Visualize: The European Super Highway of Debt

Tuesday, January 31st, 2012

These info-graphics shows how much banks loaned to Por­tu­gal, Ire­land, Italy, Greece & Spain (PIIGS). Europe is in a deep cri­sis, and this shows how much must be repaid.

from demonocracy.info:

Tags: Amp, Banks, Europe, Ireland Italy, Italy Greece, Portugal, Spain
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Precisely Watson?! (Saut)

Tuesday, January 31st, 2012

“Pre­cisely Watson?”

by Jef­frey Saut, Chief Equity Strate­gist, Ray­mond James

Jan­u­ary 30, 2012

Sher­lock Holmes: “And, then there was the event of the dog bark­ing in the night.”

Dr. Wat­son: “But Holmes, there was no dog bark­ing in the night!”

Sher­lock Homes: “Pre­cisely Watson!”

Accord­ing to Wikipedia (as para­phrased by me):

It is pre­cisely on this dis­tinc­tion that Holmes bases his insight. When the inspec­tor asks, “Is there any point to which you would wish to draw my atten­tion? Holmes responds, “To the curi­ous inci­dent of the dog in the night.” But, protests the inspec­tor, “The dog did noth­ing in the night.” To which Holmes deliv­ers the punch line, “That was the curi­ous incident.”

For Holmes, the absence of bark­ing is the turn­ing point of the case: the dog must have known the intruder. Oth­er­wise, he would have made a fuss. For us, the absence of bark­ing is some­thing that is all too easy to for­get. We don’t even dis­miss things that aren’t there; we don’t remark on them to begin with. But often, they are just as telling and just as impor­tant – and would make just as much dif­fer­ence to our deci­sions – as their present coun­ter­parts. How ask­ing what isn’t there can help us make bet­ter decisions.

And, last week there was indeed a “dog bark­ing in the night” as Chesa­peake (CHK/$22.05/Market Per­form) announced it was shut­ting down numer­ous nat­ural gas wells due to low gas prices, a sign­post coin­ci­dent with many “bot­toms.” On that announce­ment nat­ural gas futures went from $2.23 per MMcf to $2.75 into last Friday’s clos­ing price. That’s a 23% upside rever­sal and likely sets the low water mark for nat­ural gas. While our Houston-based research team doesn’t believe it, and they have been more right than me, I think the “lows” for nat­ural gas are “in.” Cer­tainly, major cor­po­ra­tions think there is a future for nat­ural gas given the buy­out activ­ity over the past few years in the nat­ural gas space. Names for your con­sid­er­a­tion that are favor­ably rated by our fun­da­men­tal ana­lysts include: Anadarko Petro­leum (APC/$79.32/Strong Buy); EnCana (ECA/$19.60/Outperform); Williams Com­pa­nies (WMB/$28.55/Outperform); and Devon Energy (DVN/$65.01/Outperform).

Speak­ing to Devon, I have men­tioned this com­pany before, sparked by my friends at the “must have” Bespoke Invest­ment Group. To wit, Jan­u­ary 17th’s mis­sive stated:

“In busi­ness school they teach you that invest­ing is all about earn­ings, and while I think fear, hope, and greed play a role in the invest­ing equa­tion, over the long term earn­ings indeed play the dom­i­nant role. Real­iz­ing this, the good folks at Bespoke have assem­bled a list of com­pa­nies that have con­sis­tently reported the strongest earn­ings since March 2009 that report between now and Feb­ru­ary 24th. Names favor­ably rated by our fun­da­men­tal ana­lysts mak­ing said list include: Cit­rix Sys­tems (CTXS/$65.14/Outperform); Devon Energy (DVN/$65.01/Outperform); and Tempur-Pedic (TPX/$70.09/Strong Buy).”

Most recently, our explo­ration and pro­duc­tion ana­lyst Andrew Cole­man had this to say about Devon:

“On Jan­u­ary 5th, we upgraded Devon to a Strong Buy from Out­per­form. Ear­lier this week, Devon announced a $2.2 bil­lion joint ven­ture with the Sinopec Inter­na­tional Petro­leum Explo­ration & Pro­duc­tion Cor­po­ra­tion (SIPC). The deal gives SIPC a 33% work­ing inter­est in Devon's 1.2 mil­lion acres across five New Ven­ture plays (e.g. Nio­brara, Ohio Utica, and Tuscaloosa Marine shales as well as the Mis­sis­sippi Lime and the Michi­gan basin). We value the trans­ac­tion at $5,500 per acre over­all. As a result of the deal, we are rais­ing our pro­duc­tion growth expec­ta­tions for 2012 from 7.5% to 10% (vs. peers at 16%).”

Inter­est­ingly, the rec­i­p­ro­cal to my nat­ural gas “dog bark­ing in the night” theme is Apple (AAPL/$447.28), which had a “blow out” earn­ings quar­ter last week. Indeed, Apple reported 1Q12 sales of $46.33 bil­lion and prof­its of $13.1 bil­lion. That was the sec­ond high­est quar­terly profit for any com­pany ever! Such met­rics lifted the company’s cash hoard to $97.6 bil­lion, mak­ing its cash posi­tion larger than the mar­ket cap­i­tal­iza­tion of 448 of the com­pa­nies in the S&P 500. Apple sold 37 mil­lion iPhones in the quar­ter for a y/y growth rate of 128%; and, has now sold a total of 315 mil­lion iPhones, iPads, and iPod Touch devices. On the earn­ings release Apple’s shares leapt from $420.41 (last Tuesday’s close) to Wednesday’s open­ing price of $454.44, mak­ing Apple the world’s most valu­able com­pany ($417 bil­lion) by exceed­ing Exxon’s (XOM/$85.83/Market Per­form) mar­ket cap­i­tal­iza­tion of $413 bil­lion. Clearly, an astound­ing quar­terly report that caused one old Wall Street wag to exclaim, “When the news can’t get any bet­ter I sell.”

Turn­ing to the stock mar­ket, in last week’s report I wrote:

“The recent rally has not been accom­pa­nied by a notice­able increase in Buy­ing Demand as mea­sured by Lowry’s Buy­ing Power Index. Rather the rally has occurred more from a reduc­tion in Sell­ing, which is reflected in Lowry’s Sell­ing Pres­sure Index. Then too, the per­cent­age of stocks above their respec­tive 10-day mov­ing aver­ages (DMAs) has failed to con­firm the upside and the New High list is not expand­ing. In fact, 40% of my short-term indi­ca­tors are now bear­ish and none are bull­ish. Mean­while, the NYSE McClel­lan Oscil­la­tor is over­bought, the stock mar­ket does not have much inter­nal energy left for a big rally, the S&P 500 is three stan­dard devi­a­tions above its 20-DMA, the Volatil­ity Index is telegraph­ing too much com­pla­cency, and we have neg­a­tive sea­son­al­ity for the next few weeks. Nev­er­the­less, I con­tinue think it is a mis­take to get too bear­ish because I believe any pull­back in the var­i­ous indices will be contained.”

The con­clu­sion to last Monday’s mis­sive was to look for a short-term trad­ing peak fol­lowed by either a pause or a cor­rec­tion that could pull the S&P 500 (SPX/1316.33) down to the 1280 – 1290 level. And, the week turned out to be just a “pause” saved by a rally attempt on the more dovish than expected FOMC state­ment. While the pause didn’t really cor­rect the over­bought nature of the NYSE McClel­lan Oscil­la­tor (see the chart on page 3), it has some­what rebuilt the stock market’s inter­nal energy. It should be noted the D-J Indus­trial Aver­age (INDU/12660.46) edged above its July 2011 clos­ing high on an intra­day basis last Thurs­day, as well as that the new rally highs in the INDU and SPX have been con­firmed by new rally highs in the Cumu­la­tive Net Points and Cumu­la­tive Vol­ume Indices. Mean­while, the NYSE Advance/Decline Line con­tin­ues to move to new all-time highs. Inter­est­ingly, given the year-to-date strength, there have been no 90% Upside Days, a reflec­tion of the afore­men­tioned reduced volatil­ity. Also of inter­est is that unlike prior quar­ters fun­da­men­tal ana­lysts are not rais­ing their earn­ings esti­mates as earn­ings sea­son is under­way. This could be because the cur­rent earn­ings “beat rate” is not nearly as robust as past quarters.

To be sure, I have repeat­edly com­mented that earn­ings com­par­isons were going to get more dif­fi­cult because the trail­ing four quarter’s earn­ings reports have been so strong; and, that’s pre­cisely what is hap­pen­ing. For exam­ple, with 180 of the S&P 500 com­pa­nies report­ing, there has been 1.81 upside earn­ings sur­prises for each dis­ap­point­ment ver­sus a more nor­mal ratio of 3:1. Accord­ingly, it makes sense to screen for com­pa­nies pro­duc­ing “Triple Plays” – that would be com­pa­nies beat­ing earn­ings and rev­enue esti­mates and also rais­ing for­ward earn­ings guid­ance. Three names from our research uni­verse that qual­ify as Triple Plays and are favor­ably rated by our fun­da­men­tal ana­lysts for your con­sid­er­a­tion, include: Arc­tic Cat (ACAT/$30.65/Strong Buy); Cater­pil­lar (CAT/$111.28/Outperform); and Xil­inx (XLNX/$35.99/Outperform).

The call for this week: Well, I am trav­el­ing the bal­ance of this week to see insti­tu­tional accounts, speak at an Invest­ment Bank­ing Con­fer­ence, and present at a hand­ful of retail sem­i­nars. Con­se­quently, there will be no ver­bal strat­egy com­ments for the rest of the week. There­fore, I will leave you with these thoughts. The Jan­u­ary Barom­e­ter has sounded the “all clear” sig­nal with a monthly gain for the INDU of 3.36% and a 4.67% rise in the SPX. His­tory sug­gests double-digit returns for the rest of the year with pos­i­tive returns occur­ring more than 80% of the time. Two sec­tors have been the main dri­vers of this Jan­u­ary Jump, namely Con­sumer Dis­cre­tionary and Tech­nol­ogy. Unsur­pris­ingly, the Con­sumer Dis­cre­tionary, Tech­nol­ogy, Indus­trial, and the Mate­ri­als sec­tors are all beat­ing earn­ings esti­mates at the high­est “beat rate,” while Con­sumer Sta­ples, Energy, Finan­cials, and Health­care are not. While I remain some­what timid on a short-term trad­ing basis, I con­tinue to believe the year of the Water Dragon will bestow the five Chi­nese bless­ings of har­mony, virtue, riches, ful­fill­ment, and longevity. That adds even more weight to my grow­ing belief that 2012 will be about break­throughs, not disasters.

P.S. – As an aside, maybe par­tic­i­pants should con­sider that War­ren Buf­fett is not pay­ing too lit­tle a per­cent of income tax, but rather his sec­re­tary is pay­ing too high a percent!

Click here to enlarge

Copy­right © Ray­mond James

Tags: Chk, Curious Incident Of The Dog, Curious Incident Of The Dog In The Night, Dr Watson, Gas Prices, Gas Space, jeffrey saut, Low Water, Lows, Mmcf, Natural Gas Futures, Natural Gas Wells, Punch Line, Raymond James, Sherlock Holmes, Sherlock Homes, Signpost, Strategist, Water Mark, Wikipedia
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Dissecting Today's Bull Market (Koesterich)

Tuesday, January 31st, 2012

In recent weeks, the Euro­pean Cen­tral Bank and the Fed have announced new mon­e­tary stim­u­lus and appear ready to act to prop up the global econ­omy.

In response, some investors have appar­ently redis­cov­ered their appetite for risk. Since Novem­ber 29^th lows, global stocks are up roughly 9% and emerg­ing mar­ket equi­ties have gained about 12%. And dur­ing the past eight weeks, high yield bonds have risen roughly 5%.

In fact, this week some mar­ket watch­ers have declared that we’re in the midst of a bull mar­ket. For exam­ple, the WSJ’s Mar­ket­Beat blog, not­ing that bull­ish sen­ti­ment is on the rise, says “Wel­come to the New Bull Mar­ket,” or at least wel­come to a con­tin­u­a­tion of the bull mar­ket it says started in March 2009.

It’s impor­tant, how­ever, to put the cur­rent “bull mar­ket” in con­text. There’s a big dif­fer­ence between var­i­ous types of bull mar­kets. In sec­u­lar bull mar­kets (like the one we expe­ri­enced from 1982 to 2000), stock prices rise over a long period of time thanks to ongo­ing improv­ing fun­da­men­tals. Cycli­cal bull mar­kets, on the other hand, can occur within both sec­u­lar bull and sec­u­lar bear mar­kets, but tend to be shorter in duration.

In my opin­ion, we aren’t in – and aren’t enter­ing — a new sec­u­lar bull mar­ket. Instead, we’re still stuck in a long-term sec­u­lar bear mar­ket that began in 2000. It’s not as if the prob­lems that haunted investors last Novem­ber — a Euro­pean cri­sis, a polit­i­cal divide in Wash­ing­ton, slow growth in devel­oped mar­kets and a poten­tial bank­ing cri­sis in China — have gone away.

Equity per­for­mance from 2003 to 2007, how­ever, shows us that there can be rel­a­tively long ral­lies in sec­u­lar bear mar­kets. I believe the rally we’re expe­ri­enc­ing now is actu­ally a cycli­cal bull mar­ket that could eas­ily go on for the remain­der of 2012, assum­ing the Euro­pean cri­sis doesn’t take a turn for the worse and we don’t expe­ri­ence other unfore­seen mar­ket shocks.

Dis­tin­guish­ing between sec­u­lar and cycli­cal bull and bear mar­kets is so impor­tant because of their dif­fer­ent invest­ment impli­ca­tions. In sec­u­lar bull mar­kets, investors can rely on a tra­di­tional buy-and-hold strat­egy. In sec­u­lar bear mar­kets and accom­pa­ny­ing cycli­cal bull mar­kets, how­ever, hav­ing a more tac­ti­cal approach (i.e. a time­frame of five years or less) can help investors take advan­tage of mar­ket peaks and val­leys and poten­tially avoid hav­ing invest­ments merely move sideways.

So what’s a tac­ti­cal invest­ing idea for the cur­rent cycli­cal bull mar­ket? Well, let’s look at the invest­ment impli­ca­tions of the Fed’s announce­ment this week. First, it sug­gests that nom­i­nal rates and real rates will stay low for a long time. This fur­ther but­tresses the case for gold. Sec­ond, if US inter­est rates are going to be anchored at zero for an extended period, peo­ple are going to need to take some risk — in one form or another — to gen­er­ate a decent return.

Source: Bloomberg

Past per­for­mance does not guar­an­tee future results.

Gold and other pre­cious metal prices may be highly volatile. The pro­duc­tion and sale of pre­cious met­als by gov­ern­ments, cen­tral banks or other larger hold­ers can be affected by var­i­ous eco­nomic, finan­cial, social and polit­i­cal fac­tors, which may be unpre­dictable and may have a sig­nif­i­cant impact on the sup­ply and prices of pre­cious metals.

