Wednesday, November 29, 2006

What Ever Happened To Anti-Competitive and Antitrust Laws?

"As organization acquires power, it uses that power, not surprisingly, to serve the ends of those involved. These ends-job security, pay, promotion, prestige, company plane and private washroom, the charm of collectively exercised power-are all strongly served by the growth of the enterprise. So growth enhances power over prices, costs, consumers, suppliers, the community and the state and also rewards in a very personal way those who bring it about."
-John Kenneth Galbraith

Not long ago I saw an interview with Jack Welch, former CEO of GE, where he opined about Wal-mart's push into the north east U.S. He shared a conversation he had with a union worker at a local grocery chain. The worker told Welch that his management was concerned they would have to fire workers and reduce salaries if Wal-mart's push was successful. Welch's response was something on the order of "So you are charging the customer too much?". In other words, if you can afford to lower labor costs, you are currently charging the customer too much and are obligated to cut wages as he went on to say. Now, if you are a feudal lord or Jack Welch, then I guess that's a reasonable statement to make. But, if you are a working person and need to provide for your family like 98% of people, wages for the masses actually matter.

Let me digress a few moments here to make a few off topic comments. I didn't see Jack worried too much about lowering GE's costs as it pertained to his bloated salary. Nor did he seem to care about GE customers paying too much when he retired from GE and continued to receive an extremely piggish compensation package that would make the Queen of England blush. I guess those who are enlightened recuse themselves from the rules for the minions they govern. Similarly, I once had a client who constantly complained that the union was keeping them from lowering wages to compete with Wal-mart. His salary was over $4 million annually. Nothing wrong with sitting sideways on your wallet. Something wrong with not wanting others in your organization to make a decent living when you are living the high life. I am not endorsing unions either. I'm simply pointing out the lack of empathy and economic disparity which appears to be developing in the U.S. This general topic fits into the reason for my post.

Typically, I'm of the opinion any massively large organization has a disproportionate and undesirable amount of control. This includes bloated government. Over the last thirty years we've seen the growth and domination of mega companies with the relaxation of antitrust regulation started under the Reagan administration.

I feel extremely fortunate to live in a democratic society. But, capitalism is not democracy. Nor do most companies practice anything similar to a democratic process in their hierarchy or organizational structure. That's too bad because they aren't maximizing their most important asset: the intellectual capital of their employees. To be fair, some actually embrace employee empowered cultures where managers act more as coaches or facilitators than the next Napoleon and constructive conflict is encouraged. But, then those are typically the companies which have the lowest turnover and strong environments of innovation, customer service and great employee moral. The reality is working for many companies is more like being a serf working for a medieval lord rather than anything close to democratic ideals. Capitalism is the best form of economic system available today but it is not perfect by any means. Nor is there a particular definition of what type of capitalism works best. Asian, European and American cultures each represent different interpretations of capitalism. As an example, while many in America may eschew European capitalism, the reality is the American engine of growth has more to do with a liberal immigration policy and continued population growth than most other variables.

Where am I going with this? San Diego just banned big box retailers which meet certain criteria. This attempted ban is targeted specifically at Wal-mart but will affect other mega retailers as well. There is actually a logic to their decision whether you agree or disagree with it. Most "free market" types would say San Diego has stepped out of bounds. Wal-mart or anyone else has the right to do whatever they want within the rule of law and the markets will pick the winner. Or, they'd cite that Wal-mart usually gets thousands of resumes for every new store opening. ie, If Wal-mart was negatively impacting the economy, why do so many people want to work there?

I generally agree with those statements although I'm not sure it's quite so clear as to who is on the right side of the law in this situation. There is no doubt there has become a great concentration of power in the U.S. economy. We've seen this concentration of power or monopolistic/oligopolistic practices in the past. And as such, we've seen capitalism without enforcement of anti-competitive laws is not necessarily self-correcting or what is best for society as a whole. That is, unless you are GM and other monopolies come into your market with a more genteel culture. Some even argue monopolistic/oligopolistic practices contributed to the Great Depression. There is a reasonable amount of supporting evidence that such practices, common during the 20s and 30s, surely didn't help the economy. It's no coincidence the board game Monopoly was created during the Great Depression.

