Saturday, September 30, 2006

Let's Look At The Bull Case

I'm a firm believer in maintaining an open mind regarding the future. Not just today but always. Most readers might be surprised to know that am uber bullish on the long term. That is a statement regarding global economies but most specifically the US, Britain & Canada. I make that conclusion based on the data in the pipeline I see building as I type this. It just so happens I am quite concerned in the short term. When the ship rights itself and how the short term plays out is the question.

The future is not an absolute. It is measured in probabilities which are constantly changing. If you find your views very black and white versus shades of grey, your thought processes might be too rigid. One should be able to articulate a positive and a not so positive future if you are going to be a successful investor. It is an easy exercise and one I believe everyone should develop not just for investing but for life's experiences. Many times I'll take the opposite side of an argument just to see if the other person actually knows what they claim to know. If for no other reason, you can learn to hone your hypothesis or rigorously defend it.

You don't want to be so married to a potential outcome that when markets start a major assault higher, you may sit back and wait. And wait. And wait. Similarly in the opposite direction, being so bullish that you refuse to acknowledge pitfalls like 2000, 2001 and 2002. In 2003, many were very bearish and they waited and waited. From trough to peak, the semiconductor index was up 120% that year. The Nasdaq nearly 100%. It was one of the best investment years in modern times and many missed it. Similarly, in 2005, many were very bearish. The oil service sector, as an example, was up nearly 100% that year. It's one thing to expect negative patterns to develop, but as long as the market is assaulting new highs, you should never fight the tape.

While the current state of "stuff" leads me to believe a stock market correction is highly probable if not imminent, I also try to keep an open mind that the future might not turn out as expected. At some point you need to start allocating capital if your models turn positive or the markets make significant upside progress. I don't get too hung up on which way the market will go and you shouldn't either. You should be more concerned about educating yourself to ride either when we break out of this messy trading range. And we will. Today my long term model is in 100% cash and nothing has happened since May to change the behavior of that model. I choose to interpret my model as black or white. Cash or invested. But, I could just as easily define it as defensive and ride through the rough patches with defensive stocks. Yet, this cycle has typically punished even defensive stocks so I prefer a strategy of capital preservation. What does that mean about the future? Well, I can logically tell you how it will end but that may not come to pass. The probabilities are on my side as are some strong quantitative work but when I learn to read the tea leaves, I'll be sure to share it with all for the betterment of mankind.

So, let's review some key points of the bullish case. Maybe you have even more:

1) The economy is still relatively healthy and continues to grow albeit it is frazzled growth
2) Housing may not totally collapse or decline as precipitously as the worst case scenario anticipates
3) If we get wage inflation, and today we don't have it regardless of what is being reported, it will help prop up housing, retailing and other weak sectors
4) Historically, one sector has not been able to bring down the economy. Hence, housing alone is likely not going to crater the economy. Remember, housing sales are still at a brisk pace from a historical perspective regardless of the supply glut which could possibly be worked off with comparatively minor damage.
5) Large capitalization stocks are pretty cheap compared to any time in the last ten years.
6) Oil, commodity and energy prices seem to be abating as is inflation. That reduces a major burden on the consumer. To date, $300 million plus per day is staying in the consumer's pocket from the gasoline peak prices. That's a $120 billion per annum tax cut should it last.
7) Interest rates are still relatively low historically and the long end rates are getting lower thus adding support for the case of weak future inflation, support for housing and equities. Mind you, rates are not that low from a historical perspective. They are close to average in historical terms.
8) Global wealth will continue to create demand for American goods
9) There is still way too much money in the system and that will prop up asset prices
10) American stocks have underperformed and outperformance is now a reasonable hypothesis after six years of a near death experience.
11) The markets have discounted alot of negative news

As I've stated a couple of times before, the market's decline from May onward was not sustainable. Just when certain groups had totally cratered, the perma-bears could see the whites of the bull's eyes. The mood was intensely negative and the bears could clearly visualize the kill. The world was over. The problem was just about when they could actually see it, the market quit going down and some stocks went up quite a bit. Oops, sorry but no bull dinner yet for the bears. At the rate of decline we were experiencing, the world would have come to an end and market would have been to zero by the end of the year. Fortunately, that didn't happen because I'm not ready to meet my maker.

If we get monthly declines on average of 2-3% a month, we will likely see an overall decline of what I think is possible by October of 2007. This isn't a generally accepted thesis for those expecting a rapid collapse but let's see what happens. This is a framework I can live with. A fluid attempt at rationality based on historical and mathematical predictions as is used by the Fed or others attempting to predict the future. Models change over time as should your thinking processes as you digest additional data points. If we are free and clear by October of 2007, our chances of an imminent decline have diminished significantly from where we sit today. That said, don't count on it.

Moral of the story? Perma-bears and perma-bulls are always losers in the long run because they are rigid thinkers wedded to an outcome and belief which is clearly well outside of the normal distribution of events. Example? Thousands in every aspect of life. There is one such person I am reminded of today by reading a regular commentary from a well respected investment advisor. That example is a New York City economist with a very active subscription based web site. He has repeatedly called for the end of the world since 2004. Three years later and he's still wrong. And his subscribers paid for what? Bad advice and poor investing returns. That's why opinions are a nice read but one needs to listen to what the markets are telling you when it comes to investing. This same economist would have likely missed a 500% rally during the Great Depression as well. Why? Because the economy was awful yet the stock market blew through the roof. I could dig a 500% rally from here. But, again, don't count on it.

If you don't already, you should plan to gain input from multiple sources including many who don't agree with your view. Remember, two things. First, psychologically you give more credence to people who agree with your methods of reasoning whether your reasoning is right or wrong. Second, your brain is conditioned to be significantly more sensitive to negative news. Studies have shown that you need 2-3x as much positive feedback just to balance the negative feedback. This served us well as cavemen and allowed Elmer Fuddstone to defeat the sabre-toothed rabbit but it serves you poorly in the investing world.

All of that said, don't become a perma-bull just because the thirty stocks leading the S&P and Dow are flirting with new highs. But, can you envision an economy six to twelve months from now which is recovering? If so, don't be so wedded to the bear argument because the market will move up on such an outcome and it will do it today not nine months from now.
posted by TimingLogic at 2:06 PM links to this post

Friday, September 29, 2006

What's Next? Part Deux

There is a topping process which takes place in major blow offs. While this may not appear as a major blow off with the SPX and NDX barely moving over the last three years, remember that consumer stocks, some financials, homebuilders, some industrials, metals and emerging markets have had a run which is very similar in girth to the run into 2000. I use girth because it has left those markets with massive overinvestment and overvaluations. Remember bubbles tend to come in pairs for psychological reasons.

I'm amazed at how many money managers seem to have little understanding as to what is going on. Sentiment surveys all over the map. Oversold, overbought, overyhyped. Too much short interest. Too much porridge in your bowl and not in mine. Topping is a process. There is a science to it if one is willing to invest time and learn.

I was going to post much of this process but I decided not to as I started typing because it's worth alot more than a blog post. As I said before, I will share alot from an educational perspective but won't be giving away the keys to the castle. Especially since following it would have likely saved alot of professional money managers alot of pain. That may sound overly confident but then I am quite confident in my models and research. Mr. Market may give me a swift kick in the butt for saying that I don't think so. I learned long ago that knowledge and who you know are your only edge in life. So, while I have a little of my own money in the market in this rally, I know the probabilities are extremely high that it is a bogus rally. Not because I feel it but because I model it.

One should strive to learn and become as self sufficient as possible in their investing strategies so I will leave my prior posts this week as a starting point to identifying what happens from a sentiment, economic and market action standpoint. Consider it your homework assignment. Tis better you become self sufficient than rely on me or anyone else for your investing advice. I realize most people don't have the time to do so but the more you learn the less likely you are to buy homebuilders or metals or emerging markets or Apple or Hansen or Caterpillar or Valero or or or after a massive blow off. Or, to listen to someone telling you they are going up forever.

Enjoy the party. The bulls are once again exuding confidence. 50% bullish, 20% bullish, 80% bullish, 30% bullish. Are you riding the roller coaster? Knowledge is the key to getting off.
posted by TimingLogic at 11:45 AM links to this post

Thursday, September 28, 2006

What's Next?

Obviously, one isn't going to determine their investment portfolio off of a chart but if one were to look at the chart patterns I posted over the last few days, what would be next? How would you attempt to determine where the markets may go? Anyone? Anyone? Bueller?
posted by TimingLogic at 9:17 AM links to this post

Wednesday, September 27, 2006

The Charts Posted Over The Last Few Days

If you couldn't tell, the prior couple of day's posts were of Russia, Emerging Markets, Brazil and the Nasdaq 100. The Nasdaq 100 chart is not a current chart but of the blow off into 2000. The other three charts are current charts. Similarities? They look like the same chart both in percentage gains and pattern. What I didn't post is that the Nikkei, the Kospi and quite a few other charts have similar patterns today. Oh, there are other charts with similar patterns such as the Dow in 1929. I won't go into the psychology of this pattern but it is a sign that human behavior is repeated.

