Want to Get Your Kids into University? Let Them Play, and Other Weekend Reads

Friday, December 31st, 2010

Here are this New Year's Eve's read­ing diver­sions for your per­sonal enlight­en­ment. Enjoy your­self tonight, and be safe.

Happy New Year Quotes, New Years Eve Sayings

Ring out the old, ring in the new,

Ring, happy bells, across the snow:

The year is going, let him go;

Ring out the false, ring in the true.

~Alfred, Lord Ten­nyson, 1850

Exer­cise Calo­ries: 10 Win­ter Exer­cises That Burn The Most Calo­ries

It's impor­tant to change your work­out rou­tine and engage dif­fer­ent mus­cles to ensure your body is con­stantly devel­op­ing and improv­ing instead of adapt­ing to a reg­u­lar rou­tine that results in a less effec­tive work­out.

***

Judith Acosta: Manip­u­lated Against Our Natures: When Good Peo­ple Do Bad Things

It is an arche­typal sce­nario: inno­cent nave falls vic­tim to the chi­canery of a malev­o­lent, urbane and –most impor­tantly — seem­ingly innocu­ous preda­tor.

***

Want to get your kids into col­lege? Let them play

We're not talk­ing about preschool chil­dren. These are Har­vard under­grad­u­ate stu­dents whom we teach and advise. They all know how to work, but some of them haven't learned how to play

***

The sim­ple secret to great sleep

You already know that preg­nancy pains and hot flashes can keep you toss­ing and turn­ing at night. But there's a host of other, less-heralded health con­cerns that may be silently inter­fer­ing with your shut-eye. Here's how to deal with these stealth sleep steal­ers, decade by decade.

***

Doc­tor Offers Tips to Cure a New Year's Hang­over

But for­get the cof­fee to heal a hang­over. Accord­ing to Michelfelder, B vit­a­mins and exer­cise may be the best way to get out from under the effects of too much drink­ing. "B6 and B12 are cru­cial in the heal­ing process for brain cells," says Michelfelder.

***

7 Foods That Should Never Cross Your Lips

The prob­lem: The resin lin­ings of tin cans con­tain bisphenol-A, a syn­thetic estro­gen that has been linked to ail­ments rang­ing from repro­duc­tive prob­lems to heart dis­ease, dia­betes and obe­sity. Unfor­tu­nately, acid­ity (a promi­nent char­ac­ter­is­tic of toma­toes) causes BPA to leach into your food. Stud­ies show that the BPA in most people's body exceeds the amount that sup­presses sperm pro­duc­tion or causes chro­mo­so­mal dam­age to the eggs of ani­mals. "You can get 50 mcg of BPA per liter out of a tomato can, and that's a level that is going to impact peo­ple, par­tic­u­larly the young," says Vom Saal. "I won't go near canned toma­toes."

***

Bone Health: 8 Work­outs That Strengthen Your Bones (PHOTOS)

Strong bones take work. Aside from ade­quate vit­a­min D and cal­cium, bones require chal­leng­ing, weight-bearing exer­cise to remain sturdy. Easy, light work­outs won't do the trick.

***

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Top 15 Weekend Reads of 2010

Friday, December 31st, 2010

Here are your top 15 Most Read Week­end Reads of 2010

1. 10 Sur­pris­ingly Unhealthy Kids Foods, and other Week­end Reads

2. 5 Kids Meals to Avoid at All Costs, and other Week­end Reads

3. If You Want to Age Grace­fully, Don't Eat This, and other Week­end Reads

4. How to Treat a Cold with Dr. Pep­per, and other Week­end Reads

5. The World's Best Travel Spots, and other Week­end Reads

6. Be Care­ful with Caf­feine, and other Week­end Reads

7. 3 Anti-Aging Foods You Should Eat to Stay Young, and other Week­end Reads

8. 14 Ways to Have a Ton of Energy, and other Week­end Reads

9. How to Raise Lucky Kids, and other Week­end Reads

10. Why Do Smart Peo­ple Make Dumb Deci­sions, and other Week­end Reads

11. Fake Louis Vuit­ton Bags Don't Fool Any­one, and other Week­end Reads

12. The Silent Killer in Your Kitchen, and other Week­end Reads

13. We Are All Fat and Have Can­cer, and other Week­end Reads

14. The 5 Worst Punc­tu­a­tion Mis­takes, and other Week­end Reads

15. Pes­ti­cide in Your Tooth­paste, and other Week­end Reads

Tags: Anti Aging Foods, Best Travel, Caffeine, Cancer, Dr Pepper, Dumb Decisions, energy, Fake Louis Vuitton, Fake Louis Vuitton Bags, Fool, Kids Meals, Louis Vuitton Bags, Lucky Kids, Pesticide, Punctuation Mistakes, Silent Killer, Toothpaste, Travel Spots
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My Blackberry is Not Working!

Friday, December 31st, 2010

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The 10 Economic Factors in the World Outlook for 2011 – and the 3 Dominos

Friday, December 31st, 2010

Apart from geo-political risk-taking com­ing to a head around the 28th March, there are a num­ber of neg­a­tive head­winds build­ing in the inter­na­tional econ­omy, par­tic­u­larly in the United States and Europe. Despite bull­ish sen­ti­ment cur­rently in ascen­dance in the stock mar­kets, it is clear to many econ­o­mists that the world is in for a tur­bu­lent time in 2011.

Of course, there is no one-to-one cor­re­la­tion between the econ­omy and the stock mar­ket, and they tend to do their own thing for extended peri­ods of time. How­ever, this time around the mag­ni­tude of the approach­ing storm will not escape the stock mar­ket, in part because QE3, QE4 and QE5 are not likely to hap­pen. Even if they do, the effect will be insuf­fi­cient to main­tain stock prices in the face of waves of indoge­nous and exoge­nous shocks to the US economy.

Addi­tional QE shots will also be utterly use­less to the econ­omy when the macro-economic tec­tonic plates shift on a magna scale. In my analy­sis, the salient world eco­nomic and social devel­op­ments com­ing in the next two years are going to hap­pen due to the fol­low­ing ten­sions build­ing to the point of explosion:

1  The sov­er­eign debt cri­sis in Europe is putting great pres­sure on the EU finan­cial sys­tem and is con­tribut­ing to the dif­fi­cul­ties in achiev­ing growth in large parts of the EU. Although the EU rul­ing class is slowly begin­ning to con­duct changes in the EU finan­cial sec­tor, it is tak­ing far too long and it does not have the nec­es­sary polit­i­cal per­spec­tive and under­stand­ing to see that the struc­tural imbal­ances in the euro­zone are now mov­ing to rip the euro­zone apart.

Although EU insti­tu­tions and their lead­ers are suc­ces­sively build­ing what amounts to a fed­eral sys­tem for loans to weak euro­zone coun­tries, it is more and more becom­ing evi­dent that they have no real idea of the con­vul­sions they are throw­ing the weaker euro­zone coun­tries into. The ECB and the Euro­pean Recon­struc­tion Bank are sim­ply not intend­ing to sup­ply ail­ing nations with credit at rea­son­able rates, and the whole EU project is in great dan­ger of fail­ing alto­gether through mount­ing debt. There is an over­hang­ing risk that the debt will cas­cade through emer­gency pack­age after pack­age until col­lapse and default of a debtor coun­try is a fact, accom­pa­nied  there­after by huge social upheavals across the 16 euro­zone nations and ulti­mately across the entire EU of 27 coun­tries as well.

The object of the lat­est 750 bn euros sup­port fund is to end the despi­ca­ble scenes when the bond vig­i­lantes, in cahoots with the rat­ing agen­cies, pick off one weak EU econ­omy at time and extract extor­tion­ate rates of inter­est, a fate hith­erto expe­ri­enced by Greece, Ire­land and now Por­tu­gal. Once oper­a­tional, this fund is intended to go a long way to elim­i­nat­ing the debt cri­sis in Europe alto­gether. Given the finan­cial head­winds about to hit, this arrange­ment has not come a moment too soon. But will it be enough? The Stock­holm pro­fes­sor, eco­nomic ana­lyst, and author on eco­nomic growth, bub­bles and crises, Ste­fan de Vylder, does not think so. He fore­sees the demise of the euro­zone (see link).

China has lost con­fi­dence in the dither­ing US polit­i­cal and eco­nomic sys­tem, prone as the lat­ter is to delays, lob­by­ing, par­ti­san inter­ests and pork-barrel pol­i­tics and has declared a will­ing­ness to assist Europe with sup­port if nec­es­sary to achieve sov­er­eign finan­cial sta­bil­ity. The EU is an impor­tant export mar­ket for China and it is in the inter­est of China to assist the EU to weather its cur­rent sov­er­eign debt crises.