Tags: Banking Crisis, Bear Markets, Bull Markets, Bullish Sentiment, Continuation, Emerging Market, Global Economy, Global Stocks, High Yield Bonds, Last November, Lows, Market Shocks, Midst, Rallies, Secular Bear Market, Secular Bull Market, Stimulus, Stock Prices, Time Thanks, Wsj
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The "January Effect" and the probabilities for 2012

Tuesday, January 31st, 2012

Mar­ket Minute: Jan­u­ary 29, 2012: The "Jan­u­ary Effect" and the prob­a­bil­i­ties for 2012

by Don­ald W. Dony, FCSI , MFTA, The Tech­ni­cal Speculator

The strength in the S&P 500 this month tells more about the per­for­mance for the rest of the year than most investors realise. Over the last 40 years, when­ever the US mar­ket has had a return above 3.75% in Jan­u­ary, the S&P 500 fin­ished the year higher. Cur­rently, the index is up 4.44%.

Since 1970, there has been 13 times when the US mar­ket has been above 3.75% in Jan­u­ary. Every time the index com­pleted the year with a sub­stan­tial gain.

The 13 Jan­u­arys with returns of 3.75% or greater were in 1971, 72, 75, 76, 79, 83, 85, 87, 88, 89, 91, 97 and 99.

The aver­age gain for the rest of the year was a sur­pris­ing 19.6%. This means that if this Jan­u­ary can fin­ish above 1307.25, then there is a very strong prob­a­bil­ity of the index going higher in 2012. And as there are only two more trad­ing days left this month, the US mar­ket would have to drop 10.77 points or more to can­cel out the effect.

Bot­tom line: The S&P 500 has gained 4.44% in Jan­u­ary. With two days remain­ing, the prob­a­bil­ity of a good per­form­ing 2012 is build­ing. If the US index can close out the month above 1307.25, then there is a strong like­li­hood of another 15% gain by year-end based on 40 years of data.

Invest­ment approach: The odds for a promis­ing 2012 are mount­ing. If the S&P 500 does per­form well, as the last 13 Jan­u­arys with a 3.75% would sug­gest, then investors may wish to remain fully invested this year to take advan­tage of the antic­i­pated rise.

From an inter­mar­ket per­spec­tive, it is also worth not­ing what hap­pens when the US mar­kets moves up. The US dol­lar index and bond prices nor­mally move in the oppo­site direc­tion to the S&P 500. Com­modi­ties are closely coör­di­nated with equi­ties. If the stock mar­ket advances this year, so should base metal, gold, sil­ver, oil and agri­cul­tural grain prices.

Also, there is a shift out of defen­sive sec­tors such as con­sumer sta­ples, health­care and util­i­ties and a move to growth indus­tries like tech­nol­ogy, energy, min­ing, con­sumer dis­cre­tionar­ies, con­struc­tion and basic industry.

More research on com­modi­ties and the mar­kets will be in the upcom­ing Feb­ru­ary newsletter.

Don­ald W. Dony, FCSI , MFTA

Tags: agricultural, Amp, Bond Prices, Bottom Line, Commodities, Dony, Fcsi, Gold Silver, Grain prices, Investment Approach, January Effect, Januarys, Likelihood, Metal Gold, Probabilities, Probability, Speculator, Stock Market, Substantial Gain, Us Dollar Index, Year End
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Will Seasonal Slump Drive Derisking?

Tuesday, January 31st, 2012

The so-called January-Effect is almost at an end and if the mar­ket closes near these lev­els, the S&P 500 will have man­aged a 4.4% gain or its 20th best Jan­u­ary since 1928 (84 years) and best since 1997. The out­per­for­mance of banks and sov­er­eigns (LTRO) and the worst-of-the-worst qual­ity names (most-shorted Rus­sell 3000 stocks +9% YTD vs Rus­sell 3000 +5.2%), as Mor­gan Stan­ley noted recently, is not entirely sur­pris­ing since the Jan­u­ary effect is con­sid­er­ably larger in mid-cap and junk qual­ity names than any other size or qual­ity cohorts. We have pointed to the sea­sonal pos­i­tives in high-yield credit and volatil­ity and along with the obvi­ous short squeeze in S&P futures (which has seen net spec shorts come back to bal­ance recently), we, like MS, are con­cerned that the tail­winds of exu­ber­ance that vir­tu­ously reflect from seem­ingly piv­otal secu­ri­ties (such as short-dated BTPs now or Greek Cash-CDS basis pre­vi­ously) very quickly revert to a sense of real­ity (earn­ings and out­look changes) and per­haps the slow­ing rally and ris­ing volatil­ity of the last few days is the start of that turbulence.

The most-shorted stocks (tracked by the red lines on the above chart) have dra­mat­i­cally out­per­formed the broad mar­kets they are part of with the Rus­sell 3000 most-shorted (thick red) mas­sively out­per­form­ing (almost 400bps in the month!).

Mor­gan Stan­ley: Jan­u­ary Effect

Jan­u­ary is often a month for risk tak­ing since opti­mistic investors believe that any under­per­for­mance dur­ing the month can be reversed by year-end.

In light of the sharp rally in the equity mar­ket thus far this year, we took some time to study the con­cept of a “Jan­u­ary Effect.” Since 1901, the S&P 500 has aver­aged a 1.2% return dur­ing Jan­u­ary with a stan­dard vari­a­tion of 4.3%. In the remain­ing eleven months of the year, the index has aver­aged a 0.5% monthly return with a 5.2% stan­dard vari­a­tion (Exhibit 2).

After account­ing for the stan­dard devi­a­tions, the return spread between Jan­u­ary and the remain­ing eleven months is mar­gin­ally sta­tis­ti­cally sig­nif­i­cant: With a T-stat of 1.73, it is sig­nif­i­cant at the 10%-level but insignif­i­cant at the 5%-level. In fact, 2012’s rally to date is only a 0.8 stan­dard devi­a­tion event, and study­ing his­tory, we would expect such a move to occur in slightly over 20% of January’s. We stud­ied the “Jan­u­ary Effect” by mar­ket cap cohort, quality-junk sta­tus, and value-growth sta­tus. Since 1970, the spread between the Jan­u­ary return and the return for Feb­ru­ary through Decem­ber has been high­est in mid-cap stocks (Exhibit 3). None of the three cap cohort’s return spread is sta­tis­ti­cally significant—the mid-cap spread has the high­est T-stat at 1.46. Year-to-date per­for­mance so far this year by cap cohort is con­sis­tent with smaller-cap outperformance.

We ana­lyzed returns by qual­ity cohort since 1981 and found that both qual­ity and mod­er­ate qual­ity, on aver­age, per­form worse in Jan­u­ary than dur­ing the remain­der of the year. Low qual­ity slightly out­per­forms in Jan­u­ary, while junk is by far the largest out­per­former on aver­age (Exhibit 4). The more pos­i­tive per­for­mance of junk rel­a­tive to the other qual­ity quin­tiles is not sur­pris­ing given that junk stocks are gen­er­ally smaller than qual­ity stocks, and the Jan­u­ary effect is stronger in these small stocks. Still, none of the qual­ity cohorts’ return spreads are sta­tis­ti­cally sig­nif­i­cant after account­ing for volatil­ity and the num­ber of observations.

Tags: Btps, Cohorts, Exuberance, Futures, January Effect, Months Of The Year, Morgan Stanley, Outperformance, Quality Names, Russell 3000, Sense Of Reality, Short squeeze, Slump, Sovereigns, Standard Deviations, Tailwinds, Turbulence, Volatility, Year End, Ytd
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Ryan Lewenza: Investment Outlook (January 27, 2012)

Tuesday, January 31st, 2012

Look to Increase Equity Expo­sure Fol­low­ing an Expected Near-Term Pull­back

by Ryan Lewenza, VP, Senior U.S. Equity Ana­lyst, TD Waterhouse

Jan­u­ary 27, 2012

TD's (TD Water­house) Ryan Lewenza has just released (late last week) his U.S. Equity Strat­egy team's strat­egy report. In it he/they detail their case for increas­ing equity expo­sure fol­low­ing their call for a near-term pullback.

High­lights
• With the S&P 500 Index (S&P 500) up 5.5% since the begin­ning of the year and over 20% since its Octo­ber 2011 low, the U.S. equity mar­ket looks tech­ni­cally over­bought, and sus­cep­ti­ble to some near-term profit tak­ing, in our view. In deter­min­ing whether the equity mar­kets are overbought/oversold we look at a num­ber of tech­ni­cal indi­ca­tors, which at present, are paint­ing a rather clear pic­ture of a stretched and over­bought mar­ket. While we see the poten­tial for some near-term pres­sure over the next few weeks, we believe investors should take advan­tage of the poten­tial weak­ness and look to add to their equity expo­sure, given an improv­ing U.S. econ­omy and the recent liq­uid­ity injec­tion from the Euro­pean Cen­tral Bank.

• One of our pre­ferred mar­ket indi­ca­tors in iso­lat­ing extreme overbought/oversold mar­ket con­di­tions is the per­cent­age of New York Stock Exchange (NYSE) stocks above their 50-day mov­ing aver­age. Gen­er­ally, when this indi­ca­tor is above 80, it indi­cates an over­bought mar­ket, and over­sold when below 20. Cur­rently, this indi­ca­tor stands at 87, a level last seen in late Octo­ber 2011, and just before the S&P 500 cor­rected 10% over the fol­low­ing month.

• After hit­ting an eco­nomic soft patch last sum­mer, the U.S econ­omy has shown some resiliency, espe­cially in light of the head­winds ema­nat­ing from Europe. ISM man­u­fac­tur­ing has ticked higher recently, and with the sub-component New Order Index surg­ing in recent months (57.6 in Decem­ber, up from 49 in sum­mer 2011), we believe there may be more upside for the ISM index over the next few months, which if cor­rect, could con­tinue to sup­port a higher stock market.

• With the recent strength in the U.S. econ­omy and stock mar­ket we are tweak­ing our sec­tor rec­om­men­da­tions, by adding some cycli­cal­ity to our invest­ment strat­egy. In par­tic­u­lar, we are down­grad­ing util­i­ties from over­weight to mar­ket weight, and upgrad­ing the mate­ri­als sec­tor from under­weight to mar­ket weight.

• While we are down­grad­ing util­i­ties, we still believe investors should have some expo­sure to the sec­tor, given their defen­sive qual­i­ties and high div­i­dend yields. One name that stands out is Exelon Corp. (EXC-N). Exelon is one of the largest util­ity com­pa­nies in the U.S. and is the country’s largest nuclear operator.

You can read/download Ryan Lewenza's report in full, in the slid­edeck below; Fullscreen for the larger read:

U.S. Equity Strat­egy (Look to Increase Equity Expo­sure Fol­low­ing an Expected Near-Term Pull­back) — Janaury ...

Tags: Bank One, Equity Analyst, Equity Exposure, Equity Strategy, Headwinds, Investment Outlook, Ism Index, Ism Manufacturing, Market Indicators, New York Stock, New York Stock Exchange, Nyse Stocks, Preferred Market, Pullback, Resiliency, Strategy Report, Strategy Team, Td Waterhouse, Term Profit, York Stock Exchange
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Eurozone Remains In Jeopardy — Rogers, Soros, Altman, Lagarde, Weinberg

Tuesday, January 31st, 2012

Per­spec­tives from the Euro Cri­sis, Week 4, Jan­u­ary 2012

For the com­plete inter­views, visit the fol­low­ing sources:

Jim Rogers:
Jim Rogers — Jan­u­ary 30, 2012 — CNBC.com — No coun­try will exit the euro zone this year but a solu­tion to the debt cri­sis remains elu­sive, Jim Rogers, CEO and Chair­man at Rogers Hold­ings, told CNBC Mon­day. Rogers elab­o­rated that because there are around 40 promi­nent elec­tions hap­pen­ing around the world this year, that noth­ing is going to be allowed to hap­pen this year, how­ever, he is not so con­fi­dent about 2013, or 2014.

George Soros:
George Soros — Jan­u­ary 25, 2012 — CNBC.com — Despite some improve­ment in the euro zone cri­sis after the Euro­pean Cen­tral Bank's recent actions, bil­lion­aire investor George Soros told CNBC on Wednes­day that more is needed to safe­guard the region in the face of a pos­si­ble Greek default and ris­ing national debts.

Roger Alt­man:
Roger Alt­man — Jan­u­ary 27, 2012 — CNBC.com — The turn­ing point in the Europe cri­sis was when the ECB made a very American-like step by lend­ing 450-billion euros and pro­vid­ing liq­uid­ity to the bank­ing sys­tem, says Roger Alt­man, Ever­core Partners.

IMF's Chris­tine Lagarde:
Chris­tine Lagarde — Jan. 27 (Bloomberg) — Inter­na­tional Mon­e­tary Fund Man­ag­ing Direc­tor Chris­tine Lagarde dis­cusses Greece's progress on struc­tural over­hauls and the role of the IMF in avoid­ing a default. She speaks with Maryam Nemazee and John Fra­her on Bloomberg Television's "The Pulse" from the World Eco­nomic Forum's annual meet­ing in Davos, Switzer­land, telling them that her crit­i­cal objec­tive at this moment is to get Greece debt under con­trol, down to a level that is equal to 120% of GDP. (Source: Bloomberg)

Carl Wein­berg:
Carl Wein­berg — Jan. 30 (Bloomberg) — Carl Wein­berg, founder and chief econ­o­mist at High Fre­quency Eco­nom­ics, talks about a Euro­pean Union lead­ers' sum­mit in Brus­sels, that starts today and the euro zone debt cri­sis. Wein­berg told Betty Liu on Bloomberg Television's "In the Loop," that the EU needs to step up and fund the EFSF (Euro­pean Finan­cial Sta­bil­ity Fund) to the tune of an addi­tional 300-billion euros to match the fund­ing agree­ment reached by the ECB, because even the big-name banks like Uni­credit, are strug­gling, and this is the only way to safe­guard the Euro­pean bank­ing sys­tem. In addi­tion, he added they are spend­ing too much time address­ing the wrong issues. (Source: Bloomberg)

Tags: Banking System, Bloomberg Television, Chief Economist, Christine Lagarde, Cnbc, Critical Objective, Davos Switzerland, Debt Crisis, Euro Zone, European Union Leaders, Evercore Partners, George Soros, High Frequency Economics, International Monetary Fund, Jim Rogers, Maryam, National Debts, Nemazee, Roger Altman, Soros George, Stability Fund, Weinberg, World Economic Forum, Youtube
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Guest Post: Baltic Dry Index Signals Renewed Market Decline

Monday, January 30th, 2012

Sub­mit­ted by Bran­don Smith from Alt Mar­ket

Baltic Dry Index Sig­nals Renewed Mar­ket Collapse

Much has been said about the Baltic Dry Index over the course of the last four years, espe­cially in light of the credit cri­sis and the effects it has had on the fre­quency of global ship­ping.  Import­ing and export­ing has never been quite the same since 2008, and this change is made most obvi­ous through one of the few sta­tis­ti­cal mea­sures left in the world that is not sub­ject to direct manip­u­la­tion by inter­na­tional cor­po­rate inter­ests; the BDI.  Today, the BDI is on the verge of mak­ing head­lines once again, being that is plum­met­ing like a wing­less 747 into the swampy mire of what I believe will soon be his­tor­i­cal lows.