What's the point? I believe we are at a time where a fundamental question needs to be asked. Are societies better off with one or a handful of companies dominating massive pieces of an economy as is the case today? Are we repeating history with lax enforcement of anti-competitive laws? Are such concentrations of power that were historically destructive to the economic vitality of nations or societies still destructive over the long term?

I generally believe in a non intrusive government policies but there are times when capitalism left to its own devices creates massive imbalances. Imbalances where competition, innovation, price flexibility and ultimately employment are compromised. Robber barons dominated the early industrial age in the U.S. as they did in other societies by many names over countless centuries. Are we seeing a return of such a business climate? There is no doubt that companies which achieve massive critical mass practice predatory business practices, stifle innovation, stifle new business creation, increase price rigidity, negatively impact employment opportunities and reduce competition.

Is it time for governments to dust off their anti-competitive laws? Is the city of San Diego effectively doing just that with a federal government that has adopted a policy of laissez faire as it pertains to antitrust regulation? Will the unchecked mergers of the last three decades exacerbate any significant economic down turn as happened during the Great Depression? Time will tell. But I am sure that companies like Wal-mart can and do use their size and financial position to unfairly affect legislation, unfairly lobby their cause and if they so choose, unfairly limit competition. With consolidation in technology, communications, transportation, banking, financial services, retail and other industries, I believe an honest discussion about enforcement of anti-competitive laws is timely and worthwhile. Entrepreneurs created the miracle of capitalism and collectively society should do everything possible to level the playing field or even slant opportunity towards entrepreneurs and new enterprise creation. As I've written before, that also includes scrapping Sarbanes-Oxley for small businesses. Something the incoming Congress appears to support.
posted by TimingLogic at 1:08 PM links to this post

Tuesday, November 28, 2006

Quick Note On Yesterday's Sell Off

It seems there are a multitude of reasons I'm hearing for the market sell off yesterday and the pathetic response from the bulls today. I expect they'll try to give it another go tomorrow but this rally appears to be finishing up without some renewed buying. The two most prominent reasons I'm hearing for yesterday's weakness are overseas sellers and the dollar. The fact is both are ridiculous. Especially the weak dollar notion highlighted by the brilliant insight of tout TV.

A weak dollar is what has fueled this rally over the last four years. So, to state that a weak dollar is causing the sell off is absurd. Should we see a drop outside of the historical trading bands for the dollar, that might cause fear of the unknown in the global growth scenario but we aren't seeing that. If dollar weakness was a problem, we'd see the bond market reacting accordingly as a weakened dollar of significance would mean import prices might cause inflation. Bond yields made a new low. Bond traders are smarter than equity traders and way above the fray of tout TV. All you need to be a equity trader is a heart beat. Additionally, the dollar is weak against what? The Euro? Who cares?

The Yuan is pegged against the dollar so imports from China, accounting for a vast amount of the trade gap, wouldn't change one iota. And, what about the Canadian dollar where we do more trade than with the Euro? Or the Yen? Or the Won? What really upsets me is I turn on the TV and the first thing I see is some special commentary on how they appear to be "cracking" some type of big story as it pertains to the dollar and the markets. Is this as good as it gets in the financial press?

Now for the selling in "Europe" as we hear because of dollar weakness. Well, this rally started failing in late October when I posted as such on the 26th. If I am an individual and I can see this rally was failing, wouldn't many sophisticated multi-billion dollar hedge funds, traders and professional money managers see the same thing and start locking in profits? So, where are we now? Right back to where the S&P 500 was when I reported the market was weakening on October 26th.

posted by TimingLogic at 3:43 PM links to this post

Grinch Steals Christmas As Durable Goods Crater?