On the face of it, the EU looks set to weather the approach­ing finan­cial storm with much greater robust­ness than the US, even though the EU will, like most economies, be affected by any dou­ble dip in the US. But again, will the Chi­nese assis­tance be enough given the wide cracks fast devel­op­ing in the EU? Fur­ther­more, what will hap­pen when China itself runs into great prob­lems, which it is head­ing towards at rapid speed? I will con­tinue with China later under fac­tor 9.

2  The US first-time unem­ploy­ment rate is as high as ever, 9.8%, while the real num­ber out of work is esti­mated to be over 17 mil­lion peo­ple. With­out any sig­nif­i­cant growth in the US econ­omy (i.e. at least 6% per annum) these num­bers are going to remain high for many years, per­haps a decade or more.

3  Every 400 000 new peo­ple out of work in the US puts fur­ther down­ward pres­sure on the US hous­ing mar­ket as they default on their mort­gages a few months down the line. Unsold US res­i­den­tial hous­ing inven­tory is now close to four mil­lion homes and the aver­age time to a sale 24 months. The mar­ket has 25% fur­ther down to go.

4  US large banks are still under pres­sure because they are still car­ry­ing toxic assets on their books (or off them) and are unwill­ing to lend to busi­nesses, mak­ing it dif­fi­cult for them to expand. A num­ber of the larger banks are also being sued by other com­pa­nies, for exam­ple Bank of Amer­ica by PIMCO for fraud in rela­tion to the value of the sub-prime mortgage-backed secu­ri­ties sold to them three years ago. Regional banks are also under pres­sure and another 500 are esti­mated to hit the wall in 2011.

5  Over 40 US states are bank­rupt and will have a com­bined deficit of $200bn in 2011. How is the US going to deal with this? If more money is printed then the national debt will increase.

Click here for the full article.

Source: Paul San­di­son, Decem­ber 29, 2010.

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Paul Krugman: The New Voodoo

Friday, December 31st, 2010

via Mark Thoma, Economist's View

Decem­ber 31, 2010

Repub­li­cans used to claim that tax cuts paid for them­selves so that they could rail against the deficit and cut taxes at the same time. Though some in the GOP still resort to this defense of tax cuts, now that the "tax cuts pay for them­selves" myth has been exposed, Repub­li­cans are turn­ing to a new defense of simul­ta­ne­ously cut­ting taxes and giv­ing "impas­sioned speeches denounc­ing fed­eral red ink" that is every bit as flimsy as the old one:

The New Voodoo, by Paul Krug­man, Com­men­tary, NY Times: Hypocrisy never goes out of style, but, even so, 2010 was some­thing spe­cial. For it was the year of bud­get dou­bletalk — the year of ... rail­ing against deficits while doing every­thing they could to make those deficits bigger. ...

In the first half of 2010, impas­sioned speeches denounc­ing fed­eral red ink were the G.O.P. norm. And con­cerns about the deficit were the stated rea­son for Repub­li­can oppo­si­tion to exten­sion of unem­ploy­ment ben­e­fits, or for that mat­ter any pro­posal to help Amer­i­cans cope with eco­nomic hardship.

But the tone changed dur­ing the sum­mer, as B-day — the day when the Bush tax breaks for the wealthy were sched­uled to expire — began to approach. My nom­i­na­tion for head­line of the year comes from the news­pa­per Roll Call, on July 18: “McConnell Blasts Deficit Spend­ing, Urges Exten­sion of Tax Cuts.”

How did Repub­li­can lead­ers rec­on­cile their pur­ported deep con­cern about bud­get deficits with their advo­cacy of large tax cuts? Was it that old voodoo eco­nom­ics — the belief, refuted by study after study, that tax cuts pay for them­selves — mak­ing a come­back? No, it was some­thing new and worse. ...

2010 marked the emer­gence of a new, even more pro­found level of mag­i­cal think­ing: the belief that deficits cre­ated by tax cuts just don’t mat­ter. For exam­ple, Sen­a­tor Jon Kyl of Ari­zona — who had denounced Pres­i­dent Obama for run­ning deficits — declared that “you should never have to off­set the cost of a delib­er­ate deci­sion to reduce tax rates on Americans.”

It’s an easy posi­tion to ridicule. After all, if you never have to off­set the cost of tax cuts, why not just elim­i­nate taxes alto­gether? But the joke’s on us because ... the incom­ing House major­ity plans to make changes in the “pay-as-you-go” rules ... that effec­tively imple­ment Mr. Kyl’s prin­ci­ple. Spend­ing increases will have to be off­set, but rev­enue losses from tax cuts won’t. Oh, and ... any spend­ing increase must be off­set by spend­ing cuts else­where; it can’t be paid for with addi­tional taxes.

So if taxes don’t mat­ter, does the incom­ing major­ity have a real­is­tic plan to cut spend­ing? Of course not. Repub­li­cans say that ... defense, Medicare and Social Secu­rity — all the big-ticket items — are off the table. So they’re talk­ing about a 20 per­cent cut in what’s left, which includes things like run­ning the judi­cial sys­tem and oper­at­ing the Cen­ters for Dis­ease Con­trol and Pre­ven­tion; they have offered no specifics about where the cuts will fall.

How will this all end? I have seen the future, and it’s on Long Island, where I grew up.

Nas­sau County — the part of Long Island that directly abuts New York City — is one of the wealth­i­est coun­ties in Amer­ica and has an unem­ploy­ment rate well below the national aver­age. So it should be weath­er­ing the eco­nomic storm bet­ter than most places.

But a year ago, in one of the first major Tea Party vic­to­ries, the county elected a new exec­u­tive who railed against bud­get deficits and promised both to cut taxes and to bal­ance the bud­get. The tax cuts hap­pened; the promised spend­ing cuts didn’t. And now the county is in fis­cal crisis. ...

Nas­sau County shows how eas­ily respon­si­ble gov­ern­ment can col­lapse in this coun­try, now that one of our major par­ties believes in bud­get magic. All it takes is dis­grun­tled vot­ers who don’t know what’s at stake — and we have plenty of those. Banana repub­lic, here we come.

Mark Thoma is Pro­fes­sor of Eco­nom­ics at Uni­ver­sity of Ore­gon, and is author of the highly regarded and widely fol­lowed eco­nom­ics blog, Economist'sView.

Copy­right © Mark Thoma, Economist's View

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Every Year it is Something; This Year it's Rare Earths

Friday, December 31st, 2010

by Trader Mark, Fund My Mutual Fund

Usu­ally dur­ing hol­i­day trad­ing there is some non­sense sec­tor that gets bid to the stratos­phere by the day­trad­ing com­mu­nity only to come crash­ing down to earth a few months later.  It could be biotech­nol­ogy stocks with no rev­enue, it could be Chi­nese solar stocks, it could be dry bulk ship­pers, it could be dot coms.  You name it, they'll find some­thing to move to the stratos­phere on a news story or "theme" that sounds great in prin­ci­ple but will even­tu­ally end in tears.  This year's fla­vor are rare earth metal stocks.  Many of these don't even have a mine open but have "prospects".... oth­ers are related to rare earths like you are related to Kevin Bacon... per­haps 4 degrees rather than 6.  My favorite is Qiao Xing Uni­ver­sal Resources (XING).... the name looked famil­iar but the ticker is one that stands out.  I looked at this name per­haps 2 years ago when it was a ..... tele­com related com­pany.  Now, I see in that short span of time they have rein­vented them­selves as a min­ing com­pany.... some­where in China a few guys have to be laugh­ing at how easy it all is.  But all that mat­ters is money and not real­ity — so for those of you who caught yesterday's 80% move in China Shen Zhou Min­ing (SHZ) I raise some gadolin­ium to you.

Moly­corp (MCP) and an Aus­tralian com­pany named Lynas  (LYSCF) are the only 2 that really have any near term prospects (by near term I mean they will actu­ally be open­ing mines by end of 2011 or first half 2012) and actu­ally deal with rare earths... and even the rare earths they deal with appar­ently are the 'less rare' ones.  But no need for facts, it is hol­i­day trad­ing and the dot coms of 2010 are here.  (I know, I know there is a "real theme" behind these com­pa­nies just as there was a real theme behind Chi­nese solar, and inter­net tak­ing over the world, and the huge increase in global trade and Iomega)

As for the mar­ket, one won­ders why it is open.  1/4th the nor­mal vol­ume, and an index that crawls up or down 1–3 S&P points a day.  Just open the rare earth metal stocks and let every­one else take the week off.