The prob­lem with the BDI is that it is lit­tle under­stood and often dis­missed by less thought­ful eco­nomic ana­lysts as a “volatile index” that is too “sen­si­tive” to be used as a real­is­tic indi­ca­tor of future trends.  What these ana­lysts con­sis­tently seem to ignore is that regard­less of their nar­row opin­ion, the BDI has been proven to lead eco­nomic deri­sion in the mar­ket move­ments of the past.  That is to say, the BDI has been volatile exactly BECAUSE mar­kets have been volatile and unsta­ble, and is a far more accu­rate ther­mome­ter than those that most main­stream econ­o­mists cur­rently rely on.  If only they would look back at the num­bers fur­ther than one year ago, they might see their own folly more clearly.

Intro­duced in 1985, the Baltic Dry Index first and fore­most is a mea­sure of the global ship­ping rates of dry bulk goods, mostly con­sist­ing of vital raw mate­ri­als used in the cre­ation of other prod­ucts.  How­ever, it is also a mea­sure of demand for said mate­ri­als in com­par­i­son to pre­vi­ous months and years.  This is where we get into the pre­dic­tive nature of the BDI…

In late 1986, for instance, the BDI fell to its low­est level on record, then, began a slow crawl towards mod­er­ate recov­ery, just before the Black Mon­day crash of 1987.

Coin­ci­dence?  Not a chance.  From 2001 to 2002, a sim­i­lar sharp col­lapse in the BDI pre­ceded a pro­gres­sive drop in the Dow of around 4000 points, end­ing in a highly sus­pect (Fed engi­neered) ille­git­i­mate recov­ery.  In 2008, the index fell to near record lows once again just before the deriv­a­tives and credit cri­sis hit stocks full force.  To imply that the BDI is not a use­ful mea­sure of future eco­nomic trends seems like an aston­ish­ingly igno­rant propo­si­tion when one exam­ines its very pre­dictable behav­ior just before major finan­cial downturns.

This is not to sug­gest that the BDI can be used as a way to play the stock mar­ket from day to day, or often even month to month.  MSM ana­lysts rarely look fur­ther than the next quar­ter when con­sid­er­ing any finan­cial issue, and that is why they don’t under­stand the BDI.  If an index can­not be used by day­traders to make a quick buck in a short after­noon, then why bother with it at all, right?  The BDI is not an accu­rate mea­sure of the daily mar­ket gam­ble.  It is, though, an accu­rate mea­sure of where mar­kets are headed in the long run and under extreme circumstances.

Over the course of the past month, the BDI has fallen around 65% from above 1600 to 726.  Main­stream econ­o­mists argue that the BDI’s fall in 2008 was a much higher per­cent­age, and thus, a 65% drop is noth­ing to worry about.  They fail to men­tion that ship­ping rates never recov­ered from the 2008 col­lapse, and have hov­ered in a sickly man­ner near lows reached dur­ing the ini­tial credit bub­ble burst.  By their logic, if the BDI was at 2, and fell to 1, this 50% drop should be shrugged off as incon­se­quen­tial because it is not a sub­stan­tial per­cent­age of decline when com­pared to that which occurred in 2008, even though the index is stand­ing at rock bot­tom.  Yes, the use­ful idiots strike again…

Look­ing at the rate and the speed of decline this past month, it’s hard to argue that the cur­rent 65% drop is meaningless:

Another sub­ver­sive argu­ment against the BDI is the sug­ges­tion that it is not the demand for raw mate­ri­als that is in decline, but the num­ber of ship­ping ves­sels out of use that is grow­ing.  A smart per­son might sug­gest that these two prob­lems are mutu­ally con­nected.  An MSM pun­dit would not.

In 2008, many ships were left to wal­low in port with­out cargo, but this was due in large part to two cir­cum­stances.  First, demand had fallen so much that too many ships were left to carry too lit­tle raw mate­ri­als.  Sec­ond, credit mar­kets had sunk so intensely that many ships could not find trade financ­ing nec­es­sary to take on cargo.  In either case, the BDI still falls, and in either case, it still sig­nals eco­nomic dan­ger.  The only way that the BDI could sig­nal a major decline in ship­ping demand arti­fi­cially or inac­cu­rately is if a con­sid­er­able num­ber of ships under con­struc­tion were sud­denly released onto the mar­ket while there is no demand for them.  There have been no mass increases or extreme changes in cargo fleets this past month, or at all since 2008, which means, the BDI’s decline has NOTHING to do with the num­ber of ships in oper­a­tion, and every­thing to do with decline in global demand.

What is the bot­tom line?  The stark decline in the BDI today should be taken very seri­ously.  Most sim­i­lar declines have occurred right before or in tan­dem with eco­nomic insta­bil­ity and stock mar­ket upheaval.  All the aver­age per­son need do is look around them­selves, and they will find a Euro­pean Union in the midst of detri­men­tal credit down­grades and on the verge of dis­solv­ing.  They will find the U.S. on the brink of yet another national debt bat­tle and hostage to a pri­vate Fed­eral Reserve which has announced the pos­si­bil­ity of a third QE stim­u­lus pack­age which will likely be the last before for­eign cred­i­tors begin dump­ing our trea­suries and our cur­rency in protest.  They will find BRIC and ASEAN nations mov­ing qui­etly into mul­ti­ple bilat­eral trade agree­ments which cut out the use of the dol­lar as a world reserve com­pletely.  Is it any won­der that the Baltic Dry Index is in such steep deterioration?

Along with this decline in global demand is tied another trend which many tra­di­tional defla­tion­ists and Key­ne­sians find bewil­der­ing; infla­tion in com­modi­ties.  Ulti­mately, the BDI is valu­able because it shows an extreme fal­ter­ing in the demand for typ­i­cal indus­trial mate­ri­als and bulk items, which allows us to con­trast the increase in the prices of neces­si­ties.  Global demand is wan­ing, yet prices are hold­ing at con­sid­er­ably high lev­els or are ris­ing (a bla­tant sign of mon­e­tary deval­u­a­tion).  Indeed, the most prac­ti­cal con­clu­sion would be that the mon­ster of stagfla­tion has been brought to life through the dark alchemy of crim­i­nal debt cre­ation and uncon­trolled fiat stim­u­lus.  With­out the BDI, such dis­as­ter would be much more dif­fi­cult to fore­see, and far more shock­ing when its full weight finally falls upon us.  It must be watched with care and vigilance...

Tags: Accurate Thermometer, Baltic Dry Index, Black Monday, Brandon Smith, Corporate Interests, Credit Crisis, Derision, Economic Analysts, Folly, Future Trends, Global Shipping, Lows, Mainstream Economists, Market Collapse, Market Decline, Raw Materials, Shipping Rates, Slow Crawl, Statistical Measures, Wingless
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John Hussman: Investment Outlook (01/30/12)

Monday, January 30th, 2012

Invest­ment Out­look, Jan­u­ary 30, 2012
Warn­ing: Goat Rodeo

by John P. Huss­man, Ph.D.

Goat Rodeo — Appalachian slang for a chaotic, high-risk, or unman­age­able sce­nario requir­ing count­less things to go right in order to walk away unharmed.

Over the years, of the most fre­quent phrases in these weekly com­ments has been "on aver­age." Most of the invest­ment con­di­tions we observe are asso­ci­ated with a mix of pos­i­tive and neg­a­tive out­comes, so rather than mak­ing spe­cific fore­casts about future mar­ket direc­tion, we gen­er­ally align our invest­ment posi­tion in pro­por­tion to the aver­age return/risk out­come, rec­og­niz­ing that the actual out­come may be dif­fer­ent than that aver­age in any par­tic­u­lar instance.

Increas­ingly how­ever, we have observed sets of con­di­tions that are so heav­ily skewed toward bad out­comes that they deserve the word "warn­ing" (see Extreme Con­di­tions and Typ­i­cal Out­comes near the 2011 peak, Don't Mess with Aunt Min­nie before the 2010 mar­ket break, Expect­ing a Reces­sion in late 2007, A Who's Who of Awful Times to Invest at the 2007 mar­ket peak, and our shift from a mod­estly con­struc­tive invest­ment posi­tion to a Crash Warn­ing in Octo­ber of 2000). While the down­turns that fol­lowed have pro­voked increas­ingly large and des­per­ate actions of cen­tral banks to kick the can down the road by pre­vent­ing debt restruc­tur­ing and finan­cial delever­ag­ing (in some cases by vio­lat­ing legal con­straints — see The Case Against the Fed ), the fact is that the S&P 500 has achieved a total return of just 1.2% annu­ally over the past 12 years, as a pre­dictable out­come of rich val­u­a­tions and still-unresolved eco­nomic imbalances.

I could admit­tedly do bet­ter, and would cer­tainly have cap­tured more upside from tem­po­rary spec­u­la­tion, had I com­mit­ted myself to the prin­ci­ple that cen­tral banks will act strictly to defend the bond­hold­ers of the banks they rep­re­sent, even if it means tres­pass­ing into fis­cal pol­icy, sub­or­di­nat­ing pub­lic inter­est, empow­er­ing the worst stew­ards of cap­i­tal, vio­lat­ing legal restric­tions, and invit­ing long-term insta­bil­ity. Still, none of those actions improve the long-term out­come for the mar­kets, and more impor­tantly, none have pre­vented repeated and seri­ous down­turns from occur­ring, despite all the can-kicking.

Once again, we now have a set of mar­ket con­di­tions that is asso­ci­ated almost exclu­sively with steeply neg­a­tive out­comes. In this case, we're observ­ing an "exhaus­tion" syn­drome that has typ­i­cally been fol­lowed by mar­ket losses on the order of 25% over the fol­low­ing 6–7 month period (not a typo). Worse, this is cou­pled with evi­dence from lead­ing eco­nomic mea­sures that con­tinue to be asso­ci­ated with a very high risk of oncom­ing reces­sion in the U.S. — despite a mod­est firm­ing in var­i­ous lag­ging and coin­ci­dent eco­nomic indi­ca­tors, at still-tepid lev­els. Com­pound this with unre­solved credit strains and an effec­tively insol­vent bank­ing sys­tem in Europe, and we face a likely out­come aptly described as a Goat Rodeo.

My con­cern is that an improb­a­bly large num­ber of things will have to go right in order to avoid a major decline in stock mar­ket value in the months ahead. We presently esti­mate that the S&P 500 is likely to achieve a 10-year total return (nom­i­nal) of only about 4.7% annu­ally, which reduces the like­li­hood that fur­ther gains will be durable even if they per­sist for a while longer. In the con­text of present val­u­a­tions and a prob­a­ble Goat Rodeo in the months ahead, my impres­sion is that the recent mar­ket advance may be a tran­si­tory gift.

Whip­saws, Noise and Exhaustion

In nearly all real-world data, there are short-term fluc­tu­a­tions, ran­dom effects, and other influ­ences that cre­ate "noise" in the val­ues that we observe. Typ­i­cally, those sources of noise con­found the "sig­nal" that we want to iden­tify, so unless the noise is fil­tered away, there is a risk of being mis­led by mean­ing­less short-term fluc­tu­a­tions. In finance, there are count­less approaches that essen­tially involve noise reduc­tion. For exam­ple, a mov­ing aver­age is just a sim­ple noise-reduction tech­nique, where very short-term fluc­tu­a­tions ("high fre­quency com­po­nents") are aver­aged away, leav­ing the smoother influ­ence of longer-term fluc­tu­a­tions. Sim­i­larly, the Cop­pock Curve — the 10-month expo­nen­tial smooth­ing of the aver­aged 11-month and 14-month rate of change of the mar­ket — is really just a "low-pass" fil­ter that cuts away high fre­quency fluc­tu­a­tions and allows the market's long-term (low fre­quency) cycles to pass through.

In late Octo­ber, I noted a con­di­tion that we char­ac­ter­ize as a Whip­saw Trap — which essen­tially involves a break­down in a broad set of mar­ket inter­nals, fol­lowed by a recov­ery dri­ven by some of the more volatile com­po­nents (sec­tors such as finan­cials and trans­porta­tion stocks are good exam­ples). I noted that only about 30% of these whip­saw traps were fol­lowed by fur­ther advances — a sta­tis­tic that was based on sub­se­quent mar­ket action over the fol­low­ing 6–8 week period. The real ques­tion is "What then?" The answer is both straight­for­ward and trou­ble­some. Specif­i­cally, when­ever we've observed a whip­saw trap that then advances enough to a) drive the S&P 500 earn­ings yield below its level of 6 months ear­lier and b) raise advi­sory bull­ish­ness beyond 45% — or bear­ish­ness below 30%, the result has almost always been hos­tile. Essen­tially, what this com­bi­na­tion picks up is an already frag­ile set of mar­ket inter­nals that has enjoyed an "exhaus­tion rally" that both exceeds earn­ings growth and is met with over­bull­ish sentiment.

The pre­vi­ous obser­va­tions of this exhaus­tion syn­drome, and the deep­est decline from that point to the low of the next 7 months, on a weekly clos­ing basis, were: Novem­ber 1961 (-25%), August 1987 (-33%), July 1998 (-18%), July 1999 (-12%), August 2000 (-22%), May 2001 (-24%), March 2002 (-32%) and May 2008 (-43%). There were also two instances of this syn­drome that were not asso­ci­ated with a mar­ket plunge: Jan­u­ary 2006 dur­ing the hous­ing bub­ble (which ulti­mately led to a mar­ket col­lapse well below those lev­els), and Novem­ber 2010, just as the Fed was ini­ti­at­ing QE2 (which still did not pre­vent the mar­ket from trad­ing at lower lev­els about 9 months later).

If we think in terms of "exhaus­tion ral­lies," the syn­drome we're observ­ing here is a mul­ti­ple indi­ca­tor ver­sion of sig­nals like the Cop­pock "killer wave" — which occurs when the Cop­pock Curve reaches a peak, declines, and the mar­ket then recruits an advance large enough to estab­lish a sec­ond wave higher. Some tech­ni­cians have debated how best to define the sig­nal (e.g. the decline required to define a neg­a­tive shift) — in our view, it's not a good idea to use a sin­gle indi­ca­tor in the first place — but in any event, the sell­offs from those exhaus­tion waves have often been bru­tal, and a few over­lap the syn­drome out­lined here.

In short, mar­ket action is presently show­ing fea­tures asso­ci­ated with "exhaus­tion ral­lies", which have often been fol­lowed by deep losses over the fol­low­ing 6–7 month period.

As a side note, we've seen an sim­i­lar whip­saw in var­i­ous eco­nomic sta­tis­tics recently, where I con­tinue to view the mod­est but tepid "recov­ery" as a reflec­tion of high-frequency noise. Here too, the under­ly­ing "sig­nal" remains weak, but the more volatile com­po­nents have been pos­i­tive. Unfor­tu­nately, the typ­i­cal result is that the diver­gence snaps shut in the direc­tion of the signal.