Which markets don't exhibit this pattern today? Large cap European and American stocks. What's driving large caps in Europe and America recently? Many dynamics at once. Money coming out of commodities, money coming out of Asia and money coming out of emerging markets. Since many of the moves are coming very early in the day, I am quite confident much of the money fueling this rally is out of Europe. Obviously not all of it but European and American money fuels the world and it is repositioning. The safest markets on earth are in North America and Europe and money is plowing into large caps, which are by nature somewhat defensive and defensive issues. Much of it likely anticipating the next economic cycle. Wrongly in my opinion but one must remember that some funds and investment vehicles must remain invested. They don't have a choice as individuals do. So, where are they to go? Brazil? Peru? Mexico? Korea? China? Malaysia? Where transparency is like a morning fog in San Francisco? Where risks are truly unknown and without bounds?

There is no doubt global economic softness is here. Where we go, no one knows. You must be willing to rediscover as you go. The biggest problem with perma-bulls and perma-bears is a rigid value system. One cause of rigid values is ego. The manifestation of that cause is premature diagnosis and the inability to identify new facts. How many people were bearish on housing in 2004 and were calling for and end to the bull market then? They missed massive rallies in technology followed by larger rallies in industrials and energy in 2005. How many times in the 1990s did you hear people saying the rally couldn't continue in technology but it did? Or in the early 80s when interest rates were at 21%, how many people would have told you to invest in equities? People talking about peak oil are primary examples of people with rigid values. People saying America is kaput. People telling you we have massive inflation and the long bond is at 4.5%. People talking about gold at $10,000 should so similarly be named. The people telling you China is the next economic miracle have rigid values. All they can only see is 1.3 billion people and dollar signs associated with every one of them. Yet, China has been in a haze for centuries. If it was just about population size....

The point is you must be flexible. You must be willing to rediscover as you go and admit your mistakes and move on. China might become a global economic power some day but today are they really? Peak oil may happen some day yet we are pumping 7 million more barrels per day than six years ago and awash in oil. Thinking in absolutes with your investments is no different than rigid thinking in other aspects of your life. It is dangerous and is actually the cause of personal strife, world conflicts and missed opportunities. You must free your mind of bias.
posted by TimingLogic at 9:28 AM links to this post

Today Brings Upgrades In Energy While Durable Goods Crater

Here we go. As discussed last week, with many energy equities being routed, a rally is likely soon enough. It's plausible we could see gasoline back above $3.00 in the US although I would expect such a move to be short lived. So, will the gains in retailers be wiped out if oil marches higher? The drop in gasoline was putting over $300 million daily back into consumer's pockets in the US. A large tax cut indeed. We are doing a fair amount of thrashing here and it is to be expected.

As I stated before, unless you are a very adept trader, personally, I would stay well clear. Playing in energy here is going to cause tremendous heartburn for many as the volatility ratchets higher.
posted by TimingLogic at 9:05 AM links to this post

Tuesday, September 26, 2006

How About Two More?


posted by TimingLogic at 2:36 PM links to this post

Monday, September 25, 2006

See Any Similarities? No, They Aren't The Same Chart!



I tried to pick similar times around the pattern so comparisons were easy. Can you make out the time frames and what the charts are? You may click on the charts for a larger view. I'll update the post with more information on Wednesday if you cannot read the charts. The only thing I will say is the crowd is wrong. They should be less concerned with the American housing bubble and more concerned with.............
posted by TimingLogic at 10:38 PM links to this post

Customer Service Part Two

I read a great article over the weekend on the Detroit News web site. As an aside, some of the best automotive journalism anywhere is from the Detroit News online. Great journalists Daniel Howes, John McCormick, Neil Winton, etc. I've already commented on why I believe Alan Mulally will be a positive influence on Ford but this is the first indication of how Mr. Mulally intends to set the tone of his involvement as CEO. The analysts who thought Ford missed the boat by not naming an automobile executive are buffoons and nary a one have any qualifications to succeed at what this CEO is charged to accomplish. So, don't listen to Wall Street. Listen to McKinsey, Accenture, Booz, Allen, etc. The people who help companies actually set strategy and have talent which has actually participated in turnarounds themselves.

The "meeting indicator" is a very good anecdotal tool for measuring company focus. There are two components to the meeting indicator. One is the number of meetings and the other is the attendance size. Both are typically inversely related to the focus a company has on its customer. Ford is very internally focused and that is changing. Mulally will drive a spike through this culture.

Personally, I tried to limit the number of meetings either I was in or my team was in. Meetings, while necessary, are the kiss of death. More can be accomplished in a one-on-one discussion whether in phone or in person than some blathering, mind numbing debate on the future of mankind. I am so anti-meeting that if I were in a position to control the meeting, I would typically cancel it, trim the attendee list or simply not show up. A handful of basic rules I have for meetings:

@ Is the he meeting specifically focused on a particular client situation or opportunity? ie, What does this have to do with our clients?
@ Is other "pre-meeting" work accomplished in advance to allow us to come to end of job in one meeting if possible? ie, Have you done your homework?
@ Is the meeting objective clearly identified and related to a particular client situation or opportunity? How much time do you need?
@Who is invited to the meeting? If they are not directly involved, de-invite them.

Now depending on what organization or role you play in a company, these may or may not be directly applicable but the general idea applies across the board.

I see alot of positives out of this article.

@Mulally has little tolerance for bureacracy
@The pervasive environment of never telling the boss bad news is gone
@He plans to mingle with the associates and create an open atmosphere and comradery
@He plans to introduce an atmosphere of positive conflict which challenges people to have their strategies and plans clearly baked and thoroughly thought out. (More on this in another post)
@He is instilling a sense of urgency
@He is going to break the bean counter's stranglehold on Ford and relegate them to the support role they should be playing. Accounting is an absolutely necessary support function but should not be driving the strategy for the company.
@He wants documented actions and plans with regular reviews to make sure people are working their plans, executing and problems come to light immediately and are dealt with in a timely fashion ie, Plan the work then work the plan.
@He is going to hold his team accountable to those plans on a regular basis so the lollygagging is over
@No more gamesmanship and fudging numbers so that real change is simply delayed and the problems fester
@Be prepared to win because I'm not a loser and if you are going to be on my team, you aren't either
@Get focused on your customer
posted by TimingLogic at 10:35 AM links to this post

Saturday, September 23, 2006

Update On Commodities

I recently watched a Bloomberg video profiling the commodities "supercycle". One of the highlighted guests was Jim Rogers. I don't know Jim Rogers from Adam but I feel a sense of insincerity and lack of forthright nature in many of his statements. I'm going to break down that video with a post some time in the next week or so including many statements I believe are highly misleading.

In the mean time, I believe it is important to make a few notes here. Commodities have the potential to hit a free fall at some point. That said, the true believer will not give up so easily. I expect this market to become extremely volatile. If you are a trader, you are likely in for a treat soon enough if you can stay on the right side of the trade. There exists a potential for a rapid snap back in many of these stocks and commodities. Coal and oil service in particular have been decimated recently. Some stocks are down 30-50%. Fording, Valero and Peabody, which I've highlighted recently, will rebound if even temporarily at some point.

The premise for a commodity supercycle lies in a buildout of China and to a lesser extent, India. The reality is drastically more complicated and includes low demand for capital, overvalued equities and traders looking for a positive return. If you watched the Bloomberg video with Stephen Roach I highlighted this week, you heard him say that in his decades of experience, he has never come close to seeing such an imbalanced economy as China with 85% of investment focused outside of the consumer sector. Heed the warning. If there is one thing I value above all else, it is wisdom. Wisdom only comes with experience. Experience only comes with age. Legacy cultures value their grey-haired while we toss them aside in the US in favor of a twenty five year old Harvard MBA who is armed to the teeth with book knowledge but little else. I have the utmost respect for Stephen Roach, Richard Russell, Walter Deemer, Justin Mamis, John Templeton and the grumpy old men and women who've been there and done that. They may not always be right but the times they are may save you substantial pain. If you are under fifty, you may be as smart as a whip, but unless you've studied history or those who've lived through history, you likely don't have alot to say with regards to markets that I care to listen to. The Chinese proverb "A single conversation across a table with a wise man is worth a month's study of books" isn't highlighted on my blog site for nothing.