No posi­tion

Copy­right © Trader Mark, Fund My Mutual Fund

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Must See: Howard Davidowitz Destroys The Recovery Illusion, Debunks The Consumer Renaissance

Friday, December 31st, 2010

Today's must see TV comes from the fol­low­ing inter­view of Pimm Fox on the con­sumer and the econ­omy with retail expert Howard Davi­d­owitz, who in 10 min­utes pro­vides more qual­ity con­tent and log­i­cal thought than we have seen from CNBC guests in prob­a­bly all of 2010 (except of course for that one time when Erin Bur­nett kicked out Mike Pento, but that's a dif­fer­ent story). Where does one start? Prob­a­bly at the end: "I am not sur­prised by the strength of retail sales, because i knew that 30% of con­sumers are respon­si­ble for retail sales, and these 30% did much bet­ter because of the per­for­mance of cap­i­tal mar­kets. I don't think it is indica­tive of any­thing going for­ward. I don't think the econ­omy is going to get any bet­ter. If you look at our fis­cal and mon­e­tary pol­icy, we went two tril­lion in the hole last year. Two tril­lion... to pro­duce this... and unem­ploy­ment went up to 9.8%! We've spent two tril­lion we're print­ing money we're going bananas. Our bal­ance sheet, we've got $2.6 tril­lion on there, and what;s on there gov­ern­ment secu­ri­ties, and MBS." And here is the kicker for the world's biggest hedge fund, which at least one per­son besides Zero Hedge appears to get: "If inter­est rates go up a point Bernanke's bank­rupt. Every­thing he's bought is under­wa­ter. All the MBS are under­wa­ter, the whole coun­try is under­wa­ter." Does any­one see the issue now with why ris­ing inter­est rates, aside from pre­dict­ing a "recov­ery", may also, cour­tesy of its now $2 bil­lion DV01, "pre­dict" the insol­vency of the Fed­eral Reserve?

Some other obser­va­tions on the retail "renaissance":

• Wal­mart is 10% of US retail sales, has 150 mil­lion cus­tomers, and its stock it is down 6 con­sec­u­tive quarters;
• Sears is the largest depart­ment store in Amer­ica: "their stock is terrible"
• Best Buy had a huge earn­ings miss
• Toys'R'Us loss increased last quarter
• A&P filed bankruptcy
• Loehmann's filed bankruptcy
• Charm­ing Shoppes is going to close 100 stores
• TJMaxx just liq­ui­dated AJ Right

And in addi­tion to dis­sect­ing the col­lapse of Sears, Davi­d­owitz observes what should be a loud glar­ing alarm sig­nal for the likes of Ack­man and all those who are bet­ting on the resur­gence of the US mall store­front and the likes of Gen­eral Growth: the bulk of store traf­fic is mov­ing online (where inci­den­tally the only jobs cre­ated are those of pack­agers and QC line peo­ple either in China or in soe ware­house in TX, CA or FL). To wit:

Online sales have to lead you to ques­tion the whole retail sell­ing strat­egy. We have 21 square feet of sell­ing space for every man woman and child in this coun­try. We already have dou­ble of what we need. With the explo­sion of online sales, what hap­pens to all these retail malls and shop­ping cen­ters which are mar­gin­als? Huge changes are going to be tak­ing place as peo­ple con­tinue shop­ping online.... In the end what do you do with the retail space...This is going to be a huge ques­tion for retail in the next ten years, that's why Wal­mart is start­ing to build smaller stores, that's why Wal­mart is build­ing more over­seas than they are build­ing here. It's going to be the biggest retail change that we've ever seen."

The biggest losers: com­mer­cial real estate land­lords. Read REITs:

Land­lords bet­ter start fig­ur­ing it out pretty quick because they already have occu­pancy prob­lems, rent prob­lems and every­thing else right now. I don't think the CRE prob­lems are fixed by any means. That's why we are going to close hun­dreds of com­mu­nity banks going for­ward, we are going to close hun­dreds more. Those CRE debts are com­ing due and they will not be able to be rolled over. We've got lots of prob­lems still com­ing up in the bank­ing sys­tem, and the prob­lems in the real estate issue is here for a long time.

In other news, Kool Aid to be served in aisle 5 of the next door Sears box from now until per­ma­nent clos­ing time.

Full must watch video after the jump (we are look­ing for an embed­d­a­ble version).

h/t etrader

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Johnny-come Lately Investors Switching from Bonds to Stocks

Friday, December 31st, 2010

Pos­i­tive sen­ti­ment in the week through Decem­ber 21 resulted in investors revers­ing course, with U.S. equi­ties regain­ing favor and bonds expe­ri­enc­ing sell­ing pressure.

After an eight-month period of with­drawals from U.S. equity mutual funds, investors chan­neled $335 mil­lion into domes­tic equity funds, accord­ing to esti­mates from the Invest­ment Com­pany Insti­tute. Prior to this inflow, a total of $90 bil­lion was liq­ui­dated from these funds since the flash crash of May.

Inflows into for­eign equity funds con­tin­ued unabated with $3.6 bil­lion find­ing a home abroad.

Inter­est­ingly, hav­ing seen inflows every week since the mid­dle of Decem­ber 2008, bond funds expe­ri­enced out­flows of $3.53 dur­ing the third week of December.

Source: Invest­ment Com­pany Insti­tute, Decem­ber 29, 2010.

The Bloomberg video below pro­vides a sum­mary of the of the mutual fund flow esti­mates. Click here or on the image to view the clip. (Please note that more text fol­lows below the video image.)

Source: Bloomberg, Decem­ber 30, 2010.

As usual with retail investors, it would seem that the change in strat­egy comes rather late in the cycle, with Trea­sury yields hav­ing bot­tomed in Decem­ber 2008 and U.S. equi­ties in March 2009. But the think­ing is per­haps rather late than never, espe­cially as the econ­omy is grow­ing again and the equity bull mar­ket, in the assess­ment of the masses, has not even been run­ning for a full two years, whereas all 10 bull mar­kets of the past 60 years made it into a third year (via Mar­ket­Watch). Addi­tion­ally, there could be the hope that the third year of the pres­i­den­tial cycle will again be pos­i­tive for stock markets.

These rea­son may have merit, but I will remain cau­tious until the over­bull­ish and over­bought con­di­tion of stock mar­kets has been worked off through a short-term mean-reversion cor­rec­tion, which I believe is over­due (also see my post “Yes, stocks are over­due for a cor­rec­tion”.)

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Investment Fads for 2011

Thursday, December 30th, 2010

How to be ahead of 2011’s biggest invest­ment fads, with Josh Brown, writer of the The Reformed Bro­ker blog.

Source: CNBC, Decem­ber 29, 2010 (hat tip: The Big Pic­ture).

Tags: ETF
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Bill Gross Bullish on Munis in 2011

Thursday, December 30th, 2010

Bill Gross, co-CIO of Pimco, tells CNBC why he thinks muni bond yield returns are attractive.

Source: CNBC, Decem­ber 28, 2010.

Tags: ETF
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Top 10 Market Charting Developments in 2010

Thursday, December 30th, 2010

The round-up below of the most pro­nounced chart­ing devel­op­ments dur­ing 2010 comes cour­tesy of tech­ni­cal ana­lyst Arthur Hill of StockCharts.com.

10. Apple sur­passed Microsoft in mar­ket cap­i­tal­iza­tion on May 26th and gained over 50% on the year.
Apple is cur­rently val­ued around $298 bil­lion, while Microsoft’s mar­ket cap is around $239 bil­lion. Both recorded around $65 bil­lion in sales for the prior year. No prizes for guess­ing which is grow­ing the fastest.

9. Shang­hai Com­pos­ite con­tin­ues to show rel­a­tive weak­ness.
While the S&P 500 zoomed to new highs in Decem­ber, the Shang­hai Com­pos­ite ($SSEC) peaked in early Novem­ber and moved lower in December.

8. Nikkei 225 ($NIKK) perked up with a Novem­ber break­out.
The index broke neck­line resis­tance from an inverse head-and-shoulders pat­tern and held this break­out as prices con­tin­ued higher in Decem­ber. The rel­a­tive strength com­par­a­tive, which com­pares Nikkei per­for­mance to the S&P 500, turned up sharply in Novem­ber and pulled back in Decem­ber. Will out­per­for­mance con­tinue in 2011?

7. Dow The­ory remains on a buy sig­nal.
Both the Dow Indus­tri­als and Dow Trans­ports moved above their Novem­ber highs this month. These higher highs con­firm a Dow The­ory buy sig­nal. The Novem­ber lows now mark key support.

6. Small-caps con­tinue to lead large-caps and show no signs of rel­a­tive weak­ness.
The chart below shows the Rus­sell 2000 ($RUT) rel­a­tive to the S&P 100 ($OEX) via the rel­a­tive strength com­par­a­tive ($RUT:$OEX ratio). The ratio remains in a clear uptrend.