[Geek's Note: What I call a "Whip­saw Trap" is basi­cally a break­down in a broad range of mar­ket inter­nals, fol­lowed by an advance in more volatile, high-frequency com­po­nents that isn't enough to sur­vive mov­ing aver­ages and other low-pass fil­ters. It's dif­fi­cult to draw a true sig­nal from noisy data unless you have a lot it, and unfor­tu­nately, the more data you need to use to infer a sig­nal, the greater the "lag" there is in rec­og­niz­ing that sig­nal. Think again of a mov­ing aver­age — the longer-term the mov­ing aver­age, the more it lags behind recent action. The bet­ter you want a micro­phone to can­cel noise, the longer the delay you have to endure between the input and the out­put. Gen­er­ally speak­ing, we get bet­ter and more rapid infor­ma­tion about the true, under­ly­ing "sig­nal" if we can draw that sig­nal out of mul­ti­ple indi­ca­tors, each which car­ries part of that infor­ma­tion. Meth­ods to dis­tin­guish "sig­nal" from "noise" run through much of my finan­cial, eco­nomic, and sci­en­tific work, for exam­ple Mar­ket Effi­ciency and Inef­fi­ciency in Ratio­nal Expec­ta­tions Equi­lib­ria , and A Noise-Reduction GWAS Analy­sis Impli­cates Altered Reg­u­la­tion of Neu­rite Out­growth and Guid­ance in Autism . The ben­e­fit of infer­ring sig­nals from mul­ti­ple sources is why the ratio­nal expec­ta­tions paper used vec­tor ARMA mod­els for infer­ence, why the GWAS paper exploited the local cor­re­la­tion of asso­ci­a­tion sig­nals within the same chro­mo­so­mal region across mul­ti­ple data sets, and why good lead­ing eco­nomic indices com­bine mul­ti­ple series rather than using any sin­gle indi­ca­tor as an acid test].

Reces­sion risk remains high

Last week con­tained very lit­tle to alter our view that a global eco­nomic down­turn is likely here. While we rec­og­nize the mod­est, low-level improve­ment in a vari­ety of indi­ca­tors (see Dodg­ing a Bul­let, from a Machine Gun ), and also esti­mate that reces­sion risk is some­thing less than 100%, this is far from a sus­pen­sion of our reces­sion con­cerns. To the con­trary, a con­certed global down­turn that includes the U.S. remains the most likely outcome.

Last week, the Con­fer­ence Board released its revised ver­sion of Lead­ing Eco­nomic Indi­ca­tors, which shows a sharply weaker tra­jec­tory than the for­mer ver­sion if the LEI. Indeed, the revised LEI has already turned down, though to a lesser degree than just before pre­vi­ous recessions.

A few eco­nomic notes. In early 2010, we exam­ined the sea­sonal adjust­ment fac­tors used by the Bureau of Labor Sta­tis­tics in the monthly employ­ment report (see Notes on a Dif­fi­cult Employ­ment Out­look ). While we didn't observe any strik­ing diver­gences between the BLS adjust­ment fac­tors and our own esti­mates, I noted that the effect of those sea­sonal adjust­ments typ­i­cally amounted to any­where between +1.9 and –1.3 mil­lion jobs, depend­ing on the month. Presently, we esti­mate that the effect of these adjust­ments range between +2.1 mil­lion and –1.1 mil­lion jobs in any given month (see When Pos­i­tive Sur­prises are Sur­pris­ingly Mean­ing­less ). These are strik­ingly large num­bers com­pared with the typ­i­cal range of fore­casts that often sur­round the monthly employ­ment numbers.

Think of it this way — if there is typ­i­cally a great deal of tem­po­rary job cre­ation in the fourth quar­ter of the year (and there is), the effect of sea­sonal adjust­ment will be to sub­tract off a cer­tain pro­por­tion of actual employ­ment in order to smooth that bulge down. Accord­ingly the October-December adjust­ment fac­tors range between –0.6% and –0.8% of total non-seasonally adjusted employ­ment. In con­trast, if there is a great deal of job destruc­tion in Jan­u­ary and Feb­ru­ary (and there is), the effect of sea­sonal adjust­ment will be to add back some amount of phan­tom employ­ment, amount­ing to between 1.1% and 1.6% of total non­farm pay­roll jobs.

Given that vir­tu­ally all eco­nomic series under­goes some amount of sea­sonal adjust­ment, it isn't dif­fi­cult to see how the extra­or­di­nar­ily weak eco­nomic data in late 2008 and early 2009 may have pro­duced an upward bump in a wide vari­ety of sea­sonal adjust­ment fac­tors for data around the turn of the year, adding to the short-term noise we're already observ­ing in var­i­ous eco­nomic series. In any event, even with­out any skewed sea­sonal fac­tors, the broad ensem­ble of lead­ing eco­nomic evi­dence remains unfa­vor­able here.

Finally, while we typ­i­cally dis­cour­age draw­ing infer­ences from any sin­gle indi­ca­tor, it's at least worth not­ing that with the release of Q4 GDP fig­ures, the year-over-year growth rate of real U.S. GDP remains below 1.6% (denoted by the red line below). A decline in GDP growth to this level has always been asso­ci­ated with reces­sion, usu­ally coin­ci­dent with that decline, though with a two-quarter lag in two instances (1956 and 2007), and with one post-recession dip in growth dur­ing the first quar­ter of 2003. As it hap­pens, the GDP growth rate dropped below 1.6% in the third quar­ter of 2011.

Given the strong and rather obvi­ous rela­tion­ship between the most recent year-over-year rate of GDP growth and the prospect of oncom­ing reces­sion, it's dif­fi­cult to under­stand why Wall Street so com­pletely rejects the like­li­hood of an eco­nomic down­turn. Then again, that's exactly why we're expect­ing a Goat Rodeo.

Mar­ket Climate

As of last week, the Mar­ket Cli­mate for stocks was char­ac­ter­ized by con­di­tions we asso­ciate with a "whip­saw trap," cou­pled with over­val­ued, over­bought, over­bull­ish con­di­tions and evi­dence of exhaus­tion that has only a hand­ful of gen­er­ally awful his­tor­i­cal peers. Strate­gic Growth and Strate­gic Inter­na­tional remain tightly hedged, though in both funds, we've clipped a few per­cent from our hedges to reflect the more defen­sive com­po­si­tion of our hold­ings. Though steep mar­ket declines tend to be indis­crim­i­nate (with even defen­sive stocks often act­ing as if they have a beta of 1.0), we rec­og­nize that "risk on" days can also be very uncom­fort­able when defen­sives lag the mar­ket and our hedges bite with full force. The mod­est change to our hedge is intended to main­tain our down­side pro­tec­tion while hope­fully pro­duc­ing a lit­tle bit less day-to-day dis­com­fort on days when Wall Street sud­denly goes "risk on" and chases banks, finan­cials, mate­ri­als, and high-debt cycli­cals, all of which we hold with smaller weight than the major indices reflect. Over­all, how­ever, we would still char­ac­ter­ize our invest­ment posi­tion as strongly defensive.

In Strate­gic Total Return, we're see­ing some mod­er­ate shifts in the Mar­ket Cli­mates for bonds ver­sus pre­cious met­als. We used last week's weak­ness in bonds to increase the dura­tion of the Fund toward a still mod­er­ate 4.5 years, while using the strength in pre­cious met­als shares to clip back our hold­ings below 10% of assets. Given the volatil­ity of pre­cious met­als shares rel­a­tive to bonds, the over­all effect is to move the Fund to a some­what more con­ser­v­a­tive stance, in the sense that day-to-day volatil­ity is likely to be lower than it has been with a more sig­nif­i­cant pre­cious met­als posi­tion. While the Mar­ket Cli­mate for pre­cious met­als shares remains pos­i­tive, we observed a dis­crete reduc­tion in our pro­jected return esti­mates, and are align­ing our invest­ment stance proportionately.

Tags: Aunt Minnie, Bondholders, Central Banks, Debt Restructuring, Extreme Conditions, Fiscal Policy, Future Market, High Risk, Investment Conditions, Investment Outlook, Investment Position, John Hussman, Legal Constraints, Market Direction, Market Peak, Negative Outcomes, Predictable Outcome, Stewards, Typical Outcomes, Valuations
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Average Age of U.S. Vehicles Hits Record 10.8 Years

Monday, January 30th, 2012

Some com­bi­na­tion of bet­ter made cars, and less Amer­i­cans able to pay new car prices has con­spired to push up the aver­age age of U.S. vehi­cles to a new record high.  Reflect­ing this sea change, one of the best invest­ment groups the past 3–4 years has been the auto­mo­tive after­mar­ket retail­ers, head­lined by Auto­zone (AZO).

Tra­di­tion­ally these stocks would rally more dur­ing reces­sions and then weaken in recov­er­ies.  But as a bevy of issues has changed the long term for­tunes of the Amer­i­can mid­dle class (plus the removal of the "house ATM" i.e. cash out with­drawal from mort­gages), we appear to have a change in this group from a cycli­cal growth story to sec­u­lar.  It is also fur­ther proof that much of the eco­nomic 'recov­ery' is hap­pen­ing in the upper 20–30% of the pop­u­la­tion, who derive about half the spend­ing in the country.

Ford (F) reported this morn­ing and while EPS missed esti­mates, rev­enue came in sharply (10%) over esti­mates.  Dur­ing the heydey of the house ATM mid decade, the U.S. car mar­ket was north of 16M in annual sales.  That dipped to about 10M in the depths of the Great Reces­sion, and has now rebounded to a 12-13M range.  Auto mak­ers of course have responded (along with the cut­ting of costs dur­ing the bailouts) and now are quite prof­itable even at this much lower range of auto sales.  If we can even see a rebound to the 14-15M range, the U.S. automak­ers should be spit­ting out prof­its.  (Keep in mind the new wage sys­tem in place is replac­ing a lot of $28–35+/hour type of works with $14 new hires)

• The aver­age age of a car or truck in the U.S. hit a record 10.8 years last year as job secu­rity and other eco­nomic wor­ries kept many peo­ple from mak­ing big-ticket pur­chases such as a new car.   That's up from the old record of 10.6 years in 2010
• ….in 1995…. the aver­age age of a car was 8.4 years.
• However, Polk Vice Pres­i­dent Mark Seng says that a rebound in sales last year and expected growth for the next cou­ple of years is likely to slow the growth rate in the age of cars as a whole in Amer­ica. Polk has not pre­dicted if or when the age will start to drop, but Seng doesn't see that hap­pen­ing for at least two or three years, if not longer.  "It's going to take the good econ­omy sev­eral years of very high sales again, and peo­ple being will­ing to let go of those older vehi­cles that they've been hold­ing onto," Seng said.
• Last year, auto sales rebounded a bit to 12.8 mil­lion vehi­cles, espe­cially in Novem­ber and Decem­ber, when sales were unusu­ally strong. In 2010, U.S. sales totaled 11.6 mil­lion after hit­ting a 30-year low of 10.4 mil­lion in 2009.
• But even a 1 mil­lion per year sales increase will have lit­tle impact on the aver­age age because there are more than 240 mil­lion cars and trucks on the roads in the U.S., Seng says.
• Shares of major auto parts stores, such as Auto­Zone Inc., O'Reilly Auto­mo­tive Inc. and Advance Auto Parts Inc., have eas­ily out­paced the S&P 500 index since late 2007 when the reces­sion began.

Dis­clo­sure Notice

Any secu­ri­ties men­tioned on this page are not held by the author in his per­sonal port­fo­lio. Secu­ri­ties men­tioned may or may not be held by the author in the mutual fund he man­ages, the Pal­adin Long Short Fund (PALFX). For a list of the afore­men­tioned fund's hold­ings at the end of the prior quar­ter, visit the Pal­adin Funds web­site at http://www.paladinfunds.com/holdings/blog

Tags: 15m, 8 Years, Auto Makers, Auto Sales, Automakers, Autozone, Azo, Bevy, Car Market, Country Ford, Cyclical Growth, Economic Recovery, Economic Worries, Investment Groups, Job Security, New Car Prices, Recessions, Sea Change, Ticket Purchases, Vice President Mark
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ECRI Leading Indicator: Turning for the Better?

Monday, January 30th, 2012

The lat­est smoothed annu­al­ized growth rate of the ECRI Weekly Lead­ing Indi­ca­tor in the week ended 22 Jan­u­ary improved from –7.6% to –6.5% pub­lished last week – the 23^rd con­sec­u­tive week of con­trac­tion since August last year.

Sources: Dis­mal Sci­en­tist; Plexus Asset Management.

But where is it head­ing? In pre­vi­ous arti­cles I argued that the smoothed annu­al­ized growth rate of the WLI bot­tomed at –10.1% (offi­cially adjusted from 10.2%) in the week ended Octo­ber 23 last year.

In light of the sig­nif­i­cant move­ments in invest­ment mar­kets over the past week, I had a look at what growth rate can be expected of this impor­tant num­ber that will be pub­lished at the end of this week for the period ended last Fri­day. To get to my fore­cast I use dif­fer­ent vari­ables that seem to explain the growth in the ECRI WLI fairly accu­rately. (Please note that I do not have knowl­edge of the pro­pri­etary ECRI WLI con­stituents and sim­u­late the Index using my own research.)

The smoothed annu­al­ized growth rate of S&P 500 Index (SPX 1316.33 ↓-0.16%) remains my best indi­ca­tor of the ECRI WLI growth rate.

Sources: Dis­mal Sci­en­tist; I-Net Bridge; Plexus Asset Management.

The con­trac­tion in the S&P 500‘s smoothed annu­al­ized growth rate ended in the sec­ond week of Jan­u­ary after con­tract­ing for 22 weeks in a row. Over the past week the growth accel­er­ated to 2.9% from 0.4% a week ago. It is evi­dent that the improved growth rate of the S&P 500 is likely to have exerted upward pres­sure on the smoothed annu­al­ized growth rate of the WLI over the past week.

Sources: Dis­mal Sci­en­tist; I-Net Bridge; Plexus Asset Management.

The con­trac­tion in the smoothed annu­al­ized growth rate of the yield on the U.S. 10-year Gov­ern­ment bond index recorded its 34^th week of con­trac­tion and remains close to its worst lev­els since Jan­u­ary 2008.at –65%. It is unlikely that U.S. bond exerted down­side pres­sure on the WLI growth last week.

Sources: Dis­mal Sci­en­tist; I-Net Bridge; Plexus Asset Management.

Last week also marked the 24^th con­sec­u­tive week of declines in the smoothed growth rate of the Econ­o­mist Metal Price Index. After slump­ing to –35% at the end of Decem­ber last year the rate of con­trac­tion eased to –22.4%. This eas­ing prob­a­bly eased the con­trac­tion in the growth rate of the WLI last week.

Sources: Dis­mal Sci­en­tist; I-Net Bridge; Plexus Asset Management.

Sources: Dis­mal Sci­en­tist; Plexus Asset Management.

Another indi­ca­tor that I value is the growth rate of ini­tial job­less claims. Con­trary to other fac­tors that forced the con­trac­tion in the growth rate of the WLI over the past 25 weeks plus, the growth rate of job­less claims indi­cates con­trac­tion for 35 con­sec­u­tive weeks. Assum­ing that job­less claims were unchanged from the pre­vi­ous week’s 377 000 the growth rate declined to ‑14.4% from –15.1%. Ini­tial job­less claims needed to fall to 365 000 to con­tinue to exhibit a faster decline in growth.

Sources: Dis­mal Sci­en­tist; I-Net Bridge; Plexus Asset Management.

I have also iden­ti­fied another fac­tor that may have a major bear­ing on the WLI. The smoothed annu­al­ized growth rate of the yield spread between the 30-year gov­ern­ment bond and Moody’s Baa Cor­po­rate Bond is highly cor­re­lated to the growth rate of the WLI smoothed annu­al­ized growth rate. (Please note the reverse order of the axis of the WLI in the graph below.)