One of my first posts was to highlight the global buildout to service the American consumer. I believe the title was "Never Have So Many Relied On So Few" if you want to go back and read it. With so much overbuilding, especially in Asia, we have a tremendous global capacity glut and no significant market reforms in these same societies to create consumer driven wealth needed to offset the overindustrialization's inevitable slow down. Thus, all of this overcapacity was built to serve the American consumer at a time when the American consumer will likely need to take a break from so much overconsumption. One must realize this overbuilding and overindustrialization means an artificially and unsustainable demand for oil and commodities. At least until the excesses are purged. This is happening just as tremendous monies are being spent to bring on new supplies of these resources. Overbuilding even if the American consumer would continue spending is still one of the most significant global dislocations we've seen this century. If just 3% of global demand were to disappear, commodities including oil, would be routed. The investment funds alone are now accounting for more than 3% of demand. Should China and or India have any type of economic crisis, and the probabilities are they will, we could see decimation on a scale seldom seen in these asset prices and the equity markets fueled by their demand. That means Brazil, Mexico, Russia, the Middle East, Venezuela, Canada, Australia and other commodity driven markets could see unprecedented collapses. There was a report within the last six months that Russia could lose thousands of banks in a slow down because of poor banking oversight and lack of robust regulations. A commodities crisis could bring about such an event. Putin realizes this and these attempted banking reforms are the reason the Russian equivalent of Ben Bernanke was just assassinated. So, was the 30% decline of the Russian equity market in May just a normal correction? What kind of liquidation can take a market down 30% in a month? Something that has only happened once as I can tell in one hundred years of American equity markets. Major players were very likely leaving Russia's market.

If there was ever any time in the last one hundred years to be cautious and defensive in the developing market, basic materials and commodities sectors, it is now. So, just as the perma-bears are calling for the end of American society, where do you think all of this money will go should this come to pass at some point? And whose currency will likely benefit as confidence in other countries wanes? And, what would that mean for dollar denominated commodities?

In closing, I don't know if we will have a gradual decline in commodities or if we will have another rise or if we will see a collapse. And, I cannot say if it will be tomorrow, next week or next year. But, others are only speculating with their commentary as well. One thing I can say is that history is on my side of the argument and risk is elevated. I tend to think a reflating Fed, when it happens, may add support for these commodities at some point but again no one knows exactly how this will play out. One thing is certain. I'd rather own P&G than Phelps Dodge.
posted by TimingLogic at 10:08 AM links to this post

Friday, September 22, 2006

Do You Know Who Your Customer Is?

If there is one thing I feel quite confident speaking of, it is customer service. I could write a book on customer service. But then, I'm not sure I could say anything that hasn't already been said. There are no secrets. No new techniques. Just people who wish to sell books with purported new ideas. Customer service is not contained in a book. It must be coursing in your blood. You must truly have a desire to delight your customer. It is an attitude not a ten step process. In fact, all successful strategies are simple. Complexity in any business strategy is the kiss of death.

I've spent fifteen years managing client relationships. Clients who typically spend $50, $100 or $200 million with you on an annual basis. Relationships of such importance put customer service in another league. It is an honor and an opportunity never to be taken for granted or taken lightly. Should that relationship ever wither or be damaged for any reason, there is little if any opportunity to save it without extreme measures. Effectively, customer relationships are no different than that of marriage and require as much thought and appreciation.

I have learned to worship my customers. In fifteen years of direct customer involvement, I never once said no. I was so cognizant of that fact that I made it a personal goal to never say no. Now, ultimately the client may not have received exactly what they wanted but I would always offer to see what I could do even when I knew the request or demand would ultimately lead me down a dead end. Even if I knew there was no way I could fulfill their request as stated I never said no. I knew my competitors were saying no and by never saying no it gave me the chance noodle on their request, strategize with my team about it or come up with an answer which might not be exactly what the client wanted but was better than anything they had considered or were able to get from anyone else.

My focus on serving the client rather than my self interest granted me unconditional trust and access to the inner circle of many companies. I developed many great personal relationships because of it. I took my relationships with my clients personally and fought many times with my employer to move mountains on behalf of them. I can't tell you how many times I had somebody tell me that I couldn't do what I wanted to do. They were seldom right. Nor were they often looking at the big picture or the long term profit potential of saying yes. I worked for my clients not my employer. Anything they wanted, regardless of how absurd, I tried to make happen as long as we could find a win-win solution where I could increase my penetration, gain more of their total spend or strategically position myself for more business. Ultimately the customer's request and my company's success were never mutually exclusive. That includes wiping the slate clean on a massive bill if there was justification for it.

As time went on I developed a reputation as a miracle worker of sorts. I could make things happen that many before me were never able to accomplish. As my reputation grew, my employers were more inclined to give me what I wanted on behalf of the customers because they knew of my ability to outperform. And customers were more inclined to ask me if I could help them before they would ask a competitor because I was very creative and always helped them. Many times they took credit for work we may have done. Never did I care. Why? Because all you care about is a satisfied client. Eventually many would quit asking my competitors all together leaving the spoils to my team.

I knew the secret of success. It wasn't because I was smarter than anyone else. Not because I was better than anyone else. Not because I was nicer than anyone else. Success isn't some magical Harvard management technique. It isn't found in a new book on new fangled ideas. It's the lost art of customer service. I don't care if you never talk to an external customer, you have a customer. Accounting's customer may be purchasing. IT's customer may be the line of business. The line of business's customer may be sales. Ultimately, everyone's customer is the customer.

I find it amazing how simple this concept is yet how difficult it is to actually deploy. Business will many times do anything except satisfy their customer. Let's look at a company whom I would consider as having the worst customer service imaginable for decades. That company is GM. Let's look at a hypothetical which would be considered radical and unimaginable for GM at the time. Forty years ago if General Motors sold many an automobile which had problem after problem. Some were entire product lines and some were simply individual cars which had so many problems they were considered a lemon. What if GM would have taken back the failing product they arrogantly shoved down their customer's gullet? Do you think they would have lost 50% of their market share or be in financial crisis? Or, if they would have had a policy of 100% satisfaction and simply repaired their poorly made products with no hassles or questioned asked? Cars that were poorly assembled or engineered would be returned or repaired at company cost. Manufacturing, engineering, sales, design, accounting, procurement, they all would have been held accountable. The senior management team would have had no other choice than to employ total quality programs to fix the crisis in manufacturing quality, solve engineering problems, procure more reliable components, resolve accounting's demand to save 10 cents by buying inferior parts. Sound familiar? Sounds like kaizen. Sounds like what Toyota, Datsun and Honda were doing thirty years ago while GM was trying to sell the consumer whatever they felt like shoving out the door. If GM would have undertaken this approach, it would have spurred a revolution inside the company. But how much would such a policy have cost GM? A billion a year until they got their act together? Two billion? Five billion at the height of their ignorance? But, how much more quickly would such a program have resolved itself with a company focused on its clients? Would GM have languished for forty years while incompetent senior executives walked away with billions of dollars in compensation as hundreds of thousands of workers were sacked and most importantly millions of customers were lost?

Forty years ago GM had north of 55% share of the American auto market. Today that number is less than half. That equates to a loss of approximately 4+ million units per annum. The average price of a new car is $28,000. Swagging unit and price growth over thirty years gives me a dirty guess is that GM has lost over $2 trillion in sales in that period of time because they refused to focus on servicing the customer. There have been many studies done which show it takes ten times the amount of effort and money to re-acquire a lost client. In GM's case, all of the money in the world will never win back many bitter customers who had to pay thousands of dollars to fix GM's poorly made product. So, while my comments about what GM should have done may sound absurd, are they really?

The moral of the story. You work for one reason. To serve your client. You lose sight of your client and someone else is going to take them from you. Great companies realize this. They are maniacal about customer satisfaction. They realize that if they get it right the first time, they don't need to resort to such extreme and costly measures. They realize that not making customer service the primary focus ultimately is prohibitively expensive. They measure customer service, they benchmark it, they are constantly looking at ways to improve it, they processize it, they develop formal feedback mechanisms to identify problems quickly and they have formal methods of quickly resolving problems. The best never rest. If you want to win, you must be better than the best. Toyota, Honda, Apple, Coach, Louis Vuitton, Nordstrom, Proctor & Gamble, Nike, Harley-Davidson, Hilton.

Are you good enough? Can you articulate what you did at work today and how it benefited your client? If not, you should ultimately be worried about your employment status because your company will eventually fall prey to someone who can.
posted by TimingLogic at 6:49 PM links to this post

The Perfect China Indicator?

While most bears view the US as the weak link in the world economy, I am firmly convinced the fools gold can be found in China. China has uncontrolled money supply growth the likes of which have never been seen in the US. 85% of investment in China is in overindustrialization and China is providing loans to the American consumer to provide an outlet for their overindustrialization. All of this is happening at a time when the advanced economies of the world are moving out of an old-line industrialization phase. I'm not sure how bad it will get in China but I know how bad it *could* get. The worst case scenario is that China experiences a major social upheaval. The socio-economic conditions are building for such a scenario. History has taught us there is nothing more dangerous than a disillusioned society which has tasted success.

I'm quite confident the hiccup in May was a sign of things to come in Asia and not the US. The tremors were the most pronounced in Asia and the emerging markets who rely on Asia for their basic materials and commodities. Now, that said, it is a time of heightened risk globally. But, while the US will emerge from this cycle stronger, I do not believe the same conclusions can be so easily drawn with respect to China.

