked is why would the emerging markets bottom while our markets look like they are stumbling? The answer is simple – monetary policy.

If you look at Brazil and India and other countries that have been raising interest rates over the past year, they have deployed a sensible monetary policy decision to combat inflation and bring economic growth back to sustainable levels. At some point very soon, they will stop raising rates and let their economies chug along growing at 6% to 8% sustainable growth rates – rates that keep their employment growing but that do not generate harmful price increases.

Stock markets are anticipatory – they will bottom six to nine months ahead of actual changes in economies. So, it is quite possible that the emerging markets are telling us that they have their inflation under control and that their stock markets will begin to move higher based upon earnings growth from a sustainable GDP growth. The recent drop in commodity prices where the speculators were shaken from the markets seems to support this thesis that inflation will be brought under control and monetary tightening can stop.

This is probably a low risk time for us to commit some money to our various Emerging Markets investments (mutual funds, ETF’s and individual companies). As with any potential change in direction, something could derail it and cause it to move back to the 200-day moving average – or even move back into the downward sloping channel — a geopolitical crisis, further evidence of inflation, oil moving back above $110 per barrel — things like that.

As we take action, I’ll be back to the blog with details for you to follow. I think you can safely assume, though, that we will be reducing US and European positions but keeping cash levels at the roughly 7% level in client accounts.


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Mark

Three Card Monty Economics

Monday, May 16th, 2011

Graph Courtesy of Stephen Wellman's Blog Article

I saw a headline earlier today that stated Treasury Secretary Geithner announced the US was tap dancing up against the national debt ceiling at $14.3 trillion.

I had trouble getting my head around how the government would continue to spend more than our hard earned tax dollars without issuing treasury debt, then the UK’s Daily Telegraph reported that the Treasury Secretary had taken the lead of the State of Illinois’ Three Card Monty Economics. I’m not picking on the Treasury Secretary here; the Congress, by not coming to an agreement, kind of forced his hand. But the similarities to this state’s acts frightens me.

Illinois has a history of not funding its pensions when it needs extra cash to spend, and the Treasury Secretary announced today that he is suspending payments into the Civil Service Pension Fund to free up $150 billion of borrowing power.

The Washington Post reports that this will buy the Congress a couple of months extra time to negotiate a solution, but that the government will likely default on its debt on August 2nd if the ceiling isn’t raised.

Income Tax Revenues By Year

If you look at the above graph of Income Tax Revenues by year, you can see the impact of the two recessions and how revenues grow as the recessions end. Deficit spending during a recession is normal policy for a government, and it adds to the national debt. However, when the recession ends, that debt should be paid off – unfortunately, our receipts are always less than our expenses in good times and bad, other than the Clinton/Gingrich budgets of the late 90’s that took advantage of the Peace Dividend from ending the Cold War.

The current selloff in commodities and other contra-dollar investments is only temporary. We have a near-term rally in the dollar but ultimately our government needs a weaker dollar in order to pay back today debt with devalued currency.

Economic policies that mimic the State of Illinois’ slight of hand are a bad sign for the soundness of the dollar. In coming days, I’ll highlight why I think that copper and agricultural commodities will be the leaders to the upside once the current action in the dollar gets back to its foretold trajectory.


This was always one of my college roommate\'s favorite songs – I never understod why

Mark

Let’s Not Let The Facts Get In The Way

Thursday, May 12th, 2011

27economix-tax-articleinline
Credit for this graphic goes to the New York Times

Lots of political theater going on today in Washington DC as Congress attacks the top five oil companies and threaten to take away their tax breaks for exploration and production. The companies are on the defensive, but not taking it lying down.

So, what’s the real story? Are oil companies the proximate cause of our national debt skyrocketing because they aren’t paying enough in taxes?

The New York Times included the graphic above, which I think speaks volumes. If you look at it, these companies that are being chastised so publicly are paying higher taxes than any other industry other than electric utilities.

Do they need the tax breaks? Obviously that is debatable – but as the chart shows, they are not underpaying taxes when they are paying at an effective tax rate of 33%.

My opinion is that this conversation goes to the viability of the whole tax code and the loop holes that have been granted to the squeakiest wheel or to the biggest campaign donors. It sure seems that things would be a lot fairer if we reformed the entire tax code and everyone paid their fair share.

Getting rid of the loop holes while lowering the rates would be stimulative to the economy and would bring in more money since the industries (and individuals) that are paying less than they should would have to pay their fair share.

It might also end these politically based crusades that make for good C-Span or spots on the nightly news, but don’t really move our country forward in terms of productive policy.

When the New York Times and I are on the same page, you really need to question the motives of those on the attack.


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Mark

When Good Companies Surprise Us With Bad Earnings

Friday, May 6th, 2011

Boston Brewing Co

Above is the chart of Boston Brewing Co., showing the strong uptrend that was recently broken. You can see that for the past couple of years, the company has moved up in concert with the 20 and 50 day moving averages. However, on May 5th it surprised everyone by missing its earnings in a big way – the culprit was higher energy prices adding significantly to its transportation costs during the quarter. They affirmed their original full year guidance range, but only because it was a very wide range that gave them lots of wiggle room, so that didn’t pacify investors.