5. Resur­gent finance sec­tor takes over mar­ket lead­er­ship.
The Per­fChart below shows the S&P 500 with the nine sec­tor SPDRs over the last five weeks. Indus­tri­als, mate­ri­als, energy and finance are lead­ing the way. It is a strange group, but rel­a­tive strength in finance is pos­i­tive for the mar­ket over­all. It is also strange that tech­nol­ogy and con­sumer dis­cre­tionary are lagging.

4. Bonds decline as stocks move higher.
The chart below shows bonds peak­ing in late August and stocks bot­tom­ing at the same time. These two have been mov­ing in oppo­site direc­tions since August. Money is mov­ing out of bonds and into stocks.

3. Agri­cul­ture prices break­out of a two year con­sol­i­da­tion.
Higher prices at the farm could even­tu­ally lead to higher prices at the super­mar­ket or the restaurant.

2. Oil breaks dia­mond resis­tance and exceeds $90 for the first time since the Lehman Broth­ers col­lapse.
Strength in the stock mar­ket is pro­vid­ing a con­fi­dence boost for the econ­omy, which bodes well for oil demand.

1. Long-term rates are poised to chal­lenge resis­tance from a 20+ year down­trend.
Eco­nomic strength and infla­tion­ary pres­sures are weigh­ing on the bond mar­ket. Remem­ber, bonds move down as rates move up. A break­out in rates would be long-term bear­ish for bonds.

Source: StockCharts.com, Decem­ber 29, 2010.

Tags: energy
Posted in Energy & Natural Resources, Markets, Oil and Gas | Comments Off

Robert Shiller: Expect Home Prices to Decline in 2011

Thursday, December 30th, 2010

Robert Shiller, Yale pro­fes­sor and co-creator of the S&P/Case-Shiller Home Price Index, dis­cusses why home prices con­tinue to decline. “It’s not entirely clear that this is a double-dip in hous­ing, but it’s start­ing to look like hous­ing is begin­ning to resume the down­trend from 2006 to 2009,” he said.

Source: Fox News, Decem­ber 29, 2010.

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11 Rules for Better Trading

Thursday, December 30th, 2010

Guy Lerner, writer of The Tech­ni­cal Take blog, has just pub­lished a post on his 11 Rules of Trad­ing, mak­ing for worth­while read­ing as we con­tem­plate how to tackle the finan­cial mar­kets in 2011.

11 Rules

Source: The Tech­ni­cal Take, Decem­ber 29, 2011.

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11 Rules for Better Trading

Thursday, December 30th, 2010

Guy Lerner, writer of The Tech­ni­cal Take blog, has just pub­lished a post on his 11 Rules of Trad­ing, mak­ing for worth­while read­ing as we con­tem­plate how to tackle the finan­cial mar­kets in 2011.

11 Rules

Source: The Tech­ni­cal Take, Decem­ber 29, 2011.

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Doug Kass: 15 Surprises for 2011

Wednesday, December 29th, 2010

Doug Kass is a lead­ing mar­kets com­men­ta­tor, and writes daily for Real­Money Silver.

“Never make pre­dic­tions, espe­cially about the future.”
–Casey Stengel

There are five lessons I have learned since my first sur­prise list for 2003:

1. how wrong con­ven­tional wis­dom can be;

2. that uncer­tainty will persist;

3. to expect the unexpected;

4. that the occur­rence of Black Swan events are grow­ing in fre­quency; and

5. with rapidly chang­ing con­di­tions, investors can’t change the direc­tion of the wind, but we can adjust our sails (and our port­fo­lios) in an attempt to reach our des­ti­na­tion of good invest­ment returns.

Eight years ago, I set out and pre­pared a list of pos­si­ble sur­prises for the com­ing year, tak­ing a page out of the estimable Byron Wien’s play­book , who orig­i­nally deliv­ered his list while chief invest­ment strate­gist at Mor­gan Stan­ley, then Pequot Cap­i­tal Man­age­ment and now at Black­stone. (Here was Byron Wien’s sur­prise list for 2010.)

Impor­tantly, my sur­prises are not intended to be pre­dic­tions but rather events that have a rea­son­able chance of occur­ring despite being at odds with the consensus.

I call these “pos­si­ble improb­a­ble” events. In sports, bet­ting my sur­prises would be called an “over­lay,” a term com­monly used when the odds on a propo­si­tion are in favor of the bet­tor rather than the house.
The real pur­pose of this endeavor is to con­sider posi­tion­ing a por­tion of my port­fo­lio in accor­dance with out­lier events, with the poten­tial for large payoffs.

Since the mid 1990s , the qual­ity of Wall Street research has dete­ri­o­rated in quan­tity and qual­ity (due to com­pe­ti­tion for human cap­i­tal at hedge funds, bro­ker­age indus­try con­sol­i­da­tion and for­mer New York Attor­ney Gen­eral Eliot Spitzer-initiated reforms) and remains, more than ever, maintenance-oriented, con­ven­tional and group­think (or group­stink, as I pre­fer to call it). Main­stream and con­sen­sus expec­ta­tions are just that, and in most cases, they are deeply embed­ded into today’s stock prices.

It has been said that if life was pre­dictable, it would cease to be life, so if I suc­ceed in mak­ing you think (and pos­si­bly posi­tion) for out­lier events, then my endeavor has been worth­while. My annual exer­cise rec­og­nizes that over the course of time, con­ven­tional wis­dom is often wrong. As a soci­ety (and as investors), we are con­sis­tently bam­boo­zled by appear­ance and con­sen­sus. Too often we are played as suck­ers as we just accept the trend, momen­tum and/or the super­fi­cial as cer­tain truth with­out a shred of crit­i­cism. Just look at those who bought into the suc­cess of Enron, Sad­dam Hussein’s weapons of mass destruc­tion, the heroic home-run pro­duc­tion of steroid-laced Major League Base­ball play­ers Barry Bonds and Mark McG­wire, the finan­cial super­mar­ket con­cept at what was once the largest money cen­ter bank (Cit­i­group ©), the unin­ter­rupted profit growth at Fan­nie Mae (FNM) and Fred­die Mac (FRE), housing’s new par­a­digm of non­cycli­cal growth and ever-rising home prices, the uncom­pro­mis­ing prin­ci­ples of for­mer New York Gov­er­nor Eliot Spitzer, the moral­ity of other politi­cians (e.g., John Edwards, John Ensign and Larry Craig), the con­sis­tency of Bernie Madoff’s invest­ment returns (and those of other huck­sters) and the clean-cut image of Tiger Woods.

In an excel­lent essay pub­lished over the past week, GMO’S James Mon­tier makes note of the con­sis­tent weak­ness embod­ied in con­sen­sus forecasts.

Attempt­ing to invest on the back of eco­nomic fore­casts is an exer­cise in extreme folly, even in nor­mal times. Econ­o­mists are prob­a­bly the one group who make astrologers look like pro­fes­sion­als when it comes to telling the future. Even a cur­sory glance at Exhibit 4 reveals that econ­o­mists are sim­ply use­less when it comes to fore­cast­ing. They have missed every reces­sion in the last four decades! And it isn’t just growth that econ­o­mists can’t fore­cast: it’s also infla­tion, bond yields, and pretty much every­thing else. If we add greater uncer­tainty, as refl ected by the dis­tri­b­u­tion of the new nor­mal, to the mix, then the dif­fi­culty of invest­ing based upon eco­nomic fore­casts is likely to be squared!

For 2011, con­sen­sus esti­mates for eco­nomic growth, cor­po­rate prof­its, stock price tar­gets and inter­est rates are grouped in an extra­or­di­nar­ily tight range. I have cho­sen to use Gold­man Sachs’ fore­casts as a proxy for the consensus.

Here are Gold­man Sachs’ prin­ci­pal views of expected eco­nomic growth, cor­po­rate prof­its, infla­tion, inter­est rates and stock mar­ket performance:

• 2011 GDP up 3.4% (global GDP up 4.7%);

• 2011 S&P 500 oper­at­ing prof­its of $94 a share;

• year-end S&P 500 price tar­get at 1,450 (a gain of about 15%);

• 2011 infla­tion of 0.5%; and

• the 2011 clos­ing yield on the U.S.10-year Trea­sury note at 3.75%.

Look­ing beyond 2011, it appears that the con­sen­sus fur­ther expects that the domes­tic econ­omy is well on its way toward deliv­er­ing a smooth and self-sustaining and nor­mal his­tor­i­cal recov­ery that (from start to fin­ish) should last about four years. The clus­ter­ing of that con­sen­sus sug­gests that any short– or intermediate-term vari­ant out­comes could be desta­bi­liz­ing to the mar­kets, both to the upside and to the downside.