As reported this AM, durable goods orders were very weak. Although much is attributed to aircraft orders, the underlying tone is weak as well. What is highly disturbing in the data is very weak capex orders. Computer orders are down about 30%. Companies like IBM, Microsoft, Cisco, EMC, Intel, Dell, HP, Oracle, SAP, BEA, CA and other infrastructure players rely on a strong fourth quarter as a significantly disproportionate percentage of annual sales.

We can assume part of this rally in large cap technology was in anticipation of a strong fourth quarter. Will we have a strong fourth quarter? Doesn't appear so from this data point. As I stated months ago, while I am comparatively bullish on these companies versus the consumer oriented market leaders over the last four years, I believe the rally is misguided and would not personally own any of these stocks as a long term investment.
posted by TimingLogic at 9:12 AM links to this post

Sunday, November 26, 2006

The Copper Topped Economy

While many look to divine the future of economic output with volatile economic indicators, copper typically provides a reasonably clear indication of global growth.

While many are quick to point to a global real estate bubble, they argue we are in a long term bull market for commodities including copper. Yet, as I have written time and again, there is zero precedence for such an argument. Sure, some commodities may violently rise and fall by large percentages for years but I don't call that a long term bull market. Bull market is defined by higher highs and higher lows not what we have seen historically.

In addition, since more than half of copper production appears to go into real estate, it's hard to argue we aren't in a copper bubble if one believes we are in a global real estate bubble. The amount of new copper production coming online in the next few years appears to be a pretty large number from what I have read. With copper in the biggest price bulge in over one hundred years (It is likely the largest bulge in the history of capitalism but I don't have any data points before 1900.), it's hard to imagine speculation hasn't fueled much of this massive blow off. The end of the commodity bubble this cycle likely happened in the massive run up in industrial commodities and said stocks in the first part of 2006. During a period of less than two months copper nearly doubled from approximately $2 a pound to nearly $4 a pound. This is consistent with the last phase of any mania including the doubling of technology stock prices in the 1999 blow off into the early 2000 peak. And, I don't care what anyone says, history will almost certainly prove this is a blow off. Copper actually reached levels of semi-precious metal status with its final violent rise.

Let me take this argument one step further and say that because commodities are traded globally in dollars, there is a reasonable conclusion to be drawn that we aren't in a commodities bubble but a sea of excess dollars. More dollars in the system means more dollars are required to buy the same amount of any dollar denominated asset. That may indeed be so. But, don't necessarily blame that on the Federal Reserve as I hope to point out soon enough in a post I've promised to get up for the last few weeks.

Now that copper, crude and gold appear to be resynchronizing, that is likely bad for all industrial commodities and a sign of weakening demand, an end to speculative fervor, excess supply building in the system or all of the above. The fair value for copper is likely 50 cents to a somewhere less than $2 not $3-4. Long term, I would be surprised if copper did not return to 6o cents. While there may be excess dollars in the system, this isn't the first time such a scenario has unfolded. Historically, this has never saved copper from cratering to the same support level it has had for the last fifty years. Things may be different this time but I'm not willing to bet my financial future on it.

The senior management team at Freeport obviously doesn't agree with history since they recently paid an astronomical sum for Phelps Dodge, the gigantic copper producer. Wouldn't it have made more sense to buy Phelps when copper was 60 cents in 2001? I would assume such an acquisition could have been made for about ten percent of the nearly $30 billion purchase price being paid today. But, then I suppose Freeport didn't have the cash to make this deal happen in 2002. If so, corporate management failed miserably in their ability to manage their financial position to take advantage of just such an opportunity. An opportunity that was clearly predictable.

Chart courtesy of

posted by TimingLogic at 4:23 PM links to this post

Wednesday, November 22, 2006

DeMark Sequential : One More Post Before The Holidays

I received a soft sell signal on my intermediate term trading model a few days ago. I say soft because the most important data point, a volume related measurement, issued a sell signal but I'm not getting any confirmations. Yet. What is interesting is the DeMark Sequential simultaneously issued a sell on the S&P 500 weekly charts. Since the S&P 500 is the preferred trading vehicle for professionals and most quantitative oriented trading money uses the DeMark Sequential in some form, we may be at a correction point. Big correction? Small correction? I wish I could divine the future but my long term model keeps me in cash or defensive if one is a buy & hold investor.