Two stocks I view as the ultimate bubbles predicated on China's continued industrialization are Caterpillar and Nucor. Both are among the best managed and most innovative companies on earth and signs of American dominance in old-line industries of steel fabrication and industrial equipment. Today Caterpillar broke support in a perfectly built bearish triangle. Is Nucor next? When Nucor and Caterpillar started dropping months ago, their respective senior management teams were dumbfounded. Both made public comments that their businesses were vibrant and they saw no reason for the stock weakness. To the contrary, I've warned of both before. So, are these normal corrections or are they ominous signs along with the weakness in commodities and oil that weakness in China is close at hand? Remember, China is not in control of its own economic future. That is not a good thing.


posted by TimingLogic at 12:08 PM links to this post

Thursday, September 21, 2006

A Great Interview With Stephen Roach

Kathleen Hays, a savvy financial journalist, has a great tete-a-tete with one of the brightest economic minds in the world, Stephen Roach of Morgan Stanley on Bloomberg video. Unfortunately, I cannot give a specific link but go to Bloomberg.com and look for the video "Roach of Morgan Stanley Says....". If it has fallen off the main page, it will likely be under the "More Audio/Video" tab for a few days.

While I don't necessarily agree with such a dire state of American savings as Roach does, only time will tell. Kathleen provides a great framework and dialog for the interview and Roach is an excellent guest. A worthwhile twenty minutes. Best viewed with Internet Explorer from my experience.
posted by TimingLogic at 10:58 PM links to this post

Philly Fed Survey Fell Off Of A Cliff

Growth Stalls this Month
The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, dropped from 18.5 in August to -0.4 this month. This is the first negative reading in the index since April 2003

Six-Month Forecast Falls Significantly
Expectations for future manufacturing growth fell sharply this month. Indicators for future activity, new orders, shipments, and employment all declined from their August readings. The future general activity index fell from 7.4 to -0.2, its first negative reading since January 2001

See the full report here.
posted by TimingLogic at 12:52 PM links to this post

Rotational Buying

I believe what we are seeing is rotational allocation and money moving out of commodities. In the middle of 2005 money left real estate and moved into the brave new world of commodity investing and emerging markets. That fueled a blow off rally into metals, oil and emerging markets in late 2005 and early 2006. As those markets peaked, money was dumped en masse in May and June. The selling pressure was higher than anything we've seen this cycle by a large amount. As I posted repeatedly, that was when I believe those stocks should have been sold. So, where does that money go? It rotates into the unloved large cap and large cap tech stocks as well as perceived defensive sectors.

So, the rally over the past few months, if you can call it that, was being driven at some point by a handful of explosive moves in the SMH. We are now entering the fourth week of September and what is the return for SMH this month? Zero. How about the utilities? They were moving hard a few months ago. Now where are they? The return over the last two months? Zero. If you bought a month ago when people were telling you they were bullish on utilities? You are down 4% per the Dow Jones Utility Index. How about the defensive consumer staples sector? Again, for the month of September the return is negative. For the past few months the return is about 2%.

Transports aren't working. Cyclicals peaked in May and aren't anywhere near their peak. Homebuilders are down significantly. Semiconductors are in a bear market and have been for three years as defined by the SMH. Banking hasn't moved at all. Energy is cratering. Small caps are underperforming. Some energy stocks have been destroyed. Commodity stocks are down significantly. Late state industrials are down significantly. Retail made a massive move in weeks after cratering post May and appears to be topping. Yet, the S&P and Dow are near multi-year highs.

The moral of the story? First, look for divergences in sentiment not the level of sentiment. Negative sentiment near major highs is not typically constructive. Second, the rotation is likely nearing completion. Big caps usually outperform as we approach times of higher risk and the narrowly weighted S&P and Dow are safe bets. If and when markets actually turn into an outright bear, well, that's another story. We have a stealth bear market right now in most sectors and these violent rallies are indicative of an unhealthy market. The returns most people are seeing on their broker statements are likely not reflective of the S&P at a new high. The rally is narrowing as fast money moves into increasingly narrow niches of what is working. Eventually, the probabilities are nothing will work and fast money will pay the piper or depart the markets.

Could it turn out differently? Well, of course. It's all about probabilities and risk management. If the Amaranth hedge fund would have listened to me, I could have saved them $5 billion dollars. And, I would have helped them for free. All they needed to do was read my blog. No, I'm not being narcissistic. I am joking. Hey, Amaranth? Would you have paid me a 10% retainer? $500 million? I'd start my own hedge fund and give all proceeds to children's charities.
posted by TimingLogic at 11:40 AM links to this post

Wednesday, September 20, 2006

It's Decision Time For The Bulls




That may be a rather dire statement but the reality is we are at a significant inflection point for the American equities markets. It doesn't mean the end of the world nor does it mean we are headed for a mind numbing decline but we are at a crossroads for the bulls. They may slice right through it but I'm very suspect of any market action this weak. Especially given how overbought many commonly used internal measures are with such weak action. I'm looking for as much confirmation to start putting on a heavy short position if the action doesn't get any better than what we've been seeing. As weak as this rally has been, I am not getting the type of clear indication of topping activity which was clearly telegraphed in early May. ie, With such a weak rally, I expect us to peter out but it hasn't happened yet.

I mentioned earlier today that we hit a six year 50% pivot on the OEX today. Coupled with three charts I am going to show you, it looks like the bulls have some muscling to do if they are going to hold the line here. I don't think they can much longer but what I think really doesn't matter. It's what they do.

First chart is of the Russell 2000, R2K. Of the small, mid and large cap indices, the small cap Russell 2000 has been the market leader this cycle. The R2K has been extremely weak on this rally. The index is at a very strong 61% Fibonacci retracement level while also sitting at the top of a rising channel. 740 defines both the channel top and the Fib level.

The second chart is of the S&P 500 where the index is in a nice rising channel but has also reached resistance at the prior high. While I doubt we will stop at exactly the old high, there is still resistance in this entire area. A rising wedge resistance line lies directly above as does a Fibonacci level a handful of percentage points higher.

The third chart is of the Transports. The Transports are another cycle leader which are extremely weak. That should not be surprising as many commodity and energy stocks are falling off of a cliff. Remember commodity equities typically lead their respective commodities. The Transports were positively correlated to energy commodities for fundamental reasons and they had great pricing power because of it. One was because they were hauling all of the finished goods from China, another because they were hauling all of the raw materials to China and a final reason was because rails have a nearly 5X cost advantage over other shipping methods when oil is this high. Falling energy is a sign that fundamentals in these leaders is likely at a negative inflection point. Transports are also at a Fibonacci retracement level and trendline resistance level. The Fib level is marked on the chart. Weeks of attempting to launch a rally while the market moves up is not a good sign for the economy or the Transports. I have written time and again that I believe the Transports are also in bubble territory with their bubble brethren, energy. To provide evidence of this, the Transports have been this overbought two times in eighty years. Once the index fell over 95% and the other time it fell nearly 50%. Now 95% is pretty extreme but don't think we can't get the kind of correction which will devastate you financially or make your favorite food Pepto-Bismol. The risks are high and regardless of the type of correction, one needs to practice strong risk management when risk is elevated. ie, Covered calls, long/short strategies, cash or more reasonably valued sectors.

Note: Coal stocks are being annihilated. Fording is down almost 50% in a few months and Peabody is down nearly 60%. This is not an orderly decline. People are running for the door. You want to step in here and buy the dips? Think twice. These stocks will hit a rally point somewhere because at this rate they are going to be at zero by the end of the year. But unless you are a trader, forget about it. Peabody rose to nearly $80 this year. Just a few years ago it was under $4. What's fair value? Closer to $4 than $80. This is a coal stock. Not the cure for cancer. We've got coal coming out of our ears from a supply standpoint. Energy is a bubble and we aren't running out any time soon. If you like the energy story, and it surely is a plausible investment as it has performed well for decades, buy when the Fed is reflating, not now. ie, You don't need to believe in peak oil to make money in energy stocks. Exxon Mobil has crushed nearly any other large cap investment over a period of thirty years. Even when oil was at $10.
posted by TimingLogic at 6:34 PM links to this post

The Never Ending Drama Of Bulls And Bears

Below is a one month Spyders chart or the ETF trading vehicle for the S&P 500, SPY. There are 22 days of trading shown on this chart with the last being today. In that period of time the Spyders ETF has been in a trading band of about 1.5%. That is plus or minus 0.75% for a month. So, while the sentiment surveys show many more investors are now bullish than a month ago, the market has effectively done nothing unless you were swift enough to be in the right sectors. If you are an investor, you have missed nothing other than angst if you were on the sidelines. If you are a trader and you happened to exactly time your entry and exit points over the last few months, you might be up a few percentage points or if you were lucky to be in the two or three industries in just the right days with just the right stocks, you might be up 10%.