To some degree, my sur­prises for 2011 attack some of the sim­i­lar, non-variant and nearly uni­ver­sally opti­mistic expec­ta­tions on the part of money man­agers, strate­gists, econ­o­mists and mem­bers of the fourth estate. As such, I want to empha­size that my inten­tion is not to be a Cas­san­dra or to be a con­trar­ian for contrary’s sake but rather to rec­og­nize that most pre­fer the dreams of the future to the his­tory of the past. My sur­prise list for 2011 rec­og­nizes an often repeated les­son of his­tory: What seems easy for (bull­ish) investors to imag­ine today might prove more dif­fi­cult to deliver, as prospect is often bet­ter than possession.

More than almost any time I can remem­ber, there exists few vari­ant views rel­a­tive to con­sen­sus as we enter the New Year. Per­haps lead­ing that minor­ity is Gluskin Sheff’s David Rosen­berg, who, though thought­ful and thor­ough in analy­sis, is pigeon­holed by the media as a dog­matic standard-bearer for the bear case. (Gluskin Sheff’s David Rosen­berg suc­cinctly under­scores and ques­tions the uni­ver­sal opti­mism in his com­men­tary this week.)

“Those who can­not remem­ber the past are con­demned to repeat it.”

–George San­tayana

Look­ing at his­tory, there was no bet­ter exam­ple of mis­placed opti­mism than in the period lead­ing up to the Great Deces­sion of 2008–2009, pro­vid­ing a vivid reminder of the poor fore­cast­ing abil­ity and invest­ment risks asso­ci­ated with the crowd’s base­line expec­ta­tions and the value of a sur­prise list that devi­ates from that consensus.

Tags: Bettor, Black Swan, Blackstone, Brokerage Industry, Byron Wien, Casey Stengel, Chief Investment Strategist, Commodities, Consensus Expectations, Conventional Wisdom, Currency, Doug Kass, Eliot Spitzer, Emerging Markets, Gold, Hedge Funds, Improbable Events, India, Industry Consolidation, Mid 1990s, Morgan Stanley, New York Attorney General, Oil Sands, Payoffs, Playbook, Silver, York Attorney
Posted in Commodities, Credit Markets, Energy & Natural Resources, Gold, Markets, Oil and Gas, Outlook, Silver | Comments Off

Gold, Dollar, Euro & China: Four To Tango in 2011

Wednesday, December 29th, 2010

By Dian L. Chu, Econ­Fore­cast

For the most part of 2010, the typ­i­cal image of Europe—one of cul­tural sophistication—has been replaced by wide­spread riots, burn­ing cars, large scale strikes over labor reform and unem­ploy­ment result­ing from aus­ter­ity mea­sures amid a sov­er­eign debt cri­sis in the region.

Gold Chart’s Euro­pean Tale

Fear about defaults and more bailouts through­out the Euro­pean Union (UN) has formed a dark storm cloud hang­ing over the oth­er­wise robust global rally, and pushed Gold to an all-time high of $1,432.50 an ounce on Dec. 7.

The market’s emo­tion related to the Euro­pean debt cri­sis is clearly reflected through the inter­ac­tion between Dol­lar, Euro and Gold, where you can lit­er­ally trace the time­line of sig­nif­i­cant macro­eco­nomic events in Europe and the United States (See Chart).

The gen­eral pat­tern is sim­ple — When­ever there’s bad news out of Europe, investors first course of action is to dump Euro and go into gold and dol­lar as the two top safe haven choices…. and vice versa.

Con­ven­tional Wis­dom Rewritten

His­tor­i­cally, gold is seen as the ulti­mate hedge against infla­tion and dol­lar weak­ness with a typ­i­cal inverse rela­tion­ship with the U.S. dol­lar. Mean­while, Euro had been gain­ing on the dol­lar as the choice of global reserve cur­rency over the past decade mostly on con­cerns over the moun­tain­ous debt of the U.S. government.

How­ever, the con­ven­tional wis­dom has been totally rewrit­ten by the global finan­cial cri­sis, the Euro­pean debt cri­sis, and the unprece­dented and syn­chro­nized global quan­ti­ta­tive eas­ing. As hor­ren­dous as the U.S. bud­get deficit and debt sit­u­a­tion is, com­pared with the depth and breadth of Euro­pean debt woes, investors now see euro as the risky cur­rency, while dol­lar has regained its safe haven sta­tus as Gold.

China In The Gold House

So, how will the dynam­ics between Dol­lar, Euro and Gold play out in 2011?

At cur­rent price lev­els, the main gold buy­ing action will come from investors and funds as infla­tion and cur­rency hedge as well as price spec­u­la­tion, instead of from jew­elry demand. From that per­spec­tive, there’s a fourth major player, in the name of China, emerg­ing in the global gold market.

Bul­lion Vault noted that with savings-deposit rates now more than 2% below the rate of consumer-price infla­tion, China has fast become the world's No.2 source of phys­i­cal gold demand. In fact, China recently revealed that its gold imports rose almost 500% year-over-year to 209 tons dur­ing the first ten months of this year.

China’s Surg­ing Gold Trade

People’s Daily Online also noted the explo­sive growth in China's pri­vate gold invest­ment mar­ket. In the first three quar­ters, the indi­vid­ual cus­tomers in Shang­hai Gold Exchanges neared 1.6 mil­lion; gold trade exceeded 4,600 tons and its turnover topped 1.1 tril­lion Yuan, both ris­ing sharply. That means Chi­nese has traded more gold than the total global iden­ti­fi­able demand (about 3,201 tons) over the first nine months of the year.

Love of Gold – A Chi­nese Tradition

The surge in China gold demand seems to have befud­dled some includ­ing Mr. Richard Daughty (aka The Mogambo Guru) at The Daily Reck­on­ing who wrote “…there is noth­ing about Chi­nese trust­ing gold for the last few thou­sand years or so.”

Well, let me set the record straight here–Chinese, like many other Asian coun­tries, have a tra­di­tion of reserv­ing and invest­ing in gold for thou­sands of years. Gold and real estate are typ­i­cally the top two invest­ment choices mainly due to a dis­trust of paper instru­ments result­ing from much tur­moil through­out the region’s history.

It is mostly this propen­sity, the clear present dan­ger of an esca­lat­ing infla­tion, and ris­ing ten­sions at neigh­bor­ing Korea, behind the ris­ing gold demand in China

Gold = Finan­cial Competitiveness

What’s more telling is that accord­ing to People’s Daily Online, in August, six China min­istries, includ­ing the People's Bank of China, and the China Secu­ri­ties Reg­u­la­tory Com­mis­sion, jointly issued a notice to pro­mote the gold mar­ket and pos­i­tively con­nected the future devel­op­ment of the gold mar­ket with the com­pet­i­tive­ness of finan­cial markets.

China is already the world’s top gold pro­ducer, but has remained some­what muted in the global gold mar­ket. Now, with the expand­ing of the Chi­nese gold mar­ket (China just approved its first gold mutual fund on Nov. 29), the increas­ing invest­ment demand from the Chi­nese gov­ern­ment and / or indi­vid­ual investors will become a major force influ­enc­ing the world gold market.

China Can’t Save the Euro

Now, let’s take a look at the Euro.

Accord­ing to data from the Bank for Inter­na­tional Set­tle­ments (BIS), Ger­man and French banks have the largest debt expo­sure to Ire­land and the south­ern rim of euro zone in the sec­ond quar­ter. So, the Euro­pean debt cri­sis most likely will not evolve into a global con­ta­gion as many have feared.

Nev­er­the­less, due to the sin­gle cur­rency union’s inher­ent struc­tural weak­ness, EU has not been able to agree on any mean­ing­ful system-wide mea­sures to com­bat the debt cri­sis. As such, EU’s country-by-country, crisis-by-crisis approach is only adding mar­ket volatil­ity, and fur­ther derail­ing the region. And not even China’s pledge of its $2.7trillion over­seas invest­ment fund as Euro­pean debt res­cue could thwart market’s pes­simism about the euro.

Spain – Too Big To Bail?

Mul­ti­ple rat­ing agen­cies already put Por­tu­gal, Spain and Greece on future down­grade watch, while Italy is another highly indebted euro mem­ber per­sis­tently com­ing up in mar­ket chatters.

Deutsche Bank AG has pegged Por­tu­gal as the next seek­ing a bailout after Greece and Ire­land, while Spain is a hid­den debt bomb dubbed as “too big to bail” since the size of Spain’s econ­omy (about $1.4 tril­lion, with 20% job­less rate) is twice that of Greece, Ire­land and Por­tu­gal combined.

Moody's esti­mated Spain may have to raise €170 bil­lion from the mar­kets next year, not includ­ing the amount banks may need to recap­i­tal­ize. Bank of Eng­land, mean­while, is not instill­ing much con­fi­dence either by fore­cast­ing a pos­si­ble return to reces­sion in 2011, adding that fur­ther quan­ti­ta­tive eas­ing may be used, if an "exter­nal shock" hits the economy.