Sources: Dis­mal Sci­en­tist; FRED; Plexus Asset Management.

Last week the yield spread entered its 24^th con­sec­u­tive week of pos­i­tive growth but eased to 38.9% from 42.5% the pre­vi­ous week and is sig­nif­i­cantly below the 61.2% level reached in the first week of Decem­ber last year. The lower growth rate of the yield spread is likely to alle­vi­ate fur­ther down­side pres­sure on the WLI growth rate last week.

Sources: Dis­mal Sci­en­tist; FRED; Plexus Asset Management.

Another fac­tor that some colum­nists advo­cate may influ­ence the WLI is the MBA Mort­gage Appli­ca­tion Sur­vey Pur­chase Index. Although there is some quan­ti­ta­tive evi­dence the cor­re­la­tion between the smoothed annu­al­ized growth rate of the Pur­chase Index and the WLI, it is not very help­ful in fore­cast­ing the WLI, though.

Sources: Dis­mal Sci­en­tist; Plexus Asset Management.

M2 money sup­ply growth is also cited as an impor­tant fac­tor in the WLI. To my mind the Fed’s inter­ven­tion since 2008 makes it an unre­li­able fac­tor in fore­cast­ing the growth rate of the WLI.

On bal­ance, I there­fore expect last week’s smoothed annu­al­ized growth rate of the ECRI WLI (to be pub­lished on Fri­day) will have eased sig­nif­i­cantly to approx­i­mately –4.5% from –6.5% the pre­vi­ous week. I think the eas­ing of the con­trac­tion in the smoothed annu­al­ized growth rate of the WLI is set to con­tinue in com­ing weeks, sup­ported by fur­ther growth in espe­cially the S&P 500, fur­ther eas­ing in the con­trac­tion in growth in metal prices and a fur­ther con­trac­tion in growth in ini­tial job­less claims. The Fed’s TWIST pro­gram may depress the WLI and the growth thereof due to arti­fi­cial low long bond rates.

A very inter­est­ing aspect came to the fore when I delved into other fac­tors that might influ­ence the WLI. The smoothed annu­al­ized growth rate of the U.S. dollar/euro exchange rate tracks the WLI growth rate. In fact, it tends to lead the WLI at major bottoms.

Sources: Dis­mal Sci­en­tist; Plexus Asset Management.

Tags: Amp, Asset Management, Bridge, Constituents, Contraction, Dismal Scientist, Downside, Ecri, Government Bond Index, Investment Markets, Knowledge, Last Friday, Leading Indicator, Rate Sources, Spx, Upward Pressure, Variables, Wli
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Balance Sheet Recession Basics – Not Your Father’s Economic Cycle

Sunday, January 29th, 2012

The Sit­u­a­tion

Europe, UK and the US are all cur­rently mired in a Bal­ance Sheet Reces­sion (BSR). A term for the cur­rent “rare dis­ease” the global econ­omy is suf­fer­ing from coined by Richard Koo in his sem­i­nal book “The Holy Grail of Macro­eco­nom­ics” where he pro­vides a blue­print for our cur­rent malaise and pro­vides what I think is the most com­pre­hen­sive solu­tion to date. This is my attempt to use his tem­plate, laid out in the book, to look at our world today. I am not an econ­o­mist, for that I am grate­ful, but if I’m wrong on any­thing please do cor­rect me!

The length of time it takes for the var­i­ous coun­tries to emerge from their BSR will depend on the pol­icy responses enacted in each eco­nomic zone. One prece­dent is pro­vided by the Great Depres­sion where it took 30 years, from 1929 to 1959 before inter­est rates returned to their aver­age level of the 1920s. These are once in a gen­er­a­tion events and we have never had one affect­ing such a large bloc of Global GDP simultaneously.

“Reces­sions are typ­i­cally char­ac­ter­ized by inven­tory cycles — 80% of the decline in GDP is typ­i­cally due to the de-stocking in the man­u­fac­tur­ing sec­tor. Tra­di­tional pol­icy stim­u­lus almost always works to absorb the excess by stim­u­lat­ing domes­tic demand. Depres­sions often are marked by bal­ance sheet com­pres­sion and delever­ag­ing: debt elim­i­na­tion, asset liq­ui­da­tion and ris­ing sav­ings rates. When the credit expan­sion reaches bub­ble pro­por­tions, the dis­tance to the mean is longer and deeper.” David Rosenberg

What is a Bal­ance Sheet Recession?

“To under­stand the Great Depres­sion was the Holy Grail of Macro­eco­nom­ics” Ben Bernanke

A Bal­ance Sheet Reces­sion comes to pass when a plunge in asset prices dam­ages pri­vate sec­tor bal­ance sheets so badly as to bring about a shift in the mind­set and pri­or­i­ties of the asset own­ers; from profit max­imi­sa­tion to debt min­imi­sa­tion; and from for­ward look­ing to back­ward look­ing. When the value of assets like equi­ties and real estate falls but the loans used to pur­chase them remain, bor­row­ers find them­selves with a neg­a­tive net worth and in a strug­gle to survive.

As with the asset bub­bles that pre­cede them, Bal­ance Sheet Reces­sions are rare and pro­longed events. When they do hap­pen, they ren­der use­less the stan­dard eco­nomic pol­icy responses taught in uni­ver­si­ties and prac­ticed by Invest­ment Bankers and Cen­tral Bankers globally.

In Japan, as today in the US, UK and Europe, we have a sit­u­a­tion where many cor­po­rate and per­sonal bal­ance sheets are under­wa­ter but “core oper­a­tions” for most com­pa­nies and fam­i­lies remain rea­son­ably robust – prof­its are healthy and cash flow/incomes are solid. In this sit­u­a­tion, any ratio­nal actor will com­mit them­selves to dili­gently repay­ing their debt and adding low risk assets to repair their bal­ance sheet as quickly as possible.

A nation­wide plunge in asset prices evis­cer­ates the asset side of the bal­ance sheet but leaves the lia­bil­i­ties intact. The entire econ­omy expe­ri­ences a “fal­lacy of com­po­si­tion” which means an action that is most appro­pri­ate for each indi­vid­ual becomes ruinous if every­one engages in it at once. In this exam­ple, we mean repair­ing bal­ance sheets.

Koo’s exam­ple is as fol­lows – a house­hold earns $1,000 and spends $900, sav­ing $100. The $900 spent becomes some­one else’s income and cir­cu­lates in the econ­omy, the $100 goes to a bank where it is then lent out to indi­vid­u­als or cor­po­rates which would then spend or invest it, cir­cu­lat­ing it back into the econ­omy. There­fore spend­ing and sav­ings both con­tinue to cir­cu­late – keep­ing the $1,000 “in play”. If there are no will­ing bor­row­ers for the $100 then the banks will lower the inter­est rate they charge until the demand is created.

But in Japan and in the Great Depres­sion, and to some extent now, there is no demand for the $100 despite inter­est rates at 300 year lows.

The $100 just sits in the bank being nei­ther bor­rowed nor spent. Only $900 is spent in the econ­omy and the next house­hold receives only that $900 of which it saves 10% to the bank, which again can­not lend that $90 because there is no loan demand so it stays as reserves. The next house­hold receives only $810 in income and so on. This is a defla­tion­ary spi­ral which would serve only to exac­er­bate falls in asset prices mak­ing bal­ance sheets worse rather than better.

Add to this sim­ple model the addi­tional prob­lem of cor­po­rates also in bal­ance sheet repair mode and you have an idea of the prob­lem faced. The econ­omy loses demand equiv­a­lent to the sum of net house­hold sav­ings and net cor­po­rate debt repay­ment each year.

This is exactly what hap­pened in the Great Depres­sion tak­ing Gross National Prod­uct down by almost 50% in 4 years.

Accord­ing to Koo, the only solu­tion for this prob­lem is for sus­tained fis­cal pol­icy sup­port via direct gov­ern­ment bor­row­ing and spend­ing on real projects to keep the econ­omy afloat whilst pri­vate sec­tor bal­ance sheets are fully repaired.

How do we know we are in a Bal­ance Sheet Recession?

1. Pri­vate Sec­tor is Pay­ing Down Debt
2. Mon­e­tary Pol­icy is Impotent
3. Quan­ti­ta­tive Eas­ing Doesn’t Work
4. Silent and Invisible
5. Debt Rejec­tion Syndrome

1. Pri­vate Sec­tor is Pay­ing Down Debt

Now, as in Japan, it was argued by many that the bank­ing sec­tor was pri­mar­ily respon­si­ble for the reces­sion. It is believed that a strug­gling bank­ing sec­tor is chok­ing off the flow of money to the econ­omy – we see this in politi­cians jaw­bon­ing about “forc­ing banks to lend to busi­nesses so they can invest” and so on.

For a com­pany in need of funds the clos­est sub­sti­tute to a bank loan is cor­po­rate bond issuance. Any com­pany that wants to bor­row but can’t because the “banks won’t lend” should, in the­ory, be able to issue bonds on the mar­ket. So do the num­bers bear out this idea that firms have been going to the mar­ket for fund­ing? Not really….Good data was hard for me to find as much of it is pol­luted by huge gov­ern­ment issuance and there­fore doesn’t reflect pri­vate sec­tor demand – but this is what I got.

Global bond issuance totalled $1.8 tril­lion in the first quar­ter of 2011, down 4% on the same period in the pre­vi­ous year.

Issuance by non-financial cor­po­ra­tions in 2010 over­took that by finan­cial insti­tu­tions for the first time since finan­cial sec­tor issuance started to grow in the early 1990s. The $925bn issued by non-financial insti­tu­tions in 2010 was down from $1,080bn in the pre­vi­ous year. Issuance from finan­cial insti­tu­tions declined more quickly dur­ing the year from $1,487bn to $576bn. All shrinking.

This says to me that cor­po­rate demand is at best tepid, espe­cially rel­a­tive to the bumper years in the mid 2000s. What makes this even more remark­able is that this is the face of ZIRP! These com­pa­nies can bor­row for costs so low they couldn’t have dreamt of them just a few years ago, and yet they still can’t be coerced.

Tags: Asset Liquidation, Asset Owners, Asset Prices, Comprehensive Solution, Credit Expansion, David Rosenberg, Economic Cycle, Economic Zone, Global Economy, Global Gdp, Great Depression, Holy Grail, Minimisation, Policy Responses, Profit Maximisation, Rare Disease, Recessions, Richard Koo, Seminal Book, Zone One
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The Sears Collapse: Conspiracy or Cluelessness…or Worse?

Sunday, January 29th, 2012

The Sears Col­lapse: Con­spir­acy or Cluelessness…or Worse?

by Jeff Matthews, is the author the author­i­ta­tive per­spec­tive on Berk­shire Hath­away, “Secrets in Plain Sight: Busi­ness and Invest­ing Secrets of War­ren Buf­fett”, (eBooks on Invest­ing, 2011) Avail­able now at Amazon.com.

Since “Hell­hound on His Trail” came out in the spring of 2010, I’ve had occa­sion to think anew about the many con­spir­acy the­o­ries that swirl around the story of the King assassination…a lot of per­fectly sane peo­ple believe that Mar­tin Luther King was killed as a result of a vast, shad­owy con­spir­acy.
—Hamp­ton Sides, author, “Hell­hound on His Trail.”

This being the week­end Amer­ica hon­ored MLK, we’re recall­ing that lament of the above-quoted author Hamp­ton Sides—whose excel­lent, com­pelling account of the largest man­hunt in FBI his­tory is worth buy­ing, right now, on your Kin­dle or iPad—about the per­sis­tence of weird con­spir­acy the­o­ries sur­round­ing what was, in fact, the well-documented assas­si­na­tion of one civil rights leader by one sorry but clever-enough jail­bird, as we con­sider the per­sis­tence of a weird con­spir­acy the­ory about a once-proud retailer brought low by one genius of a hedge-fund manager.

We speak, of course, about Sears.

The con­spir­acy the­ory, lately mak­ing the rounds on Wall Street, stems from the fact that the hedge-fund genius, Eddie Lam­pert, who also hap­pens to be Sears’ board chair­man, recently pur­chased nearly 5 mil­lion shares of Sears, mostly from his own hedge fund, at a price of close to $30 per share.

The con­spir­acy the­ory hinges on three ver­i­fi­able facts: 1) Eddie Lam­pert is an extremely smart guy with a ter­rific track record; 2) Sears under Lam­pert has become even more of a bas­ket case than it was before he took con­trol; and 3) despite the obvi­ous col­lapse in Sears’ busi­ness model, Lam­pert had been using Sears’ own cof­fers to buy up stock in the open mar­ket at absurd prices that were far higher than what he just paid for the stock, rather than invest in the busi­ness itself.
And on all three facts, the con­spir­acy the­o­rists are cor­rect.  Lam­pert is smart—witness his suc­cess with Auto­Zone.  And he has been using Sears’ own cash to buy stock in the open mar­ket at absurd prices, in hindsight:

Fis­cal Year      $MM Bt    # MM Shares Bt    Aver­age Px
2010                $394                5.5                               $72
2009                $424                7.1                               $60
2008                $678                10.3                             $66
2007                $2,900             21.7                             $135
2006                $816                6                                  $136
2005                $590                5                                  $125
Total               $5.8 Bil­lion     55.6 mil­lion shares

Aver­age price: $104/share. Last trade: $33.56 per share. Value destroyed: $3.9 billion.

As for the notion that Sears has become a retail basket-case, look no fur­ther than the credit default swap mar­ket in Sears Accep­tance Corp—the Sears financ­ing arm—and you’ll see they have blown out to lev­els that even the calculator-impaired credit mon­i­tors at S&P would rec­og­nize as, er, stressed.

“Why then,” the con­spir­acy the­o­rists ask rhetor­i­cally, “would Eddie have bought back all that stock for the com­pany at stu­pid prices before buy­ing stock for him­self cheap?”  Their answer—and while we’re para­phras­ing what we’ve heard, we’re not mak­ing up the gist of it—is this:

“Eddie wants Sears to go bank­rupt so he can take con­trol of the real estate and make a ton of money.”

And while the con­spir­acy the­ory seems to wrap up a lot of loose ends, it does not take into account the most obvi­ous notion, which is that Eddie got Sears wrong.

By way of demon­strat­ing just how wrong he may have got­ten it, we here­with present a sam­ple of howlers from var­i­ous Sears fil­ings over the years:
[Sears] com­pleted devel­op­ment of new Inter­net tech­nolo­gies and migrated our sell­ing web­sites to an improved e-commerce plat­form. This new plat­form posi­tions us to attract and retain cus­tomers using a mul­ti­chan­nel ser­vice approach to cre­ate a con­sis­tent expe­ri­ence across the chan­nels and enhance the offer­ings and the shop­ping expe­ri­ence where chan­nels inter­sect. Exam­ples include store-to-Web, Web-to-store, spe­cial order cat­a­logs and the sales hot­line. Mul­ti­chan­nel rep­re­sents the poten­tial for a sus­tain­able growth vehi­cle for our com­pany and rep­re­sents an oppor­tu­nity for us to unify and inte­grate the customer’s experience.

…in August 2007 we intro­duced the Ulti­mate Appli­ance Promise cam­paign. The pur­pose of this cam­paign is to show our cus­tomers that we are uniquely posi­tioned to meet their appli­ance needs by offer­ing the largest selec­tion of appli­ances, a price guar­an­tee, one year of free ser­vice and sup­port, and next day deliv­ery and instal­la­tion in many mar­kets across the U.S.