On some of my favorite blogs the bulls are dancing on the bear's heads and mocking their bearishness now that we've had a rally. Yet, really, what do they have to dance about? This? Or maybe it is the plus or minus 2.5% band in the equivalent ETF on the Nasdaq 100 over the same time frame? I will acknowledge that 5% for a month is an excellent return but I'm not focused on short term trading per se on this blog. That said, these two vehicles, ie, large caps are where one should be invested if they are invested in my estimation. I prefer the Spyders because they are much stronger and more conservative companies with less volatility. Normally, I love volatility, but not in this market if one is attempting to hold through the night on a rally.

The moral of the story? One will seldom, if ever, pick the exact week when the market tops unless you are willing to trade aggressively and/or have access to extremely sophisticated tools. Strong bottoms? That's comparatively easy. So, unless the squiggles turn into a significant long term gain, one should be happy to be conservatively invested or in cash or conservative bonds while not being concerned about missing something. How many things in life did you miss that, in hindsight, you were glad you did?

Significant break to the upside on the S&P? Target of 1360-1400. Of course, since we exactly hit the 50% pivot on a six year move for the OEX today, most people don't realize today is a potentially significant day. I guarantee you someone at Goldman Sachs is watching that quite closely. Most money managers? They are in a haze. Should we reverse from here in the coming days with the market leaders being the OEX, this could mark a major top. The odds of me calling that? Awfully slim. But hey, why not take a stab at it?

posted by TimingLogic at 10:09 AM links to this post

Tuesday, September 19, 2006

Commodity Supercycle

I have been very bearish on the long term viability of commodities as an investment since commodities became an investment courtesy of your favorite Wall Street personality. I became seriously bearish after we had what I believe was a clearly identifiable fifth wave count in metals which peaked in the May time frame. Time and again I have referenced the likes of Titanium Metals, Valero, Phelps Dodge, Inco and other ridiculously priced commodity stocks. I have to laugh every time I see someone on Wall Street trot out this concept of commodities as an asset class. Supercycle. Fifteen to twenty years of a commodity bull. Now, I believe even savvy Wall Street types are fooled with this one because most don't have access to historical data, most don't know anything about commodities and it is plausible to believe when stocks are range bound, commodities run wild.

In May I wrote the following in my investment journal. I've dusted it off as a reminder never to believe anything anyone tells you about your investments:

Commodities have ten to twenty year bull runs? Ah, yeah right. The Wall Street pumpers are out in force to dupe you out of your money just like they did in 2000. And, that's exactly the reason I don't trust anyone with my investments. Here's a question? Why would even the most skeptical on Wall Street believe something without doing their own research to prove it? Because it supports their biased thinking. We are all prone to a bias and need to be diligent in questioning everything we believe. There is nothing more compelling than an "expert" passionately extolling their opinion. But, the reality is the 80-20 rule applies to everything. That includes Wall Street being wrong. Unless we are rewriting history, they are wrong again.

I'll start by stating that this commodity superbull people are talking about and using contrarian thinking to support defeats the argument of a housing bubble too. Because everyone is talking about a housing bubble. So, we can expect housing prices to be fine in Phoenix as they go from 4,000 units to 45,000 units for sale. Or Boston where a condo project recently dropped their price from 1,000,000 to 600,000 to not be caught holding the bag. Or Miami where 3,500 new condo units are typically sold annually and there are soon to be fifteen times that coming on line. Or even the Midwest where housing prices have decreased the most so far yet were the most mild in appreciation. Or, I guess the IMF commentary that China is in the middle of a potential real estate crisis should be taken as a contrary indicator. Maybe, except for the fact that prices have already increased astronically and home prices are at multi-decade lows in affordability calculations. So, supply and demand don't drive price dynamics anymore? The only way we will see housing prices hold up is through a big dose of wage inflation. Being a contrarian for contrarian's sake is wrong because the herd is sometimes right. So, one really needs to create a reasonable thesis as to why they are a contrarian and must be able to formulate arguments on both sides of the fence. And using historical perspective is the way we attempt to divine the future. Yet, that doesn't appear to happen with regards to the supercycle commodities argument.

It is hardly logical that you can have a housing bubble, ie, hard asset, and not have a commodities bubble, hard asset. What happens to commodities if housing demand cools off as more and more supply is brought online by the producers to meet the "increased demand" or because commodity prices now pass the hurdle rate for new mining projects and investments? And, might I add Robert Schiller and Warren Buffett have both publicly stated the commodities markets are not working off of fundamentals but speculation. But, that in itself is hardly a reason to assume commodities are a bubble. They can be wrong just as anyone else. Although Warren Buffett did sell is silver holdings for a cool billionish in profit this month after he picked them in in 1998 for a song.

And, the discussions of the CRB up only 50% is nicely selective. Again, supporting a biased mindset. So I guess metals that are up 300-1000%, which are contained in the CRB, should just be passed off as normal? Yet, these runs are greater than the tech run into 2000 in percentage terms. Historical precedence including the inflationary 1970s that commodities are going up for 10-20 years? Might someone actually prove that to me with hard data? Maybe a copper or zinc or platinum or paladium chart that shows sometime like a 10-20 bull run? Maybe even a gold chart? If someone could actually produce that, and they can't because it doesn't exist as I have 100 year metal charts in front of me, then metals would, by definition, not be commodities. To the contrary, they would have long term pricing power. I guess that means they aren't commodities. Maybe they are semi-precious or precious metals?

So to support their manipulation, Wall Street types are out espousing these studies how commodities have outperformed stocks since 1970. And how they are noncorrelated with equities so they are a good hedge. Now, your retirement funds, yes you reading this, are investing around this ridiculous notion since more and more pension funds are succumbing to this line of bull Wall Street is feeding us. Ibbotson has some crock of shit study to show that commodities have returned 70 to 1 since 1970 while equities are only a little more than half of that. I guess spinmeisters can and do say anything they want to get your money.

Ok, so comparing this cycle to the "massively" inflationary 1970s, An era which produced the highest interest rates in the entire 1900s through today. A period of over 100 years. The absolutely best time for commodities as it was the inflationary period of the last 100+ years. Correct? Well, let's look at the facts.

Gold peaked in 1974 about around $200ish bucks after a nice run similar in return to ours from 2001/2002 till today. 1974 is comparable to late 2006 or 2007 if you follow the cycle thesis. Gold ended that cycle run in 1974 with a rapid blow higher similar to what we saw in the last six months with gold going from $400ish to $700ish. So, what was gold in 1979? About $200. Oh, by the way it took you through a gut wretching decline to $100 before you got back to break even almost six years later in 1979. The run to $850? That lasted the whole 70s? Nah, gold went from $250 to $850 in ONE year. And, supporting it were interest rates at 20+% and inflation through the roof. Want to know what nickel did during that 1980 blow off? How about nothing? Yep. Zilch. Zinc? Well, zinc went through the roof into 1974. Up a mere 700%? Sound familiar? Sounds like 2006. Then what did zinc do? Down a mere 75% in a quick downdraft and it stayed there for the rest of the 70s with a few minor squibbles in between. Want to know when you got your money back? 1989 when zinc finally returned to the 1974 levels. Copper? The new semi-precious metal selling at $4 a pound today? Well, in 1971 copper was at 45 cents. in 1974 it was $1.30. 300% return. In 1976 it was 60 cents. In 1978 it was 60 cents. In 1980 when interest rates were 20+% it went to $1.40. Basically back to the high it had been at six years earlier. Well, then in 1982 it cratered again to 60 cents. Want to know what it was in 1960? Yep, 60 cents. And on and on and on. Till the start of this cycle. Care to guess the price in 2001/2002? Yep 60 cents. In forty five years it was 60 cents with a few blow off peaks lasting a few years. There was no sustained run in the 1970s. Not for any metals. If gold sees another blow off run like 1980ish, inflation would need to build over many business cycles as it did in the 1970s, where we would ultimately see 20+% interest rates or likely something similar. Should that would happen again, the cycle would be approximately in 2012 or 2013. Copper has started each business cycle in the last 50+ years at less than 60 cents a pound. That is the spot price. No games with inflation adjustments or other silly trickery. 60 cents. So, in actuality, copper has really declined drastically as have all metals because of inflation. That's one hell of a winning investment vehicle isn't it? In the 1970s there were many short business cycles when high input costs, ie commodities, shortened the business cycle. Does anyone actually believe commodities could go up for twenty years and demand would not be cut off? Not if you think about it in economic terms of supply and demand. But, if you listen to someone smart tell you that it does, well, then it might be believable.

Ok, so let's look at the commodity stocks. Maybe the equities performed better. They sure did. Not! They cratered when the equity markets cratered in the 70s, which was quite frequently. Oh, well what about their noncorrelation with equities? Well, you don't need to understand a PhD thesis on multigrid methods for time-dependent partial differential equations to determine that's a bunch of bullshit too. What is common sense? In the supply and demand of commodities in the business cycle, what would happen when the cycle ends and general economic demand abates? Uh, economically sensitive natural resources would? Fill in the blank. How about collapse? Yep. In line with equities, commodities collapsed in the 70s. So, noncorrelation huh? Ibbotson must have received their mathematical degrees from the school of new math. That's the same school that taught Wall Street to tell us the technology bubble would last forever as they told you in 2000.