Last week I mentioned the big blow upwards after a month long consolidation in many indices might have been the final hurrah in progress. That coincides with the DeMark signal so I cheated a little bit. I don't see any reason to consider a change in trend yet but I do find a few things worth following.

@Just last week a Wall Street perma-bull declared the S&P 100 is headed to an all time high. I think it's safe to assume he doesn't follow DeMark.
@The Transports still have not made a new high and one rail company recently spoke of business weakness as I recall. A correction before the Transports hits a new high could initiate a lower high scenario that would provide a general uneasiness or outright sell for Dow Theorists.
@Most industrial commodities are weakening or worse. That included copper which I wrote about in the Phelps/Newmont trade. A trade that was developing nicely before being crushed by Freeport's takeover bid for Phelps. (A poorly timed and foolish bid without any consideration for risk management in my estimation. Maybe I need to think about shorting Freeport for being a little dull in the use of their cranial vault. Not really. They have a dividend and no outright shorting on dividend stocks for me.)
@The broader market indices including the Nasdaq, Russell 2000, midcap indices and Value Line are perched just above or below the May highs. A correction might pull them well below the May highs and initiate significant selling. ie, A potential false break out.
@Semiconductors are still languishing in a bear market which started nearly three years ago. They are showing renewed strength over the last week and are many times the last sector to show strength on a rally.
@The Banking Index still has not moved more than about 1% from its May high as I have noted time and again.

Let's see how the DeMark Sequential progresses out of curiosity.
posted by TimingLogic at 11:33 AM links to this post

Tuesday, November 21, 2006

Inflation Drops Most In 13 Years. Is That Good For Stocks?

As reported last week, inflation in the U.S. has dropped by the largest amount in thirteen years. Or, as reported at, the inflation risk to the economy is seen as easing. How great is that? Beyond the short term, that is likely bad news for the stock market if it continues.

If inflation is abating, that means the profits from commodity related companies and many cyclicals are going to be under pressure. Remember we aren't witnessing normal inflation caused by pricing power and increased wealth. We are seeing abnormal inflation caused by monetary conditions, economic malaise and overvalued equities. That means other companies which have been raising prices due to higher input costs are likely going to start lowering prices at some point. Why? Because margins will become excessively wide if inflation continues to abate. In other words, companies that have raised prices due to rising input costs will see margins expand as those costs drop. Given we live in a market based economy, we can expect price cuts from those companies to spur demand or take market share. So with commodity prices falling and prices falling from other finished goods, what happened to inflation? Das ist kaput. Now as an aside, falling input prices might re-ignite the economy and inflation temporarily. Then what? Cause the Fed to raise rates? I'm not saying that is going to happen. It is simply an observation that this may not be such great news.

End game? Cyclical profits drop if commodities continue to drop. (Cyclical profits have been propping up this market and are the highest in half a century.) Other company's profits may temporarily rise due to lessened commodity input costs IF demand stay strong otherwise they fall as well. While I've been in the camp that inflation is temporary and not the end state concern, that is based on many variables which will unfold over time and may change.

Think the money coming out of commodities will instead go into more productive assets? That's what has been happening in the stock markets recently with the move to mega caps and some large technology shares. So, how does that translate into corporate spending and economic growth? That is a good question. We are in a capex recession and it probably isn't going to end before this cycle ends for a multitude of reasons. So, I believe this rally is misguided. But, then Wall Street is always wrong eventually. The key is to figure out when.