[Sears] remod­eled approx­i­mately 30 Kmart stores to include Sears-brand prod­ucts. We intend to con­tinue our roll­out of home appli­ances, includ­ing Sears Kenmore-brand prod­ucts, into Kmart loca­tions over the next sev­eral years as a means of expand­ing our points of dis­tri­b­u­tion in response to com­peti­tor store growth. As of Feb­ru­ary 2, 2008, approx­i­mately 280 Kmart stores, includ­ing cer­tain of the remod­eled loca­tions, offered broad assort­ments of home appliances.

MyGofer expanded its ful­fill­ment options in a vari­ety of ways, as well as serv­ing as the engine behind addi­tional inte­grated retail efforts. MyGofer.com pro­vides fea­tures and ben­e­fits designed to cre­ate a one-stop shop­ping expe­ri­ence, offer­ing a range of qual­ity prod­ucts includ­ing gro­ceries, pre­scrip­tions, health and beauty prod­ucts, and elec­tron­ics. MyGofer was cre­ated to pro­vide our cus­tomers with speed and con­ve­nience – the same day a cus­tomer places an order, it is ready within hours, with pickup now avail­able in over 600 stores.

And, our favorite:
With regards to social media, we deployed a vari­ety of cam­paigns and appli­ca­tions to make our expe­ri­ences more engag­ing and “sticky,” both on sites like Face­book and Twit­ter, as well as on sears.com.

Maybe—just maybe—like when a loser from a bro­ken home of whom nobody had ever heard man­aged to kill the lead­ing civil rights leader of his times and almost get away with it, the facts are just the facts.

To sup­port this per­spec­tive, we now harken back to an early report on Sears that spook­ily her­alded every­thing that came after­wards: a 2006 For­tune Mag­a­zine piece in which Lam­pert is called “The Steve Jobs of the invest­ing world,” yet con­tains enough evi­dence of the penny-pinching narrow-mindedness that destroyed Sears to be almost prescient:

The mood was tense at the Bel Age Hotel in West Hol­ly­wood, Calif., early last year. The top two dozen exec­u­tives of Sears Roe­buck & Co. were gath­er­ing for a strat­egy ses­sion with Eddie Lam­pert, then 42, the bil­lion­aire hedge fund man­ager who had just engi­neered an unlikely takeover of their ven­er­a­ble but strug­gling com­pany. The fact that the vehi­cle of his acqui­si­tion was dis­counter Kmart–which Lam­pert had come out of nowhere to snatch con­trol of dur­ing bankruptcy–was only one source of unease. Once their pre­sen­ta­tions started, Lam­pert also began pok­ing holes in vir­tu­ally every idea. "What's the ben­e­fit of that?" he asked again and again. "What's the value?" He shot down a mod­est $2 mil­lion pro­posal to improve light­ing in the stores. "Why invest in that?" He skew­ered a plan to sell DVDs at a dis­counted price to bet­ter com­pete with Tar­get and Wal-Mart. "It doesn't mat­ter what Tar­get and Wal-Mart do," he declared.

Eyes began rolling…

—Patri­cia Sell­ers, For­tune Mag­a­zine, Feb­ru­ary 8, 2006

And the eyes should have rolled.  Because, as it turns out, it does mat­ter what Tar­get and Wal-Mart do, just as improved light­ing does mat­ter in stores where women bring chil­dren to shop for clothes.

How much such things mat­ter is evi­dent in the num­bers ever since Eddie began second-guessing the expen­di­ture of cash on any­thing, it would seem, except­ing high-priced stock.

From 2006 to 2010, Tar­get and Wal-Mart together spent $16 bil­lion and $33 bil­lion, respec­tively, on cap­i­tal upgrades to their busi­nesses (we’ve arbi­trar­ily cut Wal-Mart’s actual cap­i­tal expen­di­tures of $67 bil­lion in half, to account for the company’s inter­na­tional spending).

Sears, mean­time, spent a minis­cule $1.4 bil­lion, or about 3% of Tar­get and Wal-Mart combined—and less than a quar­ter of the share repur­chase cost—on silly things like “improved lighting.”

The result?  While Target’s annual cash flow from oper­a­tions grew from $4.9 bil­lion to $5.3 bil­lion in that time, and Wal-Mart’s grew from $10 bil­lion to $12 bil­lion (again divid­ing that company’s total fig­ure in half), Sears was watch­ing cash flow from oper­a­tions drop 90%, from

$1.4 billion—almost 10% of Target’s and Wal-Mart’s com­bined cash flow—to a nail-biting $130 million…which is less than 1% of its rivals.

And Sears has done that while gen­er­at­ing over $40 bil­lion in annual sales—not easy to man­age, negatively-speaking-wise.

None of this, of course, is new-news.  The 2011 num­bers, pre­viewed last month, were even bleaker for Sears.

But beyond the obvi­ous value destruc­tion and the con­spir­acy theorist-like attempt to rec­on­cile con­flict­ing facts, the company’s recent per­for­mance and its chairman’s ensu­ing share pur­chase in Jan­u­ary raise a rather obvi­ous ques­tion that doesn’t appear to have crossed any minds in the press corps: why is it that Eddie Lam­pert, who directed Sears Hold­ings’ share repur­chases of 55.6 mil­lion shares at an aver­age of $104 over the 2006–2010 period, bought for him­self rather than for Sears Hold­ings those 4.8 mil­lion shares at around $30 a share (tech­ni­cally the 'pur­chase' was likely an allo­ca­tion of his annual per­for­mance fee in stock, but still...)?

After all, a com­pany that had spent nearly $6 bil­lion on its stock at an aver­age price of $104 would pre­sum­ably have found the shares even more attrac­tive at $30.

Wouldn’t Sears Hold­ings have liked to aver­age down?

To the con­spir­acy the­o­rists, the answer is self-evident: it clinches their view that Eddie has pur­posely been buy­ing back stock at silly prices in order to shrink the share base and drive up his per­sonal per­cent­age of the remain­der, while simul­ta­ne­ously dis­in­vest­ing in the stores so aggres­sively that the Sears park­ing lot is the only place to find a space at the mall dur­ing the hol­i­days, mak­ing it worth more to Eddie dead than alive.

But we don’t buy it.

We think Eddie’s mother, quoted in the above For­tune arti­cle, had it right:

“I never thought he would go into retail,” Dolores Lam­pert says. “It's a very hard busi­ness. But it's a chal­lenge, and Eddie likes a challenge.”

Still, if War­ren Buf­fett is look­ing for scape­goats on Wall Street, he might want to direct some atten­tion to Sears.  Unlike Sta­ples, for exam­ple, which pri­vate equity nur­tured and grew into an industry-creating pow­er­house, here’s a busi­ness that was an industry-creating pow­er­house that has, pretty sys­tem­at­i­cally, been destroyed by pri­vate equity.

Retail is indeed a very hard business.

Jeff Matthews
Author “Secrets in Plain Sight: Busi­ness and Invest­ing Secrets of War­ren Buf­fett”
(eBooks on Invest­ing, 2011)    Avail­able now at Amazon.com

© 2012 Not­Mak­ingTh­isUp, LLC

The con­tent con­tained in this blog rep­re­sents only the opin­ions of Mr. Matthews.   Mr. Matthews also acts as an advi­sor and clients advised by Mr. Matthews may hold either long or short posi­tions in secu­ri­ties of var­i­ous com­pa­nies dis­cussed in the blog based upon Mr. Matthews’ rec­om­men­da­tions.  This com­men­tary in no way con­sti­tutes invest­ment advice, and should never be relied on in mak­ing an invest­ment deci­sion, ever.  Also, this blog is not a solic­i­ta­tion of busi­ness by Mr. Matthews: all inquiries will be ignored.  The con­tent herein is intended solely for the enter­tain­ment of the reader, and the author.

NOTE ON COMMENTS: We abide by one rule on the com­ment pages here, and that is NO “Yahoo Mes­sage Board-Type Lan­guage.”  So what­ever you write and whether or not you agree or dis­agree with some­thing, spell it cor­rectly and keep it clean, and no per­sonal stuff.  And if you think we won’t enforce that, well, we have over 300 com­ments that never appeared because they were sloppy, obscene, or per­sonal. —The Management

Tags: Amazon, Authoritative Perspective, Autozone, Berkshire Hathaway, Civil Rights Leader, Cluelessness, Conspiracy Theories, Conspiracy Theorists, Conspiracy Theory, Eddie Lampert, Fbi History, Hampton Sides, Hampton Sides Author, Hedge Fund Manager, Hellhound, Ipad, Jailbird, Jeff Matthews, King Assassination, Manhunt, Martin Luther King, Terrific Track Record, Verifiable Facts, Warren Buffett, Weekend America
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Don Yacktman: How He Beats the Overall Stock Market

Sunday, January 29th, 2012

Great Investor Don Yack­t­man, founder and co-manager of the Yack­t­man Fund tells us how he con­tin­ues to beat the over­all stock mar­ket land­ing in the top one per­cent of all large cap mutual funds over the past one, three, five and ten year peri­ods. Such out­stand­ing per­for­mance was recently rec­og­nized by Morn­ingstar, the mutual fund rat­ing firm, that nom­i­nated Yack­t­man for Domes­tic Man­ager of 2011.

Source: WealthTrack.com

Tags: Don Yacktman, Investor, Morningstar Rating, Mutual Fund, Mutual Funds, Periods, Stock Market, Yacktman Fund
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Heart of China Bull Beats Strong

Sunday, January 29th, 2012

Heart of China Bull Beats Strong

By Frank Holmes
CEO and Chief Invest­ment Offi­cer
U.S. Global Investors

My debate this week with Gor­don Chang on China’s future at the Van­cou­ver Resource Invest­ment Con­fer­ence was a stim­u­lat­ing, intel­lec­tual exer­cise. A healthy mar­ket needs a com­pro­mise between the bid and ask, and dis­cus­sions between peo­ple who strongly dis­agree is a great way to pro­mote crit­i­cal thinking.

Crit­i­cal think­ing is vital to our invest­ment process as a means to ensure that we ques­tion assump­tions. One way our port­fo­lio man­age­ment team prac­tices a critical-thinking process is through a weekly S.W.O.T. (Strengths-Weaknesses-Opportunities-Threats) analy­sis of key fac­tors influ­enc­ing global mar­kets. By ham­mer­ing out the pos­i­tives and neg­a­tives, we can paint an accu­rate pic­ture of the real­i­ties we face. The S.W.O.T. model allows us to avoid pit­falls by weigh­ing the evidence.

Lack of crit­i­cal think­ing some­times leads to bub­bles, such as the one tak­ing place in the par­a­bolic rise in the num­ber of arti­cles fore­telling China will expe­ri­ence a “hard land­ing.” Last fall, more than 1,000 arti­cles ques­tioned the pos­si­bil­ity of a “China crash,” accord­ing to data from BCA Research. This is twice as high as the num­ber in 2004, when fear arti­cles reached 500. Gordon’s bear­ish pro­nounce­ments only added to the extreme neg­a­tiv­ity group­think sur­round­ing China’s economy.

Invest­ment strate­gist Keith Fitz-Gerald, a long-time friend of mine, wrote an excel­lent arti­cle com­par­ing today’s dooms­day sen­ti­ment of China to the naysay­ers who fore­casted the demise of the U.S. dur­ing the mar­ket bot­tom of March 2009.

Through­out the past cen­tury, U.S. stocks went through many sec­u­lar bear mar­kets. Keith points to the 1929–1932 period when the Dow Jones Indus­trial Aver­age declined by nearly 90 per­cent, along with point­ing out Dow’s loss of more than 52 per­cent from 1937 to 1942. Also, begin­ning in 1901, 1906, 1916 and 1973, there were four “40+ per­cent declines,” says Keith.

Amer­i­cans have also endured two world wars, the Great Depres­sion, pres­i­den­tial assas­si­na­tions and the dead­liest ter­ror­ist attack ever seen on U.S. soil. What’s impor­tant for investors to remem­ber was that each sig­nif­i­cant mar­ket decline pre­sented a “great buy­ing oppor­tu­nity” with U.S. stocks ris­ing double-, or in some cases, triple-digits, writes Keith.

And, over the past 100 years, the Dow gained an out­stand­ing 24,000 percent.

So despite set­backs includ­ing infla­tion, Tianan­men Square protests, the Asian finan­cial cri­sis of 1997, and the SARS scare, over the last 30 years, China’s aver­age annual real GDP has grown 10 percent.

With ris­ing incomes and increas­ing urban­iza­tion, we believe China is pur­su­ing the Amer­i­can Dream, and the gov­ern­ment has shown great deter­mi­na­tion to build the nec­es­sary infra­struc­ture along with a robust urban labor mar­ket. On a pur­chas­ing power par­ity basis, China’s share of world GDP has risen sig­nif­i­cantly, from around 3 per­cent in 1985 to a cur­rent world share of nearly 16 percent.

Yet, China is only in the mid­dle of its super­cy­cle with sev­eral stages to come. Super­cy­cles, or what we call S-curves, are long, con­tin­u­ous waves of boom and bust inher­ent in human his­tory. While the over­all trend is up, peri­ods of volatil­ity are an inher­ent part of this super­growth. Not every down period is a sign of demise—even a bro­ken clock is right twice a day. It’s the wise active man­ager who learns to man­age expec­ta­tions by under­stand­ing the dif­fer­ence between short-term cor­rec­tions and sec­u­lar long-term bear markets.

While “risks cer­tainly can­not be taken lightly,” BCA Research believes that the risk of a China crash is “exag­ger­ated.” For exam­ple, bears often point to “shadow” bank­ing prac­tices to sup­port their case.

Keith believes Bei­jing was “delib­er­ately tap­ping on the brakes,” in 2009, when the cen­tral bank increased the reserve required ratio for com­mer­cial banks, effec­tively reduc­ing the amount of money banks could loan. This resulted in a sharp decrease in the amount of credit avail­able and sig­nif­i­cantly increased rates from 4.78 per­cent to 8.06 per­cent, accord­ing to BCA.

One neg­a­tive con­se­quence of China’s quan­ti­ta­tive tight­en­ing was that it forced some pri­vate firms unable to gain loans from state-controlled banks to seek credit from “loan sharks at some­times deathly high bor­row­ing costs,” says BCA.

We sent our research ana­lyst to his home coun­try of China to find out how preva­lent this prob­lem was. The Shanghai-native Xian Liang joined an inves­tiga­tive tour led by research firm China Inter­na­tional Cap­i­tal Cor­po­ra­tion (CICC) to the Zhe­jiang Province. His group had access to exec­u­tives from banks, pri­vate lenders and local gov­ern­ment agen­cies, many of which he found knowl­edge­able and shrewd.

Dur­ing his research trip, he learned about an exten­sive sur­vey done by Alibaba of 2,800 smaller and medium enter­prises, which showed that half of the enter­prises needed exter­nal financ­ing, and the com­pa­nies that cur­rently bor­row from banks—only 13 per­cent of Alibaba’s sample—faced pretty strin­gent risk man­age­ment practices.