I guess because the 70s is noted as the cycle where we had inflation pressures people equate rising rates and inflationary pressures as meaning commodities keep going up yet commodities cratered every business cycle in the 70s. Gold did as well but gold held up a little better because some speculators think it has some instrinsic value and is an inflationary/deflationary hedge, thus, there is some worthwhile argument it is not a true commodity. But, that said, it too tanked 50% and did nothing for six years. Or put another way, except for a short period of time in the 1970s, gold had one massive run of one year. The 1980-81 blow up from $250-850.

If we are all so convinced this has historical precedence, and can prove it with charts of metals or commodities, which cannot be done, then let's all buy copper here at $4 a pound. I guess that's why the Russian stock market, an exchange dominated by commodities, dumped 30% in a few weeks this month. But that's normal. Or so we are told. Anyone show me where a US exchange dumped 30% in a few weeks? How about one time in 100 years? That is not normal and is typically a sign of topping in any type of financial market.

This is a little bit of outcontrarianing the contrarian with some factless facts. ie, Taking a contrarian position just because its out of vogue yet has no supporting historical perspective. And, historical perspectives matter because human behavior never changes. Care to guess how much money it takes to corner the global lead market? A few billion smackers. A relatively small market. Care to guess how much hedge fund money is chasing commodities? That's right. Alot. Human behavior never changes. That includes those who state there is historical precedence for this commodity bull lasting for decades. Metals will go up until the business cycle is broken because, just as this thesis proves, human behavior is repeated and so are the stories that commodities are going up forever. It's hard to pick the top of a mania so who knows where it ends. I could see oil going to $100 a barrel based on some sentiment work I've done. And, it truly might be different this time. Housing might continue to go up as a new asset class. Metals might continue to go up and have no effect on supply and demand. Yet, if this is so, one cannot use historical perspective to divine the future of equities because hard assets are driving equities. That likely means human behavior has changed. So, in conclusion, we are right back at year 2000. Goldilocks is surely getting alot of action these days. Can anyone set me up with a date? Pax Americana. Yet this time, it's truly Pax Globalia.
posted by TimingLogic at 1:32 PM links to this post

Monday, September 18, 2006

Have You Been Watching?

A few months ago or in that time frame as I recall I posted a response to comments that the bulls could take this market substantially higher. My comment was to watch one thing and only one thing to determine the health of this market. Forget about oscillators, sentiment, advancing issues or anything else. It was the Philly Banking Index. Prior I had posted that the BKX was likely topping based on my work and outlined three peaks and a domed house pattern recognition taken from George Lindsay's excellent work. There is a remote chance the BKX could hit approximately 116 but beyond that point, I would be highly surprised. Ultimately, picking the exact day of a top is fun but meaningless and nearly impossible so guesstimates may or may not be proven accurate. Let's look again at that prior post graphic of the BKX again.



Today, the banking index has made zero and I do mean zero progress with this "rally". The banking index is again down today. Finance is far and away the largest and most important component of market capitalization in the US. If anyone tells you that the market can go higher without Citigroup, Bank of America, JP Morgan Chase, Wells Fargo and twenty more of the largest banking institutions in the US, they are absolutely wrong. (JPM is relatively undervalued but then their dividend is paltry as well. Likely the reason why it is valued so cheaply versus traditional banking measures.)

We've had three bottoms in this move. June for utilities, July for the S&P and Nasdaq and August for retailers and transports. As fast money and fools cycle through these indices with rapid moves to the upside, the BKX has not participated at all. Of course, the good news is the BKX has also not collapsed either. This is not a technology rally as many would have one believe. It is a rotational oil=>semiconductor rally I talked about in the pairs trading post before oil started cratering. Unless you are a trader capable of extremely fast moves in pinpointed stocks, this rally is pathetic. As the Dow approaches its earlier highs, one should be less concerned about what the thirty stocks in the Dow are doing than what the overall market is doing. Remember, those same thirty stocks are the same weighted stocks which disproportionately affect the S&P. There are about six thousand stocks traded on the Nasdaq and NYSE and more on the pink sheets, Amex, etc.
posted by TimingLogic at 11:43 AM links to this post

Friday, September 15, 2006

Mean Mr. Market

Today the futures market jammed us higher. I'm sure many bears with heavy shorts are sweating right now. I expect today will be a down day for many of the indices. Daily predictions are like Ouija boards but the tape is awful and there are other forces at work. If one doesn't have a model and methodology, there is likely a feeling of being left behind here. If you sold at the very bottom in July, you missed a decent rally in some sectors. You also made a major investing mistake. You sold when some indices were down 20% in less than two months. And, if you did that, you are likely now just putting your money back in the market only to have someone take it from you again. Remember, the concept is buy low, sell high. Not sell low, buy high. I wouldn't be so giddy that the market is ready to take off to the upside here. Nothing in my analysis has changed. Of course, my models could be wrong but if they are, the market is lying to me. And, remember, those calling for a low using the four year cycle are likely wrong. I've harped on this topic for a long time. First off, if you are using cycles to predict a four year low in October, there are two cycles which supersede the four year cycle right now. If we get a major correction, the low will likely be set in 2007. I'm using October based on some time series analysis as I have posted before. That's pretty loose but if I nail it, I'll be changing my name to the "Enlightened One".

Could we get a rally into 2007? I guess it is a possibility we might top in the March time frame but I wouldn't be committing large dollars to it. I still believe we will not make anything other than marginal new highs on any index. Personally, if I were to get long, I would be averaging in. And, I would do it near the end of or after October if the market obliges.

Those who were short certain stocks or indices are being crucified right now. Many were short the wrong stocks or wrong indices. The short bets were on technology and the long bets remained in energy. So, guess what? They lost on both sides. Energy cratered and technology went up. Serves many of these high priced managers right. If the big hedge funds, I say hedge funds because they are the long/short investors, are being paid massive fees, they ought to do a little thinking. I've been bearish oil and materials, told of a rotational move out of them into tech, bearish transports, bearish late stage industrials, bearish anything to do with China, bearish emerging markets, bearish Asia, bearish broker/dealers, recently bearish consumer staples and utilities per prior posts and bullish on ten year government bonds. Oh, and short term bullish homebuilders weeks before the Barron's cover story. Nice little rally here in homebuilders. Misguided but still behavior is predictable to a certain degree. Not bad. If I'm bullish on anything, it would be big cap American and European companies outside of banks, energy, materials and financial stocks that pay a 5% or greater dividend. But, since I'm not bullish, that is only what-if. Remember, the savvy investor does not feel the need to be invested at all times. Especially when my models are puking.

One final note. Wal-mart. In the last few weeks Wal-mart is up about a year's rally or about 17%. This is predicated on lower oil. It's also predicated on an expectation the Fed will be easing within a reasonable time frame. Remember, the market doesn't care about today. It is looking six to twelve months out. This is a major mistake many investors including professionals make. That is why you need to be able to take a trade when the economy might look like civilization as we know it is ending. The market doesn't care about the bad news being reported today and you shouldn't either. Homebuilders went down starting well over a year ago. The news has just become very ugly in the last few months. Back to Wal-mart. So, at an annualized rate, Wal-Mart's ascent over the last few weeks will yield a 300% return over the coming year. Still want to chase? One must fight irrational urges to be a successful investor.

Here's a bigger question. Wal-mart has been biding time for seven years. Lower highs. Something big is likely to happen over the next year or so as a bearish formation is developing. The stock could snap out of the formation and move to the upside or it could decline to what I see is around $32ish as a first line of support in a major correction. I'm off. Have a good weekend!


posted by TimingLogic at 11:21 AM links to this post

Well Isn't That Timely?

Yesterday a post that DCX is a mess. Today, our friends in Stuttgart tell us business is cratering. Today as we wax nostalgic with the stock down 8% in the first hour of trading, I am reminded Mercedes and Dodges don't mix. Synergies? Your Mercedes now has Dodge pickup parts in them? For the shareholders of DaimlerChrysler, since the merged stock in 1998, your investment is down nearly 50%. Are you happy? All courtesy of lax corporate governance, ego, greed and your friendly mergers and acquisitions industry.

posted by TimingLogic at 11:10 AM links to this post

Wednesday, September 13, 2006

DaimlerChrysler Is Still A Mess

As I have posted many times, I am quite bullish about the future of Ford and GM. Both companies have very successful international operations and are dominant & profitable players in Europe, South America and parts of Asia including China and India. Both have tremendous small car expertise to call upon in their American turn around and both have very deep and wide engineering, manufacturing , supply chain and design centers globally. ie, This is not 1974. So, while GM and Ford have sold alot of junk in America, they make some exciting products for the global markets. ie, They know how to do this and do it successfully. They just need to shake up their US operations.