Want the market to continue higher? I'd say you might wish for inflation. Worried about the global housing market? Wish for inflation to keep the asset prices up. But, if you have a variable rate mortgage, you should wish for no inflation so your adjustable rate mortgage payment stays low. Wait a minute. You should wish for inflation so your home value doesn't fall. Flip, flop, flip, flop. Don't want to wish? Distract yourself. Maybe it'll all go away before tomorrow.

As I've written before, if inflation abates, the growth cycle is in jeopardy.
posted by TimingLogic at 1:42 PM links to this post

I Wish I Was Above This

But I'm not. We should all aspire to greatness in something. All I can say is amazing!
posted by TimingLogic at 10:43 AM links to this post

Competition From The Chinese Black Markets

The general fear that America is losing its competitiveness is simply unfounded. As is the fear that Japan and Europe are losing their competitiveness. I might write more on this in the future as it pertains to specific topics but I thought this was very timely. Reports are that up to 25% of all GDP in China are ripoffs.

Everything from premium golf equipment to gaming consoles to motorcycles to cars to hand bags to medicine to movies to music to books to software and on and on and on are copied illegally. I remember twenty years ago that text books we were using in college was being mass produced illegally in China. It is as much a part of their culture as baseball is to America. Why? China is not an innovative society.

In order for China to truly become a capitalist society or provide a real economic threat to established capitalist societies, they need stronger intellectual property laws. In order to protect investors, companies and individuals which develop new products, ideas or any new innovation, laws need to protect the research and investment required to do so. The current situation in China is ridiculous. There is nearly zero respect for the rule of law as it pertains to intellectual property. Chinese companies have gone so far as literally copying Daimler Chrysler's Smart car, Chevrolets, Honda motorcycles and most recently copying the Lexus automobile badge, reversing it and slapping it on a Chinese made automobile. How incredible is it to imagine that you work for General Motors and are selling a model of Chevrolet in China and walk down the street to see the nearly exact car in a Chinese company showroom? If these companies did not sell their products in China and exert pressure on the authorities to stop such shenanigans, they would continue unchecked as has happened with other companies over the last quarter century. Recently German authorities seized over 1 million pairs of counterfeit Nikes.

Now, this story does not pin blame as to where the shipment originated, but I would be surprised if it wasn't China since they have a very robust infrastructure for ripping off Nike products. Typically, as I understand it, these shipments are pushed into Europe and "laundered" for re shipment to the U.S. as legitimate goods. How many tens to hundreds of billions in revenue are lost by companies to these efforts? No one really knows but there is a reasonable chance your Calloway driver is made in China if you bought it on eBay. Ditto with Viagra bought on the internet. To allow China to join the WTO with such lax enforcement of intellectual property rights is an oxymoron of major proportions. Emphasis on oxy"moron".

Imagine what a society could be capable of if the energy used to ripoff was used to innovate. Why won't the Chinese government crack down on such practices? I suspect for a multitude of reasons. Not the least of which is most government officials have benefited from such practices. In addition, what would you do if up to 25% of your economic output was attributed to such behavior? Encourage it?
posted by TimingLogic at 10:13 AM links to this post

Sunday, November 19, 2006

Fastenal Is A Proxy For The Industrial Economy

A relatively obscure company I have followed for some time is a well run outfit by the name of Fastenal. $10,000 invested in Fastenal in 1988 would have returned approximately $2 million at its peak earlier this year. Not too bad. The company has experienced very few weak periods. One was the 1990 recession and the other was the 1998 small cap crash. Fastenal Corporation and its wholly owned subsidiaries sell industrial and construction supplies on a wholesale and retail basis. According to corporate literature, customers who use Fastenal products include:

Road contractors

As of December 31, 2005, the company had 1,755 store sites located in the United States, Puerto Rico, Canada, Mexico, Singapore, China, and the Netherlands. If we are starting a new mid cycle bull market, why is Fastenal not leading us to new highs? Each equity market rally since this bull market began in 2003 has been led by Fastenal. A nonconfirmation from Fastenal does not necessarily mean anything. But, given its peak in May with the general equity markets and its relative weakness since, it does tell me the general tone of the market has changed.