Expect A Full-on Assault on Euro

All this is not to say other EU mem­bers are in good finan­cial and fis­cal fit­ness either. So, if you think the series of down-grades and ris­ing con­cerns on euro zone coun­tries' debt has worked against the euro this year, expect a fresh new round of downgrades–over debt or growth prospect—to bring about a full-on assault on Euro next year, par­tic­u­larly when you see Spain come up in headlines.

Trou­ble in Euro should boost Gold while pro­vid­ing sup­port to the Dol­lar (i.e. the dog with fewer fleas.), which is the sce­nario that would play out in 2011.

Global Infla­tion Spike

Infla­tion is already run­ning ram­pant in coun­tries like China, Rus­sia and India, mostly dri­ven by food short­ages. In Bei­jing, for exam­ple, food costs soared nearly 12% year-on-year in November. Now, on the heel of U.S. Fed­eral Reserve’s QE2 announce­ment in Nov, more mon­e­tary eas­ing could be expected from cen­tral banks to stim­u­late their economies in 2011. This will only add fuel to the fire of the grow­ing anx­i­ety over ris­ing infla­tion, and again bode well for gold.

Gold As a Reserve Currency

Com­bin­ing the fun­da­men­tal fac­tors dis­cussed here and tech­ni­cal sig­nals, Euro could break below $1.25 or even $1.20 some­time next year, which could drive gold upwards towards the $1,600 lev­els. U.S. Dol­lar and Trea­sury would gain sup­port as safe haven, which could push the bond yield down.

It is worth not­ing that Gold priced in Euros has risen more than 38% so far in 2010, reach­ing a new record high above €34,475 per kilo, far out­pac­ing the Gold’s nom­i­nal price gain (in dol­lar) of around 28%.

So, in a way, gold is treated almost like a sec­ond reserve cur­rency replac­ing the Euro, and you would have got­ten bet­ter return get­ting into gold via Euro.

Tags: Currency, Emerging Markets, Gold, India, Oil Sands, Russia
Posted in Energy & Natural Resources, Gold, Markets, Oil and Gas | Comments Off

A Fed-Induced Speculative Blow-Off

Wednesday, December 29th, 2010

by John Huss­man, Huss­man Funds

Why are Trea­sury yields ris­ing despite hun­dreds of bil­lions of Trea­sury pur­chases by the Fed­eral Reserve? There are two pos­si­bil­i­ties in the cur­rent debate. One is that the Fed's pol­icy of pur­chas­ing Trea­suries has scared the willies out of the bond mar­ket on fears of higher infla­tion, and that the pol­icy is a fail­ure. The other is that the pol­icy has been such a suc­cess at boost­ing the prospects for eco­nomic growth that inter­est rates are ris­ing on antic­i­pa­tion of a bet­ter economy.

From our stand­point, nei­ther of these expla­na­tions hold much water. On the infla­tion front, the recent bond sell­off has hit TIPS prices as well as straight Trea­suries, which isn't some­thing you'd expect to see if infla­tion expec­ta­tions were being desta­bi­lized. And although pre­cious met­als and other com­mod­ity prices have been pressed higher, the com­mod­ity run can be more accu­rately traced to neg­a­tive real inter­est rates at the short-end of the matu­rity curve, cou­pled with a down­ward trend in long-term yields that has now reversed dra­mat­i­cally (more on that below). I've long argued that unpro­duc­tive gov­ern­ment spend­ing and prof­li­gate fis­cal pol­icy are ulti­mately infla­tion­ary (regard­less of how the spend­ing is financed, and par­tic­u­larly if it is mon­e­tized), but I con­tinue to view per­sis­tent infla­tion as a long-term, not near-term con­cern. A rise in T-bill yields of more than 15–25 basis points would change that assess­ment. Until then, veloc­ity can be expected to col­lapse in direct pro­por­tion to changes in the mon­e­tary base, with lit­tle impact on prices.

As for the notion that the Fed's tar­geted Trea­sury pur­chases have directly aided the econ­omy, the argu­ment requires bizarre log­i­cal gym­nas­tics. It demands one to believe that although the pur­chases were intended to stim­u­late the econ­omy by low­er­ing rates, they have been suc­cess­ful with­out low­er­ing them, and in fact by rais­ing them, because the expec­ta­tion of lower rates was so stim­u­la­tive that it caused rates to rise, so that the higher rates can be taken as evi­dence that low­er­ing rates with­out low­er­ing them was a suc­cess. Oh, brother.

It's clear that we've seen some firm­ing in var­i­ous indi­ca­tors such as the Pur­chas­ing Man­agers Index, the ECRI Weekly Lead­ing Index and weekly claims for unem­ploy­ment. The ques­tion is whether these can be traced to lower yields and greater avail­abil­ity of liq­uid­ity. On the inter­est rate front, the answer is clearly no, as Trea­sury and mort­gage rates are even higher than they were before QE2 was announced. On the "liq­uid­ity" front, the addi­tional reserves have sim­ply added to an exist­ing pile of well over a tril­lion dol­lars of idle reserve bal­ances in the bank­ing sys­tem. And while we did see a pop in con­sumer credit in the lat­est report, it was entirely due to Fed­eral loans to stu­dents (arguably peo­ple dis­placed from the labor force and seek­ing an alter­na­tive). Other forms of con­sumer credit have col­lapsed at an accel­er­at­ing rate.

So nei­ther side typ­i­cally taken in the debate over the Fed's Trea­sury pur­chases is par­tic­u­larly sat­is­fy­ing. For­tu­nately for fans of logic, there is a third expla­na­tion that is much more plau­si­ble, and has the ben­e­fit of hav­ing data behind it. Despite my extreme crit­i­cism of Fed actions in recent years, I would argue that QE2 has in fact been "suc­cess­ful" over the short-term, but not through any mon­e­tary mech­a­nism. Rather, QE2 has been suc­cess­ful a) by cre­at­ing a burst of enthu­si­asm that released some pent-up demand in the same way that Cash for Clunk­ers and the new home­buyer tax credit did, and b) by encour­ag­ing investors to believe that the Fed has pro­vided a "back­stop" for stocks and other risky assets, cre­at­ing a spec­u­la­tive blowoff in these secu­ri­ties, to the detri­ment of what investors per­ceive as "safe" assets, which iron­i­cally includes Trea­sury securities.

In short, the main effect of QE2 has not been mon­e­tary but has instead been rhetor­i­cal — and that rhetoric may very well be nearly empty.

The key event related to QE2 wasn't its for­mal announce­ment, but was instead the Op-Ed piece that Ben Bernanke pub­lished a few days later in the Wash­ing­ton Post, which essen­tially advanced the argu­ment that the Fed was tar­get­ing a "wealth effect" in stocks and other risky assets, in hopes of get­ting peo­ple to con­sume off of that per­ceived wealth. At that moment, Bernanke unleashed a spec­u­la­tive bub­ble in risky assets, and a sell­off in safe ones. This has rewarded risk-seeking and pun­ished risk-aversion, but it has also unfor­tu­nately dri­ven the mar­kets into an over­val­ued, over­bought, over­bull­ish, rising-yields con­di­tion that has his­tor­i­cally ended in steep and abrupt losses.

Ned Davis Research tracks a set of "fac­tor attri­bu­tion" port­fo­lios, which mea­sure the per­for­mance between the top 10% of stocks ranked by a given fac­tor, and the bot­tom 10% of stocks as ranked by that fac­tor. The fac­tors are things like mar­ket beta, div­i­dend yield, 26-week momen­tum, and so forth. Essen­tially, the these fac­tor port­fo­lios track the return of hypo­thet­i­cal port­fo­lios that are long the top 10% and short the bot­tom 10% of stocks based on any given variable.

The per­for­mance of these 133 fac­tor port­fo­lios over the past 13 weeks offers tremen­dous insight into the extent to which the Fed­eral Reserve has encour­aged spec­u­la­tive risk. Investors are chas­ing stocks with the great­est expo­sure to mar­ket fluc­tu­a­tions, com­modi­ties, credit risk, small-cap risk and volatil­ity. Con­versely, secu­ri­ties demon­strat­ing rea­son­able val­u­a­tion, sta­bil­ity, qual­ity, or pay­out have been vir­tu­ally aban­doned by investors. Here is a sampling:

For us, the past few months have felt like our own minia­ture equiv­a­lent of a bear mar­ket. The Strate­gic Growth Fund has pulled back by sev­eral per­cent, and though our occa­sional draw­downs have been a frac­tion of those expe­ri­enced by the S&P 500 over time, the past four weeks have felt relent­less on a day-to-day basis. Dur­ing this period, the strongest four fac­tors have been: Mar­ket Beta (8.98%), Sigma Risk (8.50%), Small vs. Large Beta (8.05%), and Cycli­cal vs. Con­sumer Beta (7.75%). Mean­while, fac­tors such as High vs. Low Qual­ity Beta (-2.18%), Div­i­dend Yield (-3.07%), and EPS Sta­bil­ity (-5.16%) have been par­tic­u­larly unrewarding.