Now let's contrast that to DaimlerChrysler. First off, there is little precedence for mergers of equals being successful. There have been quite a few case studies done which reinforce this data point. Of course, Morgan, Goldman and others aren't going to make this a well known point when they are looking at what could be ten figure fees for a deal like this. The merger of Chrysler and Daimler was an ill-conceived marriage of two cultures which will never mesh. Cultural synergies are often overlooked in the M&A business where getting the deal done, egos and greed reign supreme. The merger was doomed to failure from the start and the best thing for all involved would be to break the union apart in my opinion. While that may sound like an odd proposition, this rumor has been floated around time and again. It is not that difficult to imagine or to accomplish.

Shareholders were deceived and senior management sold out for hundreds of millions of dollars going into individual pockets. Frankly, I consider this deal totally immoral in how it was sold and ultimately executed. Investment bankers sold everyone involved a line of hooey and shame on both management teams where ego and greed was more important than IQ or corporate responsibilities.

It appears Chrysler still has a few of those American Motors designers hanging around. The ones who designed the Matador and Pacer, two of the ugliest cars ever to grace this planet. Uglier than cars sold in the old Soviet Union and just as miserable from an engineering & quality perspective. So, here we go again. While GM and Ford have quite a few hot designs in the pipeline or already hitting the markets, Chrysler comes up with a car Autoblog.com nominates for the ugliest design sold in Britain, the Jeep Compass Rallye. Whoever thought this design should actually be approved for production should be shot. Hundreds of millions or more wasted. A failure before the first sale. A Cadillac Cimarron redux. Who is running the show over at DC? Dr. Z? When a car company can let such a generally acknowledged ugly beast make it to production, something is very wrong. I really don't think Chrysler is going to make its European sales goals with this ugly duckling. Hey, Dr. Z, that sure is a fine looking Mercedes.

posted by TimingLogic at 6:40 PM links to this post

Tuesday, September 12, 2006

Japan Part Deux

If I could impart anything on this blog, it is thinking outside of the box or questioning mainstream thought. I'm never going to share proprietary secrets but I will share ideas, facts or data which will stimulate your own discovery process. Not necessarily that everything I post are unquestionable facts, because they won't be. Nor is everything others post.

Along those lines, a month or so ago I wrote that the deflationary cycle in Japan was in jeopardy of restarting or worse, that it had never actually been beaten as so many are so quick to claim. Six months ago many of the most defensive on Wall Street were still recommending Japan. I viewed and still view Japanese equities as a risky investment. Yet, I also view Japan as the economic jewel of Asia and I fully expect it will remain so for quite some time. Listen folks, if it was a forgone conclusion population size led to economic might, China, India, Indonesia and the Soviet Union would have ruled Asia and the world for the last three hundred years and more. It's not a guarantee China can transition from a corrupt, communist, centrally planned cheap labor pool for the world to a democratically elected pre-eminent economic, technological and industrial power like Japan. It's highly likely they have turned the corner in many respects but China has more challenges than America did in the 1920s.

Yesterday it was reported that machine orders literally fell off of a cliff in Japan. Fell off of a cliff. They sank the most in twenty years at nearly -20%. Twenty years? Guess when the deflationary cycle started in Japan? Where was this information reported? Well, amongst other places, Finfacts, a site I highlighted as a top site I visit daily and superior site to any free site I have found in the US. Frankly, Finfacts has more of what I want to read than the Wall Street Journal, Barron's or many other pay sites. In a global economy, I cannot stress enough how one must watch the world events and economic activity outside of the US. The US press is too focused on events within our borders yet 75% of global GDP and 95% of the world's population is outside of the US. International investors understand this.

So, in a domestically driven economy, Japan's machine order shortfall wouldn't necessarily pose a serious problem. Yet, Japan's massive industrial and technology base derives a disproportionate amount of sales via export. So, in a recession, where the underserved consumer sector sees a reallocation of capital as the industrial sector cleanses itself, Japan's consumer sector is simply not large enough to offset the oversized industrial sector investment losses. Japan's deflationary cycle is not over and the Bank of Japan never should have raised rates. It is my belief this is not an inflationary world.
posted by TimingLogic at 9:58 PM links to this post

Monday, September 11, 2006

Acute Cerebral Infarction And Your Typical Wall Street Expert - The Wisdom Of Herds, Brain Farts and Stock Market Sentiment

I'm sorry if I continually take pot shots at Wall Street. If you work on Wall Street, do not take offense. Somehow I am attracted to derogatory and cynical humor. It gives my life meaning when I can make fun of the elitist snobs who are above the crowd. Those who buy their $20 million Manhattan penthouse, a beach house in the Hamptons and new Aston Martin Vanquish when a child dies every three seconds in this world because of no health care or lack of sustenance. Those on Wall Street who draw in those seven, eight or even nine figure salaries because they are omniscient and enlightened. They truly have achieved prajna. Oh great one, Wall Street guru, please come before us on CNBC and share The Word with us lowly proletariat. Tell me should I buy, sell or hold? I wish I could express laughter in my text because some of you might think I'm serious. Although I am quite serious about my statement of humanity. Make you feel guilty? Then don't read my blog or make a donation to a children's charity. I don't have alot of respect for the generalized bullshit and pablum Wall Street feeds the average investor. Two things we are fed daily with a firehose.

Ok, enough of my cynicism. Let's look at a few charts courtesy of your brilliant Wall Street professionals. I say courtesy of Wall Street because they are the people who bid these stocks up and are telling you to buy at these levels. A nouveau riche form of taking from the rich and giving to the poor. You know, like they did in 2000 right before the market dropped 85%. Caterpillar, Valero, Titanium Metals, Nucor, Manitowoc, Inco are all rising charts with higher highs and higher lows. These are companies that are printing cash on the China story, the peak oil theory, the global building boom. The charts of these stocks are monthly charts showing ten years of data. The horizontal bar charts on the right side of the price charts are monthly volume a the corresponding price. See a pattern? Indeed, a very disorderly rise. Massive gaps in volume. Those are danger signs. Irrational sentiment. "I can see it. 1.3 billion people in China and houses, roads, bridges, TVs and schools for all. I am going to be rich!" Stupid money or momentum money chasing stocks. Don't equate stupid with momentum. They can be mutually exclusive. Stupid is to hold when momentum fails. Riding momentum while it is strong is not stupid. That's called making money. If you believe in mean reversion after disorderly price increases, and you should because that is what happened to the Nasdaq post 2000, reversion happens around volume. Fibonacci retracements? Ah. Maybe some self fulfilling prophecy there. Retracement to areas of significant volume. Absolutely.

So, further down we've got a few additional charts of similar patterns which have progressed a little further into their cycle. Toll Brothers, Oracle and Intel. Toll Brothers is in the middle of a retracement. The Hovnanian CEO was recently on Bloomberg stating the downside risk to his company seemed minimal given it was trading at book value and used to trade at two times book value. Really? At two times book value, your stock was a bubble of the likes seldom seen. At book value, your stock is only overvalued by about 50% in my estimation. Remember, this is a CEO, along with all of the other homebuiding CEOs, who were on CNBC daily telling you how smart they were. To be fair, I'm sure they are quite capable at running their businesses but not at telling you when to buy or sell their stock. Oracle and Intel have had quite a few years to retrace. Isn't it odd that all charts started out looking the same way? Isn't it ironic that price and volume find a stasis over time? Finally, look at the daily chart of the Nasdaq 100 ETF, QQQQ. There isn't ten years of data behind it because it hasn't been available that long but looks like alot of virgin territory with respect to volume at higher prices doesn't it? If I printed monthly data there would also be gaps on this chart but I chose daily to give you a better view of where we are today with respect to the Nasdaq 100. Do you wonder why big money was dumping shares the first six months of this year?

So, I ask you again, is sentiment bullish or bearish? Has sentiment in these stocks been bullish or bearish? If sentiment surveys are bearish at a point where market leader charts look like this, do you want to be a contrarian? Is Wall Street about to leave main street holding the bag again? Being a contrarian isn't all it's cracked up to be. Being on the right side of the trade is.

This is a tool anyone can use. It's readily available via many investment services and many offer it free as part of their investment tools. Very few people know about it or know how to use it. That includes Wall Street professionals. It's very basic so it isn't because they aren't capable of using it. It's because they are too busy crawling through balance sheets trying to predict the future of corporate earnings with a Ouija board. Learn to use it and save yourself some money.

Click on the following charts for a larger view.






posted by TimingLogic at 4:13 PM links to this post

Sunday, September 10, 2006

Where Are The Buyers?

We've been hearing for some time that market sentiment should fuel a rally. At some point, that will indeed come true. But, the problem with using sentiment re my prior post is that it can stay negative or positive for long periods of time and it can always become more extreme on one side or the other. One popular advisor has called the bottom three times since the May top. Do you see three bottoms on this chart? His next call was that perceived smart options players were negative which he determined was bearish for stocks. Finally, his last call was to start raising cash. Using sentiment during this decline has totally destroyed unsophisticated bottom calling techniques.