Normally, this would be one of those events that cause us to possibly book the profits we’ve made to date. However, there are three mitigating factors that I believe might cause us to hold onto this company – or potentially add to our current position – and see if their proven management skills can get things back on track:

1. If you look at the chart, there is still a lot of positive investor sentiment with this company based upon the fact that the selloff stopped right at the 200-day moving average. The 200-day moving average is the level at which you want to buy good companies as they tend to move higher if their business is sound and their industry is in favor. If it drops below the 200-day moving average then we will reassess the “buy-the-dip” sentiment of investors.

As far as the business being sound, earnings are growing at 28% per year and they have no debt on their balance sheet. As far as the industry being in favor, most of the beer producers are near 52-week highs in their stock price.

2. If energy costs were the culprit that ate into earnings, we had a $10 per barrel crash in the price of oil yesterday that should translate into a more favorable cost structure for the company.

Much of the oil (and other commodity run up) has been due to speculation so once that is shaken out of the system, fundamentals can take over.

3. In spite of the earnings miss, their earnings growth is still projected to be 28% this year. That is significantly higher than defensive stocks that are growing in the single digits and trading at much higher PEG ratios – this company is trading at a 1.7 PEG ratio while Procter & Gamble is trading at 2.0 PEG with 9.1% earnings growth and Clorox is trading at 2.09 PEG with 7.3% earnings growth.

PEG, if you recall from previous blog posts, is a key to our investment methodology. It a ratio of the P/E ratio to earnings growth rate. What it does is allow you to compare apples to apples: high growth companies can be a good value if their PEG ratio is lower than other companies in slower growing industries – even if their P/E ratio is higher.

One axiom my work has taught me over the years is that a company with a PEG ratio of less than 2 is always a better investment than a company with a PEG ratio greater than two: its always better to have a company valued at less than two times the growth rate than more than two times the growth rate.

So, for now, I am sitting back and waiting – I’m not at the point where I want to add to the position as I’m still monitoring the investor sentiment, but the fundamentals seem sound enough that holding this company that has a proven and battle tested management makes sense until we see if the fundamentals change.

Enjoy the weekend!


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Mark

Two Out of Three Ain’t Bad

Thursday, May 5th, 2011

gld

In a blog post on April 6th ( Here is the link ) I told you I was getting a bit uncomfortable with the euphoria that had pushed the commodity trades up fast and furious.

I showed you three graphs in that post: the Gold ETF (which I’ve updated above), the Gold Miners and Commodity Index ETF (both updated below).

Notice the black circle around April 6th on the graph where we took some profits on 20% to 30% of our holdings on these three as well as other commodity related investments.

gdx

The Gold ETF at the top went vertical after we sold a portion of our holdings and even after the recent selloff, its still slightly above where we booked some gains.

dbc

The other two, however, proved to be better implementation of strategy as you can see they happened at the top of the range.

As I’ve mentioned on the blog, I believe long term, the commodity sectors of the market will be big winners as the dollar moves lower. We will likely only be able to pay back our foreign lenders by depreciating our currency – something that China has stated publicly that they anticipate will happen and which has caused them to start to reduce their holdings of treasuries. As that process unfolds, the industrial metals, precious metals, oil, and ag commodities will go up in value along with their producers.

However, it will not be in a straight line and it will not be on the schedule that everyone wants. Too many people got into these ETF’s and similar investments late in the game, and now they are all trying to exit at the same time. Watching the technicals on the charts allows you to see when things have gotten frothy and over bought, and allows you to book some profits to reinvest them back into those investments – which have a long secular bull market ahead of them – at lower levels.

I have always believed that when you are in a secular bull market like we see for commodities that has a macroeconomic tailwind behind it that could have several years to play out, you want to have a core investment in the market at all times. But you also want to have a portion of your target position that you book profits on when investor sentiment gets too one-sided – the technicals can show you when that is – and reinvest those proceeds back into the bull trend once investor sentiment swings the other way.

We were right on the miners and commodity index, we had the right analysis but were early on the gold etf. I’ll take those results anytime.


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Mark

S&P Fades Throughout Day

Monday, May 2nd, 2011

sp-500-today

It was an interesting day after all.

As I wrote last night, the market rally on the news of Bin Laden’s death might fade similar to the action after Sadam’s capture. As you can see on the chart above, we lifted nicely at the open but slowly faded as the day went on, ending with a slight 0.18% loss.

As I scan my screen, the metals producers were the big losers today (Goldcorp lost 5.5%, Junior Gold Miners index lost 4.2%, Avalon lost 3.9%), along with some high P/E stocks (like Whole Foods down 4.9% and Valeant Pharmaceuticals down 5.6%, both in spite of either anticipated earnings surprises). The winners include most other pharma/biotech stocks, large industrials, and oddly some stuff that hasn’t been working lately – tech and small cap banks.

I’m getting increasingly worried about the market.

keltner

In spite of today’s weakness, the market is at the top of its current trend and the relative strength is bordering on being over-bought. We’ve been using the rising trend to raise cash in portfolios and are in the 6% to 8% range in most accounts. If the trend continues up, we’ll get to the 10% level – if we pull back to the bottom of the channel, we’ll put some of it back in the market.

Never a dull moment, plus I’ve been waiting a long time to use the following video from one of my favorite bands.


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Mark

Silver Drops 12%

Sunday, May 1st, 2011

silver-15-minute

Over the past several weeks I’ve written that I thought commodities (gold, silver, oil) had run up faster than fundamentals support.

This morning we wake up not only to the death of Bin Laden but a major drop in the price of silver. Related? Not sure – but it bears watching.

Mark

[Graph courtesy of Mike Shedlock’s blog]