For exam­ple, one com­mer­cial bank that lends pri­mar­ily to smaller com­pa­nies checks the elec­tric and water meters of the busi­nesses to make sure they are actu­ally using energy. They delve into the per­sonal habits of the pri­vate entre­pre­neurs to gauge if the exec­u­tives are cred­it­wor­thy and finan­cially sound, as it is believed that char­ac­ter has a lot to do with one’s will­ing­ness and abil­ity to repay.

Over­all, Xian under­stood the alleged sys­temic credit risks in the bank­ing sys­tem to be man­age­able at this point. The gov­ern­ment had been pru­dent to not only raise inter­est rates six times, but it also increased the reserve limit banks must set aside against loans.

BCA iden­ti­fied an addi­tional unin­tended con­se­quence of the tight­en­ing. Some banks tried to bypass tight reg­u­la­tory con­trols so they could extend credit, lead­ing to an “increase in off-balance-sheet activ­i­ties,” accord­ing to BCA. This activ­ity was rec­og­nized by the gov­ern­ment, and the cen­tral bank has “increased its over­sight of off-balance-sheet items.”

BCA says that in a way, “‘shadow’ bank­ing activ­ity can be viewed as an attempt by mar­ket par­tic­i­pants to cre­ate more market-driven inter­est rates.”

In a report of Asian banks, CLSA Asia-Pacific Mar­kets found that non-performing loans (NPL)—those assets not yet delin­quent but that have fallen behind schedule—remain near a 12-year low in China, and the NPL-to-loan ratio is under 1 per­cent. This default rate is extremely low com­pared to the 1999–2002 time­frame, and it is believed that no large debt defaults are expected due to China’s abil­ity to cre­ate liquidity.

Keith Fitz-Gerald says the gov­ern­ment has an abun­dance of liq­uid­ity. It has set aside $3.2 tril­lion in reserves, amount­ing to half of the country’s entire GDP. Keith says this could poten­tially be spent on recap­i­tal­iz­ing its bank­ing sec­tor, with “plenty of money to spare.”

Besides the reserves, China has more fis­cal and mon­e­tary fire­power than sev­eral emerg­ing mar­kets. The Econ­o­mist ana­lyzed 27 emerg­ing mar­kets and ranked the country’s abil­ity to ease mon­e­tary pol­icy, tak­ing into con­sid­er­a­tion infla­tion, excess credit, real inter­est rates, cur­rency move­ments and current-account bal­ances. Then it cre­ated a “fiscal-flexibility index” which included gov­ern­ment debt and the bud­get deficit. A score of 100 means a coun­try has no flex­i­bil­ity to ease poli­cies; a score near zero means a greater abil­ity to “let out the throttle.”

This chart “sug­gests that China, Indone­sia and Saudi Ara­bia have the great­est capac­ity to use mon­e­tary and fis­cal poli­cies to sup­port growth,” com­pared to other listed emerg­ing mar­kets, says The Economist.

Many bear­ish arti­cles that appeared last fall relied on gen­er­al­i­ties taken out of con­text. They offer anec­dotes of ghost cities, empty shop­ping malls, rob­ber barons, worker sui­cides and cit­i­zen protests as rea­sons the coun­try as a whole is headed for a crash. These efforts to high­light China’s eco­nomic imper­fec­tions are akin to say­ing the U.S. is a poor nation because impov­er­ished areas still exist. As ana­lysts, it is our job to research and make a ratio­nal deter­mi­na­tion whether the facts are mate­r­ial or superfluous.

“China is merely going through the first uncom­fort­able grow­ing pains of its ado­les­cence,” Keith says, and he does not believe it’s the end of the world if China goes through a mar­ket cor­rec­tion. What he’ll be doing instead is investing.

As our team con­tin­u­ously weighs the evi­dence of China’s econ­omy, I agree with my friend. Moments such as these offer buy­ing oppor­tu­ni­ties for global investors.

We believe China is a buy­ing opportunity.

Tags: Bear Markets, Chief Investment Officer, Critical Thinking, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Fitz Gerald, Frank Holmes, Intellectual Exercise, Investment Conference, Investment Strategist, Long Time Friend, Market Bottom, Naysayers, Portfolio Management Team, Resource Investment, Strengths Weaknesses Opportunities Threats, Strong Heart, Team Practices, U S Global Investors
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U.S. Equity Market Radar (January 30, 2012)

Sunday, January 29th, 2012

U.S. Equity Mar­ket Radar (Jan­u­ary 30, 2012)

There are sev­eral signs that things are look­ing up for global mar­kets. These two charts show momen­tum for U.S. stocks, espe­cially small-caps, is improv­ing. Through­out this Alert we have included charts show­ing how the momen­tum has shifted in many areas of global markets.

The domes­tic stock mar­ket as mea­sured by the S&P 500 Index was basi­cally flat for the week, ris­ing a very mod­est 0.07 per­cent. Cycli­cal sec­tors con­tinue to lead the way as basic mate­ri­als, tech­nol­ogy and indus­tri­als all posted gains for the week. More defen­sive areas, such as con­sumer sta­ples and tele­com ser­vices, fell for the week.

Strengths

• Within the basic mate­ri­als sec­tor, East­man Chem­i­cal, U.S. Steel Corp. and Freeport-McMoRan rose sharply. East­man Chem­i­cal agreed to buy Solu­tia in a deal that was well received by the mar­ket because it is expected to be imme­di­ately accretive.
• Within the tech­nol­ogy sec­tor, the biggest news of the week was Apple’s blowout quar­terly earn­ings report as iPhone and iPad sales vastly exceeded expectations.
• Indi­vid­ual stocks that per­formed well this week include Net­flix, First Solar and J.C. Pen­ney. All three stocks rose by at least 18 per­cent this week.

Weak­nesses

• In the tele­com sec­tor, both AT&T and Ver­i­zon reported earn­ings that were not well received this week. Smartphone-related costs and iPhone sub­si­dies cut into the company’s margins.
• The office elec­tron­ics indus­try group was the worst per­former this week as Xerox reported dis­ap­point­ing fourth quar­ter earn­ings and weak 2012 guidance.
• The elec­tronic com­po­nents group was dragged down by Corn­ing, which fell by more than 12 per­cent on expec­ta­tions for weak glass prices.

Oppor­tu­ni­ties

• Earn­ing results have been encour­ag­ing so far and the mar­ket has responded. Next week will be another heavy week of earn­ings announcements.

Threats

• An esca­la­tion in con­cerns over sov­er­eign debt oblig­a­tions in Europe would be neg­a­tive for stocks.

Tags: Basic Materials, Blowout Quarterly Earnings, Consumer Staples, Domestic Stock Market, Earnings Announcements, Eastman Chemical, Electronic Components Group, Fourth Quarter Earnings, Freeport Mcmoran, Glass Prices, Iphone, J C Penney, Market Radar, Materials Sector, News Of The Week, Small Caps, Solutia, Steel Corp, Telecom Sector, Telecom Services
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Gold Market Radar (January 30, 2012)

Sunday, January 29th, 2012

Gold Mar­ket Radar (Jan­u­ary 30, 2012)

For the week, spot gold closed at $1,739.07 up $72.42 per ounce, or 4.4 per­cent. Gold stocks, as mea­sured by the NYSE Arca Gold BUGS Index, jumped 9.3 per­cent. The U.S. Trade-Weighted Dol­lar Index slid 1.7 per­cent for the week.

Strengths

• The week started with a takeover announce­ment that Pan Amer­i­can Sil­ver was going to acquire Minefind­ers for $1.5 bil­lion (Cana­dian), rep­re­sent­ing a 36 per­cent pre­mium. Then with the Fed­eral Reserve report­ing that it would be main­tain­ing low inter­est rates until at least the end of 2014, inter­est com­mod­ity mar­kets surged with sil­ver, gold and cop­per com­ing back into focus. The pre­vi­ous week, gen­er­al­ist investors had opined that they saw no rea­son to own gold. Gold soared to $1,713 the day of the Fed’s announce­ment, up 3 per­cent. Since the start of 2012, sil­ver has climbed 22 per­cent and gold has risen 11 per­cent. After falling last year for the first time since 2008, cop­per has enjoyed its best start since 1987, up 13 per­cent for the year.
• Gran Colom­bia Gold Corp. rose 20 per­cent this week upon announc­ing pos­i­tive drill results from its Segovia Prop­erty, con­firm­ing a strike length of 3,500 meters. This is the company’s sec­ond pos­i­tive news release of drill results in 2012. The lat­est press release announced that the com­pany had com­pleted a dia­mond drilling pro­gram con­sist­ing of 86 dia­mond holes as of Decem­ber 5, 2011. Bonanza grades were inter­sected with high­lights being grades of 161 grams per ton gold and greater than 100 grams per ton of sil­ver over 0.4 meters on the Provin­den­cia Vein and 249 grams per ton of gold with 162 grams per ton of sil­ver on the Silen­cio Sur Vein, part of the Las Aves vein system.
• Cater­pil­lar reported its fourth quar­ter and 2011 results, deliv­er­ing record-breaking sales and rev­enues for the year, with prof­its of just under $5 bil­lion, up 83 per­cent from the pre­vi­ous year. Cater­pil­lar ben­e­fits from the rise in infra­struc­ture spend­ing from its sales of earth-moving equip­ment for min­ing fleets. Major Drilling Group Inter­na­tional and Ener­gold Drilling are two other com­pa­nies that pro­vide drilling equip­ment to the min­ers, so their stocks also have been a defen­sive way to ben­e­fit from the increases in explo­ration spending.

Weak­nesses

• There were a sig­nif­i­cant amount of neg­a­tive head­lines this week on South Africa’s attrac­tive­ness for min­ing invest­ments. In 2006, the coun­try was ranked 37th out of 64 coun­tries and ter­ri­to­ries. The lat­est South Africa Sur­vey shows the country’s posi­tion has declined to 67th out of 79.
• Fac­tors con­tribut­ing to the weaker rank­ings for South Africa would be the uncer­tainty con­cern­ing the admin­is­tra­tion, inter­pre­ta­tion, and enforce­ment of exist­ing reg­u­la­tions. Con­cerns over labor reg­u­la­tions, employ­ment agree­ments, work dis­rup­tions, the reli­a­bil­ity of the legal sys­tem, and uncer­tainty over dis­puted land claims are also con­sid­ered strong deter­rents for min­ing invest­ment in South Africa.
• In addi­tion, the coun­try has expe­ri­enced rolling black­outs due to a short­age of elec­tric­ity gen­er­a­tion capacity.

Oppor­tu­ni­ties

• John Embry from Sprott Asset Man­age­ment said that he main­tains his bull­ish view for gold on MineWeb’s weekly gold pod­cast this week. Embry said, "If the economies are as dam­aged as I think they are, par­tic­u­larly in Europe, (I don't think they are as good in China or the U.S. as they are try­ing to crack them up to be).... I think gold and sil­ver prices could con­ceiv­ably see the biggest per­cent­age gains this year that they've had in the entire bull market.”
• On Tues­day, Eric Sprott also told an investor con­fer­ence that every­one should make room for the shiny metal in their port­fo­lios. "It is way less risky to have money in gold than to have money in the bank," Sprott told the GAIM USA con­fer­ence in Boca Raton. "As an indi­vid­ual, I would have at least 20 per­cent in gold," Sprott said. "As a rule of thumb, high-risk port­fo­lios should have about 10 per­cent in gold."
• There are a num­ber of fac­tors con­tribut­ing to silver’s out­per­for­mance of gold so far this year. From a tech­ni­cal stand­point, sil­ver appears strong after the break­ing above the 50-day mov­ing aver­age and is likely encour­ag­ing investors to jump in. Addi­tion­ally, a break­down in the gold-to-silver ratio has trig­gered sil­ver buy­ing. Retail demand for sil­ver coins has also been very strong, par­tic­u­larly in the U.S. So far in Jan­u­ary, sales of Amer­i­can Eagle sil­ver coins sit at 5.3 mil­lion ounces, the strongest vol­ume since Jan­u­ary 2011.

Threats

• The Her­ald, a Zim­bab­wean news­pa­per, reported on Wednes­day that the gov­ern­ment will soon announce raised min­ing license fees, with a focus on the grow­ing plat­inum and dia­mond sec­tors. Finance Min­is­ter Tendai Biti said he expects $600 mil­lion cash inflows from the dia­mond sec­tor to help fund a $4 bil­lion bud­get for 2012. Min­ing expec­ta­tions are obvi­ously very high in Zimbabwe.
• Mali announced a pro­posed revi­sion to its min­ing law that the coun­try is seek­ing to raise the government’s share in min­ing projects from 20 to 25 per­cent. How­ever, the revi­sion would also trim taxes on min­ing income to 25 per­cent from 35 per­cent and it is yet to be passed by par­lia­ment. Mali relies on gold for about 70 per­cent of export rev­enues and 15 per­cent of gross domes­tic prod­uct, with the country’s gold rev­enues surg­ing in 2011 by more than 20 per­cent track­ing a rise in gold prices. While this falls under the head­ing of coun­tries want­ing a big­ger share of gold min­ing expo­sure, Mali’s deci­sion to also lower taxes in exchange was a wel­come compromise.
• With Bar­rick Gold and New­mont Min­ing giv­ing unim­pres­sive 2012 pro­duc­tion guid­ance, it’s appar­ent these senior gold min­ing com­pa­nies must con­front the growth ver­sus prof­itabil­ity dilemma. His­tor­i­cally, to achieve sig­nif­i­cant growth the larger com­pa­nies have sac­ri­ficed cap­i­tal dis­ci­pline by acquir­ing large, low-grade gold deposits with high invest­ment risks. As the gold price has gone higher, so have these cap­i­tal costs.

Tags: Commodity Markets, Diamond Drilling, Dollar Index, Drilling Program, Generalist, Gold Bugs, Gold Corp, Gold Gold, Gold Market, gold stocks, Gran Colombia, Las Aves, Low Interest Rates, Market Radar, Nyse Arca, Nyse Index, Pan American Silver, Positive News, Silver Gold, Spot Gold
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The Economy and Bond Market Radar (January 30, 2012)

Sunday, January 29th, 2012

The Econ­omy and Bond Mar­ket Radar (Jan­u­ary 30, 2012)

Long-term Trea­sury yields fell sharply this week as once again the schiz­o­phrenic mar­ket gyrates up one week and down the next, which is what we have expe­ri­enced since mid-November.

The Fed­eral Reserve sur­prised the mar­ket this week with a news release that details the “cen­tral ten­dency” of think­ing from Fed offi­cials on the direc­tion of fed­eral fund rates. What sur­prised the mar­ket was the Fed’s state­ment that cur­rent eco­nomic con­di­tions “are likely to war­rant excep­tion­ally low lev­els for the fed­eral funds rate at least through late 2014.” That is well beyond cur­rent expec­ta­tions and was a cat­a­lyst for appreciation.

Easy mon­e­tary pol­icy on a global basis and a reduc­tion in risk per­cep­tion in Europe has allowed bonds to rally, not only here in the U.S. but also in Europe. As can be seen in the chart below, Ital­ian 10-year bond yields have ral­lied sig­nif­i­cantly from more than 7 per­cent to below 6 per­cent in less than three weeks.