I've talked about normalized positive volume before but let's simply look at positive volume on the Nasdaq. Below is a one year daily chart of the Nasdaq with nonnormalized positive volume overlaid on it. Doesn't look like there is alot of enthusiasm for Nasdaq stocks, does it? Will the buyers step in here upon returning from their summer vacations and fuel a rally? So far the appetite for Nasdaq stocks is pathetic in this July & August rally. We are likely days to weeks away from a very major tipping point. But, unlike the last tipping point, should the move be to the downside, I wouldn't expect a reprieve. Mr. Market has already warned you once. He isn't likely to warn you again. The quantitative measures of this market have changed for the first time in four years. Has your appetite for risk changed with it?

posted by TimingLogic at 1:17 PM links to this post

Thursday, September 07, 2006

Sentimentology

Ok, I'm busting on a legitimate geology term as a parody for Scientology but this stock market sentiment debate sure seems to be an interesting one. Hopefully, there are no Scientologists out there reading my board because I don't mean to offend anyone. I also believe little green men are inside all of us and they came to earth on 747s or what ever it is L. Ron Hubbard dreamt after a nice ride on the LSD train. I'm kidding! It's my Lewis Black imitation. I would never discount anyone as a friend or associate because of what religion or beliefs they have. Who actually knows what reality is other than what we've conjured up in our minds? It's not so implausible we came from some place else. Superman did and he's a pretty cool guy. Ok, there goes any attempt at professionalism on my blog.

What was I talking about? Let me back up. Most of the readers on this board understand the theory behind market sentiment but if you don't, the theory goes that the majority of people are wrong. So, when they are all optimistic, the market is vulnerable to a decline and when they are pessimistic, the market will likely go up. There is some actual logic to this but I don't feel like writing a book today. It's a legitimate concept if you know how to apply it. Recently, we have people out-sentimenting the sentiment. "Well, if sentiment is really bad, we'll get a rally. Err, well, maybe if everyone thinks sentiment is really bad, then it's really not and we won't get a rally." Huh? I've written about sentiment a few times. I believe one of my first posts was about sentiment and how it would likely fail the bulls over a long period of time.

I'm going to chime in with my two cents. First off, you might want to use independent variables in your analysis. Most people are measuring the same thing seventy five different ways. Investor's Intelligence surveys, Rydex funds ratios, put/call ratios, other polled sentiment ratios, short interest ratios, McClellan oscillators, stochastics, other oscillators, bullish percent, stocks above or below moving averages, price declines and on and on and on and on and on. They are all dependent variables. They are all measuring the same data point: PRICE. You don't need to have seventy five different dependent data points to determine people are negative. If prices are dropping, people are negative. I really do not like opinion surveys such as Investors Intelligence at all. They are highly unreliable in my estimation and people, being irrational, may be invested to the hilt and bearish. Or they may be bearish for a reason as they were in 2000 before the Nasdaq fell 85%. If I use surveys at all, it would be as a divergence or at very significant extremes. ie, If people are bearish when the S&P 500 is within a few percent of a six year high, that smells funny. That happened in 2000 and again today. Something is off. Yet, when I look at a long term gauge of sentiment I like, it is at the second highest level in twenty years. The other time? Right before the Nasdaq fell 85%.

Now using some of the sentiment data above, you may get a better idea of how oversold or overbought a short term move is but I don't need 75 gauges to know the sentiment is negative after the May decline. One will do fine for me. When stocks like AMD or Qualcomm or eBay or Broadcom fall 50-70% and the semiconductors drop 20% in a few months, there is a problem and sentiment is going to be negative. But, the problem with sentiment is it can always get worse or better and it can stay at either extreme for long periods of time. Did overly bullish sentiment keep the stock market from going ballistic in 1996-2000? Hardly.

Here's the deal with sentiment. All that matters is that you know what the big money is doing and follow it. It's not about what other people think and trying to determine if people are positive or negative. It's what the big money thinks. The Generals move this market and all you need to be is a lowly private in their army. There is absolutely nothing else for you to ever think about. When I read these reports by people trying to divine what will be the next big thing, I just tune out. Well, it's going to be grains because we are in a drought. It's going to be technology because of Web 2.0. It's going to be energy because we are running out of oil. Blah, blah, blah. The reality is most have no idea. (Some very sharp strategic thinkers actually do but they aren't going to tell you. At least not for free.) If big money thinks its going to be a restaurant chain selling a Krispy Kreme doughnut burger, you'd be smart to ride it until they don't like it any more. If big money thinks the market is going to decline, you had better take notice. Fundamental analysis, to me, is ridiculous. To pay HAAWVAAAWD University $250,000 for a degree to know how to value stocks is ludicrous. One can theorize, hypothesize, hypnotize and aggrandize about what to buy based on fundamentals but it simply doesn't matter. If you aren't trading with the Generals, you are on the wrong side of the trade.
posted by TimingLogic at 10:25 AM links to this post

Wednesday, September 06, 2006

Ford's Bold Move

As I've mentioned before, the state of the American automotive industry is something I am very passionate about. Fifty years of management failure are coming home to roost and the American consumer is going to be the beneficiary as are the remaining workers at Ford, GM and DaimlerChrysler. Unfortunately, not so for the millions who have lost their jobs over the last fifty years.

As you may have read, Bill Ford has pulled another bold move. Ford was acting CEO, Chairman and President for a $200 billion company in crisis. This is a feat no single human is capable of fulfilling. At least one who is honest with himself or herself.

I don know anything about Alan Mulally the new CEO of Ford but what I read. No one person is going to turn around Ford but this move makes alot of sense to me. It appears his positive credentials can be summarized by a top ten list as follows:

1)He's an outsider in an insular industry and that means new ideas and a clear perspective
2)He's got a very strong operational and manufacturing background using lean techniques copied from Japan and the best of American manufacturers
3)He's been through many major turnarounds after devastating blows to Boeing's commercial aircraft business
4)He made Boeing a global R&D and manufacturing powerhouse by taking advantage of a worldwide team capable of working around the clock to shrink development times: This is something Ford really needs to hone with tremendous engineering and design talent on every continent
5)He has a belief that American manufacturing and design excellence is achievable and he delivered it at Boeing. We know it is possible because Caterpillar, Honda, Siemens, IBM, Intel, Deere, Toyota and others excel at it. And America still is the manufacturing leader globally by a large spread.
6)He appears to be a compassionate "people person" who still has the ability to make tough decisions when necessary as well as very well respected by the employee team at Boeing: Leadership with the respect of its employees is extremely important in any turnaround
7)He knows how to deal with low morale and the motivational issues of a company in crisis
8)He has experience dealing with a unionized workforce through a turnaround in a win-win fashion and nothing positive will come at Ford without shared responsibility with the UAW
9)He believes strongly in product development's role in a turnaround and so does the Ford team
10)He accomplished the turnaround at Boeing by engaging the customer in the design process and does Ford need that more than words can possibly say

I can't see anything but goodness in this appointment. It brings outside talent into the executive ranks and a seasoned leader with a track record of success. I would have thought maybe someone from a consumer products background might be interesting but good things don't always come in one package. ie, I expect more of the same with additional outside hires. I believe you've got to give Bill Ford some serious credit here. This decision helps proves Bill Ford has the right stuff. He's acknowledged Ford is in crisis publicly, he's acknowledged they lost touch with their customer, he's hired outside talent thus admitting he doesn't have all of the answers, he put aside his ego to bring in that talent and he has publicly announced a turnaround plan open to scrutiny. There will be alot of criticism and second guessing by outsiders and Wall Street analysts but frankly none of them have ever accomplished any of the bullets I've included above so what the hell do they know anyway? Seriously? GE's Immelt gave Mulally the highest praise of any person Ford interviewed. Immelt is one hell of a CEO.

GM? Their CEO did the same thing when he brought in Bob Lutz as Vice-Chairman. Leadership which admits they need strong complementary talent to help them steer the ship is generally a good sign in my book. Less of a God complex and more interested in doing what is right. GM is moving positively in the right direction but I still have questions as to whether the right CEO is running the company. There surely doesn't seem to be the sense of urgency at GM there is at Ford and the lack of a publicly announced turnaround plan means there is no way to measure GM's progress nor is there any external pressure exerted in earnest because of it. In any event, the sense of urgency at Ford continues to gain traction. Next comes the quickened pace of a revised turnaround plan to be submitted to the board on September 14th.

Update: GM Extends 2007 Model Warranties to 100,000 Miles
GM, the world's largest automaker, will extend warranties to 100,000 miles on 2007 cars and trucks as part of a plan to tout quality and win back buyers lost to Toyota Motor Corp. and other rivals.

The new warranty on engines and other powertrain parts is an increase from the current 36,000 miles, Chief Executive Officer Rick Wagoner said today in Detroit. It also will apply to 2007 models already sold, he said.

Desperate times sometimes require desperate measures. Expect Ford and DaimlerChrysler to match this program. This won't hurt Toyota or Honda but it might hurt Nissan because their quality has been sorely lacking in recent years.
posted by TimingLogic at 1:03 PM links to this post