posted by TimingLogic at 11:56 AM links to this post

Saturday, November 18, 2006

The Embodiment Of Leadership

The greatest leader and best field general in college football today. A young man who has overcome tremendous adversity to become a wonderful person and over achiever. Someone we would all be proud to call our son and teammate in any of life's endeavors.

posted by TimingLogic at 7:24 PM links to this post

Thursday, November 16, 2006

Philly Fed Survey For November

BUSINESS OUTLOOK           Previous
SURVEY Diffusion No Diffusion
Index Increase Change Decrease Index

What is your evaluation
of the level of general
business activity? -0.7 29.9 45.3 24.8 5.1

Company Business

New Orders 13.4 29.5 37.3 33.2 -3.7

Shipments 5.3 31.4 43.4 24.9 6.5

Unfilled Orders -11.1 18.6 58.3 22.6 -3.9

Delivery Times -9.4 18.9 68.1 13.0 5.9

Inventories 13.2 27.6 49.2 23.2 4.4

Prices Paid 32.0 35.7 54.2 9.0 26.7

Prices Received 17.8 16.5 72.7 10.8 5.7

Number of Employees 9.4 21.2 57.9 20.9 0.2

Average Employee Workweek -2.0 22.3 52.3 21.9 0.4
What I notice most in this report is new orders went from 13.4 to -3.7. That is a substantial drop and signals additional concern for Christmas season in my estimation. Not necessarily because they make Barbie Dolls in the Philadelphia area. They don't. But, because that means Christmas season may be filled with angst about the future which could translate into lower spending.
posted by TimingLogic at 12:31 PM links to this post

Wednesday, November 15, 2006

Automaker's Press Release After Meeting With President Bush

Here is the joint statement provided by Ford, DaimlerChrysler and GM post their meeting with President Bush yesterday.

I absolutely love this inept double talk. I'd have been embarrassed to publish this statement. The auto industry's insular management, terrible products and abominable customer service has lasted over half a century. Any other industry would have gone bankrupt or been forced into transformational change decades before. Instead, these massive bureaucracies continued to pay their inept leaders handsomely while cumulatively losing over $1 trillion in sales through constant market share erosion.

While I don't doubt there is legitimacy to their calls of fair trade and equal playing fields, that is a fact of life in every industry. There is no such thing as free trade. There never has been. All we can ever hope for is relatively fair trade.

Every nation has their protected industries. In Japan it's automobiles. In the US it's Boeing and defense contractors. In Korea it's autos and semiconductors. In Norway it's oil. Whatever. You want access to the Japanese auto market? First off, make something the consumer in Japan wants. Secondly, maybe Japan wants something in return. Maybe they want to compete in markets which are off limits. Maybe they ask to lift the unspoken ban imposed by America on the Japanese defense and aerospace industry and let them compete in the U.S. for contracts. Uh, you don't want that? My point is no one wants totally free trade. It's a ruse. Countries want generally fair trade with a fluid definition of what fair means.

Here's my rub of this two faced press release. On the one hand these executives complain about currency manipulation making it difficult to compete with Asian auto makers or in Asian markets. That's a true statement but it seems funny Honda can make cars in the U.S. at a profit. Yes, maybe there is some financial gamesmanship between parent and the U.S. business but Honda has never tried to pawn off garbage to the American consumer or flipped a buyer the bird when they bought a lemon. In other words, the American auto makers have no idea what they are capable of because they've never really been forced to change.

On the other hand, these CEO's complain that buying steel from American companies is too expensive so they should be allowed to buy steel sold below cost from the same Asian countries manipulating their currency. In other words, on one hand they complain about manipulated currency making their business difficult but on the other hand they want to take advantage of that manipulated currency to make business for other American companies more difficult. Now, go talk to the U.S. steel companies and they'd tell you that opening the barriers to dumped steel would decimate their industry. They'd have just as valid argument as the auto executives. Actually more valid because they've already transformed their inept management and business practices.