Tags: Commodities, Gold
Posted in Commodities, Credit Markets, Gold, Markets | Comments Off

10 Important Lessons I’ve Learned

Wednesday, December 29th, 2010

by Jef­frey Saut, Chief Invest­ment Strate­gist, Ray­mond James

Lost in the “noise” of the year-end sooth­say­ing con­tests are some sim­ple lessons on invest­ing. One of the best exam­ples of these lessons was pub­lished in The Finan­cial Ana­lysts Jour­nal in 1995. It was penned by Arthur Ziekel (at the time head of Mer­rill Lynch Asset Man­age­ment) as a let­ter to his daugh­ter on invest­ing. To wit:

“Per­sonal port­fo­lio man­age­ment is not a com­pet­i­tive sport. It is, instead, an impor­tant indi­vid­u­al­ized effort to achieve some pre­de­ter­mined finan­cial goal bal­anc­ing one’s risk-tolerance level with the desire to enhance cap­i­tal wealth. Good invest­ment man­age­ment prac­tices are com­plex and time con­sum­ing, requir­ing dis­ci­pline, patience, and con­sis­tency of appli­ca­tion. Too many investors fail to fol­low some sim­ple, time-tested tenets that improve the odds of achiev­ing suc­cess and, at the same time, reduce the anx­i­ety nat­u­rally asso­ci­ated with an uncer­tain under­tak­ing. I hope the fol­low­ing advice will help:

A fool and his money are soon parted.

Invest­ment cap­i­tal becomes a per­ish­able com­mod­ity if not han­dled prop­erly. Be seri­ous. Pay atten­tion to your finan­cial affairs. Take an active, inten­sive inter­est. If you don’t, why should any­one else?

There is no free lunch.

Risk and return are inter­re­lated. Set rea­son­able objec­tives using his­tory as a guide. All returns relate to infla­tion. Bet­ter to be safe than sorry. Never up, never in. Most investors under­es­ti­mate the stress of a high-risk port­fo­lio on the way down.

Don’t put all your eggs in one basket.

Diver­sify. Asset allo­ca­tion deter­mines the rate of return. Stocks beat bonds over time. Never over­reach for yield. Remem­ber, lever­age works both ways. More money has been lost search­ing for yield than at the point of a gun.

Spend inter­est, never principal.

If at all pos­si­ble, take out less than comes in. Then, a port­fo­lio grows in value and lasts for­ever. The other way around, it can be dimin­ished quite rapidly.

You can­not eat rel­a­tive performance.

Mea­sure results on a total return, port­fo­lio basis against your own objec­tives, not some­one else’s.

Don’t be afraid to take a loss.

Mis­takes are part of the game. The cost price of a secu­rity is a mat­ter of his­tor­i­cal sig­nif­i­cance, of inter­est only to the IRS. Aver­ag­ing down, which is dif­fer­ent from dol­lar cost aver­ag­ing, means the first deci­sion was a mis­take. It is a tech­nique used to avoid admit­ting a mis­take or to recover a loss against the odds. When in doubt, get out. The first loss is not the best but is also usu­ally the smallest.

Watch out for fads.

Hula hoops and bowl­ing alleys (among oth­ers) didn’t last. There are no per­ma­nent short­ages (or over­sup­ply). Every trend cre­ates its own coun­ter­vail­ing force. Expect the unexpected.

Act.

Make deci­sions. No amount of infor­ma­tion can remove all uncer­tainty. Have con­fi­dence in your moves. Bet­ter to be approx­i­mately right than pre­cisely wrong.

Take the long view.

Don’t panic under short-term tran­si­tory devel­op­ments. Stick to your plan. Pre­vent emo­tion from over­tak­ing rea­son. Mar­ket tim­ing gen­er­ally doesn’t work. Rec­og­nize the rhythm of events.

Remem­ber the value of com­mon sense.

No sys­tem works all of the time. His­tory is a guide, not a template.

This is all you really need to know ...Love Dad”

Lessons, I’ve learned a few over my 40 years in this busi­ness. Two of the more impor­tant ones sprung from the lips of War­ren Buf­fet – les­son num­ber one, “Don’t lose money;” les­son num­ber two, “Don’t for­get les­son num­ber one.” Or as my father says, “If you man­age the down­side the upside will take care of itself.” Another les­son I’ve learned is not to par­tic­i­pate in the annual cha­rade of pre­dict­ing where the stock mar­ket will be at this time next year. While I know it makes for good media fod­der, you will do just as well by flip­ping a “lucky penny.” Indeed, mak­ing pre­dic­tions, espe­cially about the future, is dif­fi­cult. For exam­ple, hang­ing on my office wall is a reprint from the Decem­ber 2007 edi­tion of Barron’s where Wall Street strate­gists made fore­casts about where the stock mar­ket would be in Decem­ber 2008. Their bull­ish guessti­mates, fly­ing in the face of the Novem­ber 20, 2007 Dow The­ory “sell sig­nal,” were so wrong I won’t even scribe them. To be sure, it is far eas­ier to make an S&P 500 earn­ings esti­mate for the com­ing year than it is to pre­dict what price earn­ings mul­ti­ple a manic depres­sive Mr. Mar­ket is will­ing to put on that esti­mate. Accord­ingly, when asked where stocks will be in Decem­ber 2011 my response has been, “Bar­ring a geopo­lit­i­cal event, and if the politi­cians stay out of the way and don’t make a pol­icy mis­take, I think stocks will be higher.” That con­struc­tive view is dri­ven by what I think will be an improv­ing econ­omy with a con­cur­rent mar­ginal increase in employ­ment. As for inter­est rates, they should be higher, but higher for the right rea­sons (an improv­ing econ­omy). If cor­rect, that also means the U.S. dol­lar is unlikely to collapse.

Yet another les­son I’ve learned is to con­sider invest­ing in unloved, and con­se­quently under owned, asset classes. One of my bet­ter “unloved” insights was to buy stuff-stocks (energy, met­als, tim­ber, agri­cul­ture, water, cement, etc.) in late 2001 when China joined the World Trade Orga­ni­za­tion, ush­er­ing in a rise in Chi­nese incomes. His­tory shows that when per capita incomes rise peo­ple con­sume more stuff. Con­tin­u­ing with that “unloved” theme, I have recently begun to look at bank stocks after avoid­ing them for roughly 10 years. While banks are not totally unloved, they are most cer­tainly under owned. If 2011 turns out to be “The year of the banks,” the finan­cials may have the wind at their back. While I con­tinue to eschew most of the money cen­ter banks, cer­tain banks that are not under the government’s aegis have been increas­ing their div­i­dends. To me that is a sign they are com­fort­able with their cap­i­tal ratios. Two names I have men­tioned in past mis­sives are IBERIABANK Cor­po­ra­tion (IBKC/$60.36/Strong Buy) and People’s United Finan­cial (PBCT/$13.92/Strong Buy). Sur­pris­ingly, my more favor­able view of select banks has sparked another ques­tion, “Are you also warm­ing to the home­builders?” Here’s the response.

“I’ve been get­ting a lot of calls lately after I was busy point­ing out the jump in lum­ber prices as a lead­ing indi­ca­tor peo­ple like to use for trad­ing the home­build­ing stocks (builders). Over the past cou­ple of years, lum­ber futures have worked as a great lead­ing indi­ca­tor for poten­tial demand shifts in the builders, par­tic­u­larly around the time of the tax credit expi­ra­tion. How­ever, lum­ber futures are not per­fectly cor­re­lated with actual home sales. They are sub­ject to not only U.S. hous­ing demand, but either exter­nal sup­ply shocks from Canada or chang­ing pat­terns of inter­na­tional demand soak­ing up exports. I’ve talked with the Cana­dian tim­ber team, and it appears the jump in lum­ber is likely a result of the lat­ter. Specif­i­cally a surge in export demand from Chi­nese con­struc­tion pulling lum­ber sup­plies out of the Pacific NW ports. They specif­i­cally point to an unusual price inflec­tion between West­ern spruce pine fir (WSPF) rel­a­tive to South­ern yel­low pine (SYP). Typ­i­cally SYP com­mands a pre­mium price rel­a­tive to WSPF. Those 2 grades have inverted recently, which seems like evi­dence of heavy Chi­nese demand.