Strengths

• The Fed­eral Reserve guided the mar­ket to expect con­tin­ued easy mon­e­tary pol­icy for roughly the next three years.
• Durable goods orders rose 3 per­cent in Decem­ber as man­u­fac­tur­ing indi­ca­tors are sig­nal­ing a rebound in activity.
• In another indi­ca­tor that global man­u­fac­tur­ing is improv­ing, euro­zone com­pos­ite PMI rose back into expan­sion territory.

Weak­nesses

• Fourth quar­ter GDP rose 2.8 per­cent. While this was the best quar­terly show­ing since the sec­ond quar­ter of 2010, it did trail expec­ta­tions of at least 3 per­cent growth.
• New home sales fell 2.2 per­cent in Decem­ber and only 302,000 new homes were sold dur­ing 2011, the worst per­for­mance since 1963.
• The Con­fer­ence Board index of lead­ing eco­nomic indi­ca­tors index (LEI) rose 0.4 per­cent but was short of expectations.

Oppor­tu­ni­ties

• The Fed­eral Reserve is in no hurry to raise rates and appears very com­fort­able with the cur­rent infla­tion sit­u­a­tion. This means the Fed is likely to main­tain a very easy mon­e­tary pol­icy for some time.

Threats

• If the weekly oscil­lat­ing trad­ing pat­tern over the past cou­ple of months is any indi­ca­tion of mar­ket direc­tion, bonds could see a mod­est sell-off next week.

Tags: Board Index, Bond Market, Bond Yields, Central Tendency, Durable Goods Orders, Economic Conditions, Economic Indicators Index, Fed Officials, Federal Funds Rate, Federal Reserve, Global Basis, Index Of Leading Economic Indicators, Leading Economic Indicators, Leading Economic Indicators Index, Market Radar, Monetary Policy, Quarter Gdp, Risk Perception, Schizophrenic Market, Treasury Yields
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Energy and Natural Resources Radar (January 30, 2012)

Sunday, January 29th, 2012

Energy and Nat­ural Resources Mar­ket Radar (Jan­u­ary 30, 2012)

Strengths

• Indus­trial met­als ral­lied strongly this week bol­stered by pos­i­tive eco­nomic data in the U.S., dovish lan­guage from the Fed­eral Reserve and likely short-covering. Cop­per fin­ished up almost 4 per­cent at $3.89 per pound, mak­ing this the third con­sec­u­tive week of gains.
• J.P. Mor­gan reported that China has now sur­passed Japan as the world’s largest coal importer after import­ing 183.2 mil­lion tons in 2011, up 10 per­cent on a year-over-year (yoy) basis. Com­par­a­tively, Japan’s total imports for 2011 came in at 175.2 mil­lion tons, down 5 per­cent (yoy). The drop in Japan­ese imports could par­tially be attrib­ut­able to the earth­quake and tsunami in the first half of 2011.
• Deutsche Bank high­lighted that com­modi­ties ral­lied across the board after the Fed­eral Reserve sig­naled that a rate hike was nowhere in sight. The Fed­eral Reserve’s state­ment that con­di­tions are likely to war­rant excep­tion­ally low lev­els for the funds rate “at least through late 2014” is on the sur­face a major dif­fer­ence from the “at least mid-2013” date given in the last statement.
• U.S. nat­ural gas prices have also ral­lied off a bot­tom near $2.32 mil­lion British ther­mal units (mmbtu) to break through a tech­ni­cal ceil­ing. Traders drove a sharp move higher on Wednesday.
• Grain prices recov­ered this week on sup­ply con­cerns due to dry con­di­tions in Argentina. Corn gained 5 per­cent and wheat gained 6 per­cent this week.

Weak­nesses

• Aus­tralian oil pro­duc­ers shut­tered as much as one-quarter of the country’s out­put as Trop­i­cal Cyclone Iggy was fore­cast to strengthen.
• India Coal Mar­ket Watch said that India’s coal pro­duc­tion fell 2.7 per­cent since April 1, 2011. The group said that out­put was 359.8 mil­lion tons from April to Decem­ber com­pared with 369.8 mil­lion tons the pre­vi­ous year. Pro­duc­tion was 8 per­cent less than the government’s tar­get of 391.48 mil­lion tons. India’s coal pro­duc­tion was 533 mil­lion tons in the year ended March 2011, below the gov­ern­ment tar­get of 573 mil­lion tons.
• South Africa has become sig­nif­i­cantly less attrac­tive as a min­ing invest­ment des­ti­na­tion since 2006, the South African Insti­tute of Race Rela­tions (SAIRR) said this week. "Uncer­tainty over nation­al­iza­tion and mine own­er­ship, and increas­ing work dis­rup­tions are affect­ing investors' will­ing­ness to get involved in min­ing ven­tures in South Africa," SAIRR researcher Jonathan Sny­man said in a statement.

Oppor­tu­ni­ties

• Cop­per stock­piles at the Lon­don Metal Exchange fell for the 16th week, declin­ing 2.3 per­cent to 348,750 tons. This is the low­est level since Decem­ber 2012 and could be another dri­ver for stronger cop­per prices as stock­piles get replenished.
• Bar­clays Cap­i­tal reported that global man­u­fac­tur­ing data and busi­ness con­fi­dence seem to sug­gest that indus­trial pro­duc­tion and sen­ti­ment have started to sta­bi­lize. On a monthly basis the Bar­clays aggre­gate global man­u­fac­tur­ing PMI data recorded its strongest improve­ment since Jan­u­ary 2011, advanc­ing from –0.71 in Novem­ber to 0.5. Fur­ther, that improve­ment was wide­spread, span­ning the U.S., U.K., Brazil, Asia and even in the Europe. In fact, Flash PMI for the euro­zone moved above 50 for the first time since August 2011.
• Bar­clays cited a news report that the cur­rent size of the cat­tle herd in the U.S. may be the small­est since Dwight Eisen­hower was Pres­i­dent in 1958. A Bloomberg News sur­vey said ranch­ers held 91.24 mil­lion head of cat­tle as of Jan­u­ary 1, down 1.5 per­cent from a year ear­lier. A record drought in Texas last year and ris­ing feed costs prompted ranch­ers to cull herds, even as beef exports from the U.S. surged. Cat­tle futures are up 15 per­cent since the end of June. After reach­ing an all-time high on an annual basis in 2011, the Live­stock Mar­ket­ing Infor­ma­tion Cen­ter says retail-beef prices will keep ris­ing through next year.

Threats

• GMP reported that an oil pipeline in United Arab Emi­rates that would strate­gi­cally bypass the Strait of Hor­muz to the tune of 1.5 mil­lion bar­rels per day could face more delays due to dif­fer­ences with a Chi­nese con­struc­tion company.
• Gains that made nat­ural gas the best-performing com­mod­ity this week may soon be evap­o­rat­ing as traders bet U.S. pro­duc­tion cuts won’t be enough to reduce the biggest sup­ply sur­plus since 2009. Resource Daily com­mented that futures soared as much as 20 per­cent from a 10-year low in New York after Chesa­peake Energy Corp. and Cono­coPhillips said they’ll reduce out­put. Energy pro­duc­ers are shift­ing spend­ing to basins that yield more lucra­tive oil and gas liq­uids, in addi­tion to pro­duc­ing nat­ural gas. Gas has tum­bled 14 per­cent this year as a boom in U.S. shale out­put pushes inven­to­ries toward record lev­els. Stock­piles were 21.4 per­cent above the five-year aver­age last week, the most since June 19, 2009. Data from the U.S. Depart­ment of Energy shows pro­duc­tion grew by an all-time high of 4.5 bil­lion cubic feet a day in 2011, while demand rose 920 mil­lion cubic feet.

Tags: Australian Oil, Coal Market, Coal Production, Deutsche Bank, Dovish, Economic Data, Federal Reserve, Grain prices, Industrial Metals, J P Morgan, Japanese Imports, Market Radar, Market Watch, Milli, Natural Gas Prices, Oil Producers, Rate Hike, Supply Concerns, Target, Tropical Cyclone
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Emerging Markets Radar (January 30, 2012)

Sunday, January 29th, 2012

Emerg­ing Mar­kets Radar (Jan­u­ary 30, 2012)

Strengths

• Despite world­wide eco­nomic tur­moil, global for­eign direct invest­ment (FDI) flows jumped by 17 per­cent in 2011. This num­ber, how­ever, widely reflects the large num­ber of cross-border merg­ers and acqui­si­tions. China was the second-largest FDI des­ti­na­tion, receiv­ing a record $124 bil­lion. India’s FDI rebounded 38 per­cent after a big fall in 2010, but remained far behind China.
• Poland’s econ­omy expanded at the quick­est pace in three years dur­ing 2011, as com­pa­nies boosted invest­ment and a weak­en­ing Pol­ish zloty buoyed exports. The country’s GDP rose 4.3 per­cent from the pre­vi­ous year, com­pared with a revised 3.9 per­cent in 2010.
• With a more favor­able pol­icy envi­ron­ment and an end in sight for the indus­trial destock­ing process, we antic­i­pate more sta­ble eco­nomic growth in China for Feb­ru­ary after the Chi­nese New Year cel­e­bra­tions are com­plete. CEBM con­cluded in a recent research report that his­tor­i­cal expe­ri­ence shows the destock­ing cycle usu­ally lasts four months and the firm thinks the end of the destock­ing process is likely to emerge around March.
• Chi­nese banks listed in Hong Kong are cur­rently cheaper than dur­ing the 2008 lows. Banks are cur­rently pric­ing at 5.4x 2012 price-to-earnings (P/E), 1.1x price-to-book value, and 21.63 per­cent return on equity, accord­ing to JP Morgan’s recent research.
• In China, 22 out of 31 provinces have seen their total GDP sur­pass Rmb 1 tril­lion. The Guang­dong province leads all of them with Rmb 5.3 tril­lion. The Shan­dong province hasn’t reported its 2011 GDP yet, but it is prob­a­bly the third largest provin­cial econ­omy in China after Jiangsu province with Rmb 4.8 tril­lion. Shanghai’s GDP is Rmb 1.9 trillion.
• In 2011, nearly 20 per­cent of the houses in Hong Kong were bought by peo­ple from main­land China.
• In 2011, China became the second-largest global mar­ket for Mercedes-Benz and BMW behind the U.S. CEBM reports Mercedes-Benz posted year-over-year sales growth of 32.8 per­cent dur­ing the first three quar­ters of 2011. This is roughly 25 per­cent of China’s lux­ury car mar­ket. CAAM expects sales of lux­ury cars to out­per­form the over­all sedan mar­ket in 2012.

Weak­nesses

• Bloomberg News reports that the world’s best-performing con­sumer stocks have become the lowest-rated by ana­lysts after val­u­a­tions of South African retail­ers and food pro­duc­ers climbed to the most expen­sive lev­els on record. Five com­pa­nies in the MSCI South Africa Con­sumer Sta­ples Index, includ­ing Shoprite Hold­ings and Mass­mart Hold­ings, are rated the low­est among peers in 36 countries.
• Weekly hous­ing sales trans­ac­tions in Bei­jing declined 70 per­cent from the pre­vi­ous week and 83 per­cent from the pre­vi­ous year. Although the Chi­nese New Year was a fac­tor, the trend will con­tinue until the price has dropped to a level that sat­is­fies the gov­ern­ment. In China, hous­ing mar­ket spec­u­la­tors have been squeezed out of the mar­ket in the last two years by tight­en­ing pol­icy. Now poten­tial buy­ers are wait­ing for a fur­ther price drop to get into the mar­ket. What the gov­ern­ment fears is that if the tight­en­ing pol­icy is lifted, the spec­u­la­tors will come back into the market.
• Korea reported forth quar­ter pre­lim­i­nary GDP growth at 3.4 per­cent on a yearly basis, lower than the esti­mate of 3.5 per­cent. On a quar­terly basis, it was up 0.4 per­cent, weaker than the con­sen­sus fore­cast of 0.5 percent.
• Japan’s Decem­ber CPI fell 0.2 per­cent on a yearly basis, and Japan’s core CPI fell 0.3 per­cent year-over-year for 2011. This shows the Japan­ese econ­omy is struc­turally weak.
• Korean man­u­fac­tur­ing con­fi­dence reg­is­tered at 81 for Feb­ru­ary, improv­ing from January’s 79 but still hov­er­ing near 30-month lows. Con­sumer con­fi­dence for Jan­u­ary came in at 98, drop­ping 1 point from December’s read­ing and reg­is­ter­ing a 10-month low.
• Thailand’s indus­trial pro­duc­tion shrank by 25.8 per­cent in Decem­ber, con­tract­ing for a fourth month on con­tin­u­ing effects from the flooding.
• Many migrant work­ers may not come back to the coastal cities after the Lunar New Year since they can just find a job inland locally in China, Zhong­guang Web reported in Bei­jing. A tight labor mar­ket will force employ­ers to raise wages and increase their costs.

Oppor­tu­ni­ties

• HSBC Emerg­ing Mar­kets reports that their key fore­casts see China avoid­ing a hard land­ing and grow­ing 8.6 per­cent, Brazil cut­ting inter­est rates to 9 per­cent by midyear, the Czech Repub­lic and Hun­gary being the only two emerg­ing mar­kets falling into reces­sion, Turkey’s infla­tion remain­ing high and mon­e­tary pol­icy unortho­dox, India’s infla­tion finally eas­ing, and Russia’s econ­omy grow­ing 3 per­cent. As emerg­ing mar­kets have started to show signs of an eco­nomic slow­down, pol­i­cy­mak­ers have switched back to a reflat­ing mode and we expect them to accel­er­ate their efforts if con­di­tions war­rant a more aggres­sive response.
• Colom­bia expects about $10 bil­lion in inter­na­tional invest­ment in crude, min­ing and energy projects this year, the Mines Min­ster Mauri­cio Car­de­nas said this week. Colom­bia is South America’s third-largest oil producer.
• Poland “deserves a rat­ing upgrade after all the work it has done since 1989” and because growth is bol­ster­ing investor con­fi­dence, said the CEO of Deutsche Bank’s local unit in Poland. Poland is rated A2 by Moody’s Investor Ser­vice, on par with Italy.

Threats

• Argentina has announced that it will extend the list of goods that require a gov­ern­ment per­mit to be imported and will raise import taxes for 100 prod­ucts to 35 per­cent from 20 per­cent, a lead­ing news­pa­per in the coun­try reports.
• On Jan­u­ary 31, Rus­sia will release the country’s fourth quar­ter GDP data. Ana­lysts at Roubini Global Eco­nom­ics are fore­cast­ing that the num­ber will show a mean­ing­ful decline from the third quarter’s 4.8 per­cent year-over-year increase.
• Two major sets of Chi­nese eco­nomic data that can con­tinue to decline in the first half of 2012 are GDP growth and prop­erty invest­ment. Before the econ­omy touches its low­est growth rate, the mar­ket may have to adapt to a large amount of bad news in the prop­erty mar­ket, such as sales dry-up and a sharp price fall.

Tags: Chinese Banks, Chinese New Year, Chinese New Year Celebrations, Cross Border Mergers, Economic Growth In China, Economic Turmoil, Foreign Direct Investment, Guangdong Province, Jiangsu Province, Jp Morgan, Mainland China, Mercedes Benz, Mergers And Acquisitions, New Year Celebrations, Policy Environment, Polish Zloty, Provincial Economy, Return On Equity, Shandong Province, Stable Economic Growth
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