Frankly, I'd tell all three to pound salt. Fix your internal problems then come back to see me if you still cannot compete. To hide behind piss poor management decisions for fifty years, fire all of your employees because of those said piss poor decisions and come whining for protectionism so you can get your bonus doesn't sit well with me. In fact, it infuriates me.
posted by TimingLogic at 1:30 PM links to this post

Small Caps And The Broad Market Are Back To The May Highs

For all of the hoopla of this rally and fear of being left behind it was only yesterday that small caps, as defined by the Russell 2000, and the equal weighted broad market Value Line Index bested the May highs. This was after a one month consolidation where both were stuck in neutral. Is this the start of a new upward push? That's an interesting question. We are closing in on the longest period without a 1% intraday decline in the S&P 500 in over a decade. I know I keep repeating this but violent rallies without a pause aren't typically healthy. The last rally where we had this type of run without a correction long term interest rates dropped 30% to fuel the move. In the last six years, we have only had one sustained rally in the Nasdaq that has really generated a significant return to date. That was 2003 which was a strong rally but a very orderly rise. This, by comparison has signs of blow off. Now, this may not be a blow off but unusual activity catches my attention.

One could have predicted a move into mega caps from international markets and small caps in a move to safety as investors anticipated higher risk. A few weeks ago I talked to a compatriot who has $300 million under management and he told me they were moving everything into mega caps. So, the move up in the S&P does not really surprise me. American and European mega caps were the most reasonably valued equity asset globally. Now, that said, if we move beyond 1400, that will surprise me.

In the 2000 bubble, we didn't get a flight to mega cap safety because the bubble was in mega caps. Instead we had a rotation into undervalued small caps which had not recovered from the 1998 drop of 40ish percent as I recall. Two things surprise me here. Ok, maybe not surprise me. Nothing on Wall Street should ever surprise me. Concern me might be more appropriate. The violence of this rally and the fact that everything else is being bid up with mega caps. I've talked about the valuation of small caps likely being a bubble and as extended as the S&P was in 2000. The fact they are rising past old highs is very unnerving for the future of equities in my estimation. Most cyclical earnings in half a century. Earnings at the extreme end of historical norms. Small cap valuations higher than the S&P in 1929 and similar to the S&P in 2000. Dividend yields in a channel of 100 year lows. That is not a peaceful feeling. The stock market is not a casino and many money managers younger than my parents do not seem to understand the concept of value or effective risk management. Equity markets rising under these conditions should be viewed with caution for those of us interested in long term appreciation and capital preservation.

One final note. It wasn't until October 16th that I really started measuring extreme risk taking in this rally. That also happened to be when the internals on the SPX and Nasdaq peaked. Up until yesterday, the broader market had not made any progress since then. Typically a sign of future weakness. What does the future hold? At this point, I'd be inclined to say yesterday's move might be nearing a final thrust. But, most of my short term work still isn't showing any signs of weakness. In fact, it is accelerating. That doesn't engender a feeling of confidence given the pace of this rally and the loss of momentum on market internals.

The good news is that if you are invested in small caps or the broader market, you have recaptured your losses since May.

posted by TimingLogic at 8:23 AM links to this post

Tuesday, November 14, 2006

Oil Glut Spurs Production Cuts

If we are running out of oil, why is OPEC cutting production nearly 5%? Or, for that matter, if the world economy is so strong, why are they cutting production? I am extremely leery of oil's ability to hold its current levels. By implication, I am extremely leery of the equity market's ability to do the same. As I've said time and again, corporate profits are the most cyclical in half a century. Part of that cyclicality is due to energy profits.

(Table SP1. OPEC Production million barrels per day)

Oct. 2006
Nov. 2006
Nov. 2006
Projected Cut
Nov. 2006
Targeted Cut











































Saudi Arabia


















Total OPEC 10






Courtesy of the IEA
posted by TimingLogic at 11:14 AM links to this post

Google Again

I've probably highlighted Google more than any other individual stock. I view their success as a proxy for this cycle given we are in a very unhealthy consumer centric investment cycle. Google is the consumate consumer stock. Therefore, it is one of the stocks I absolutely do not like as an investment now that we are entering a period of uncertainty.