Nev­er­the­less, investors like to use the lum­ber charts as con­fir­ma­tion of the ris­ing tide in home­build­ing stocks. This is exactly what I’ve talked about with investors a cou­ple of months ago when I told peo­ple to buy selected builders to play the ‘hope trade’ in hous­ing. The Hope Trade has worked for six years in a row, beat­ing the mar­ket by ~11% on aver­age from mid-November to Super Bowl Sun­day. I fig­ured this would be year 7, and so far it’s work­ing as expected. Our ana­lyst favorite name, KB Homes (KBH/$13.61/Strong Buy) has led the way in Decem­ber, up ~26% month to date. But the Hope Trade has an expi­ra­tion date. The real­ity, unfor­tu­nately, is the U.S. hous­ing really isn’t improv­ing all that much. Sales remain tepid, mort­gage rates have risen sharply, inven­tory is back on the rise, and con­se­quently home prices should remain under mod­est pres­sure for most of 2011. The good news is the econ­omy is clearly in recov­ery. Peo­ple fig­ure that means a sharp turn­around in hous­ing is just around the cor­ner. I agree, hous­ing will even­tu­ally recover back to trend­line lev­els of pro­duc­tion, but it won’t hap­pen in 2011 and prob­a­bly not in 2012 either. The bull argu­ment seems to cen­ter around the past few years of below trend pro­duc­tion, cre­at­ing a level of pent up demand that will be unleashed once job growth starts to pick up. Sounds great in the­ory, but the prac­ti­cal appli­ca­tion is that the hous­ing recov­ery will look more like a boat hull than some kind of sharp V-shaped pat­tern. The last time we saw a mas­sive jump in hous­ing starts com­ing out of a reces­sion was 1983 when starts jumped 60% y/y. But hous­ing con­di­tions in 2011 are very dif­fer­ent than in 1983. First, we still have sig­nif­i­cant excess vacant inven­tory over­hang­ing the mar­ket (2.8 mil­lion units by our last count). In 1983, we were actu­ally under built rel­a­tive to nor­mal­ized vacancy. Sec­ond, inter­est rates are ris­ing. In late 1982, mort­gage rates dropped 300 bps in a cou­ple of months, unleash­ing a wave of demand in 1983. Thirdly, 23% of all mort­gages are under­wa­ter, trap­ping a tremen­dous num­ber of peo­ple in their cur­rent home. Fourth, demo­graph­ics were strongly in favor of home­own­er­ship in 1983, not so much in 2011. And finally, in 2011 we are exit­ing a finan­cial cri­sis started by res­i­den­tial real estate. Mean­ing hun­dreds of banks are still try­ing to clean their books of busted res­i­den­tial projects and bad mort­gages. The pri­vate home­build­ing indus­try, which is still 65% of the mar­ket, sim­ply can’t get the credit and new devel­op­ment loans they need to re-start the con­struc­tion machine.

So that’s a very long winded way of answer­ing the ques­tion, but the short answer is that par­tic­i­pants should enjoy the ride in builder stocks while it lasts. How­ever, the real­ity is that hous­ing in 2011 isn’t going to be all that much improved rel­a­tive to 2010. It should be bet­ter, but peo­ple look­ing for some kind of 50% snap­back in hous­ing starts, and sales, are going to be very disappointed.”

The call for this week: The Volatil­ity Index (VIX/16.47) is down to the “com­pla­cency lev­els” seen last April right before a 17% cor­rec­tion. Ditto, Investors Intel­li­gence data shows advi­sory sen­ti­ment approach­ing the bull­ish extremes of Octo­ber 2007. Mean­while, stock mar­ket lead­er­ship is nar­row­ing, inter­nal momen­tum is wan­ing, and every macro sec­tor except Util­i­ties is over­bought. Addi­tion­ally, cor­re­la­tions between var­i­ous asset classes are decreas­ing, imply­ing that investors are becom­ing increas­ingly selec­tive. All of this sug­gests more cau­tion as we enter the new year. That cau­tious Jan­u­ary strat­egy is rein­forced in a report from Citigroup’s tech­ni­cal ana­lyst Tom Fitz­patrick, who chron­i­cles pre­vi­ous dra­matic multi-year declines, like we expe­ri­enced between 2007 – 2008, fol­lowed by strong ral­lies like 2009 – 2010, and what tends to occur in the suc­ceed­ing Jan­u­ary. I have recre­ated the his­tor­i­cal data in the table on page 4. How­ever, don’t get too bear­ish because any cor­rec­tion should be for “buy­ing” and not for “sell­ing” because the pri­mary trend remains “up.” Indeed, last week, for the first time in 22 months, Lowry’s Buy­ing Power Index rose above Lowry’s Sell­ing Pres­sure Index con­firm­ing the bull­ish trend. Still, I think the strat­egy of hedg­ing select stock posi­tions, which have accrued large prof­its, makes sense in the short/intermediate-term. And don’t look now, but North Amer­i­can Energy Part­ners (NOA/$11.78), rated Out­per­form by our Cana­dian energy ana­lysts, has broke out in the charts to the upside on big volume.

P.S. – These will be the only strat­egy com­ments for the week.

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Yes, Stocks are Overdue for a Correction

Wednesday, December 29th, 2010

The first trad­ing day of the week was a some­what dreary affair, not unlike the weather in the North­ern hemi­sphere. Fol­low­ing the Christ­mas day rate hike in China, most major U.S. stock mar­ket indices man­aged to reverse ear­lier losses and close in the black, albeit only mar­gin­ally. How­ever, the Dow Jones Indus­trial Aver­age bucked the trend and remained in the red in a thinly-traded market.

I yes­ter­day posted an arti­cle enti­tled “Chi­nese stocks – finely bal­anced”, show­ing a chart of the Shang­hai Com­pos­ite Index trad­ing above its key 200-day mov­ing aver­age but below the 50-day aver­age. “The Index is also squeezed into a tri­an­gle, indi­cat­ing a point of resolve could be expected over the next week or so,” I commented.

We may not have to wait a week: The Shang­hai Com­pos­ite Index is down again this morn­ing by a mas­sive 3.6%, caus­ing con­sid­er­able tech­ni­cal dam­age. In addi­tion to break­ing trend sup­port, the Index (2,733) has breached its 200-day aver­age (2,779) (not yet shown on the chart). This is a rather omi­nous pic­ture for Chi­nese stocks and could also be spelling dan­ger for global stock markets.

Source: StockCharts.com

Regard­ing the U.S. stock mar­kets (and pretty much most other world bourses), Ray­mond James’s Chief Invest­ment Strate­gist Jeff Saut sum­ma­rized the sit­u­a­tion as fol­lows: “The Volatil­ity Index (VIX/16.47) is down to the ‘com­pla­cency lev­els’ seen last April right before a 17% cor­rec­tion. Ditto, Investors Intel­li­gence data shows advi­sory sen­ti­ment approach­ing the bull­ish extremes of Octo­ber 2007. Mean­while, stock mar­ket lead­er­ship is nar­row­ing, inter­nal momen­tum is wan­ing, and every macro sec­tor except Util­i­ties is over­bought. Addi­tion­ally, cor­re­la­tions between var­i­ous asset classes are decreas­ing, imply­ing that investors are becom­ing increas­ingly selective.

“All of this sug­gests more cau­tion as we enter the new year. That cau­tious Jan­u­ary strat­egy is rein­forced in a report from Citigroup’s tech­ni­cal ana­lyst Tom Fitz­patrick, who chron­i­cles pre­vi­ous dra­matic multi-year declines, like we expe­ri­enced between 2007 – 2008, fol­lowed by strong ral­lies like 2009 – 2010, and what tends to occur in the suc­ceed­ing Jan­u­ary (see table below).”

Saut con­cluded: “How­ever, don’t get too bear­ish because any cor­rec­tion should be for ‘buy­ing’ and not for ‘sell­ing’ because the pri­mary trend remains ‘up’. Indeed, last week, for the first time in 22 months, Lowry’s Buy­ing Power Index rose above Lowry’s Sell­ing Pres­sure Index con­firm­ing the bull­ish trend. Still, I think the strat­egy of hedg­ing select stock posi­tions, which have accrued large prof­its, makes sense in the short/intermediate-term.”

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Doug Kass: What Could Go Wrong in 2011

Wednesday, December 29th, 2010

A look at why the recov­ery might not be a recov­ery but just reces­sion fatigue, with Doug Kass of Seabreeze Part­ners. Mov­ing to a net short posi­tion on stocks, he said: “We should be fear­ful that the recov­ery in the econ­omy as well as the rally in the mar­ket will be short lived.”

Source: CNBC, Decem­ber 28, 2010.

Tags: ETF
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