Below is a chart of Google since it went public. Notice how the chart maintained an orderly rise within a parallel channel until the blow off top in January of this year. At that point clarity of vision was achieved. Google was going to rule the world. Newspaper articles, magazine covers. The founders were geniuses. $2,000 price predictions by analysts. Maybe. More like a mania top. The stock dropped back into its orderly rise and found support at the bottom of the channel in an attempt to rise again only to fail. Now, that isn't necessarily bad news. Maybe the stock is just taking a breather. Eventually the stock settled just about the unfilled gap marked on the chart and floated along the top of that gap until it broke the parallel channel. I suspect there was a little unfilled business before the stock could drop. It was the down gap created when the stock fell from its January high. That gap has been filled but now there is a huge gap directly below the new high peak just set and the stock has failed to move higher since making a new high. I'm pretty confident we are going to fill that downward gap. Do we fill all of the gaps on the chart? Eventually, I would suspect so. The stock's action in 2006 has been very unhealthy.

Anyone other than me notice that Google used to consistently trade 60, 70 even close to 100 million shares a week? And, since that January high we are trading 18, 20, 28, 30 million shares a week? New highs on low volume are typically a very negative development in any stock. The market will eventually price significantly more risk into Google's future. Remember, the future of this company is very unclear. The future of the global economy is very unclear. Competition for new methods of internet advertising revenue are already showing up. Google has one source of revenue and, therefore, is a one hit wonder. The stock is trading at a valuation that is likely greater than the GDP of most small or under developed countries. What kind of surety do I get for this valuation? Dividends? Predictable business model like an insurance company? Nada.

posted by TimingLogic at 8:16 AM links to this post

Saturday, November 11, 2006

Robert Rubin's Speech

On Bloomberg's site under the Audio/Video Reports is a taped Robert Rubin speech everyone concerned about their future should watch whether you live in the Americas, Europe, Africa or Asia. Why? Because his speech surely represents similar topics of concern in your country and the leadership willing and able to address the issues he talks about will lead in the future global economy. I am a huge fan of Robert "Beefy Dollar" Rubin whom I believe is one of the most brilliant leadership minds in the world today. Rubin and other impactful leaders will continue to lay down the gauntlet for serious dialog. This is the type of message which has galvanized a nation in the past and will provide the foundation for significant change in the future. Potential crisis is an arousal for systemic change and if any nation has a system flexible enough to adapt, it is the U.S. system of government and open democracy. (As I have mentioned before, to a lesser extent so does Britain, Canada, Australia, Japan and much of Europe.) So, while many may view this message negatively, I view it as a necessary sign of true leadership attempting to arouse a country into a serious dialog on serious issues. Transformational issues which face all nations every few generations.

Personally, I believe Rubin's comments attacking minimization of risk is focused squarely on litigation, tort reform and Sarbanes-Oxley amongst other upside down examples in the economy. Mark my word. As I said in the past, Sarbanes-Oxley will be repealed or seriously overhauled to an end state of less regulation. When corporations are afraid to take risk because of significantly new and misguided regulation, it will end up on the chopping block when jobs aren't being created and corporations finger regulation as a culprit. We aren't there yet but there's every reason to believe we will be. Too many executives are afraid to take risk and the constant I hear over and over is Sarbanes-Oxley.

This is a cyclical pattern which is repeated time and time again. Long waves of expansion culminating in excessive wealth and greed followed by regulation to legislate morality followed by business malaise caused by over regulation followed by reductions in regulation ultimately leading to renewed risk taking and expansion. It happened in the 1970s and was reversed by Reagan in the early 1980s. And it happened in prior cycles as well.

The video is best watched with Microsoft Explorer. Problems with the video are most likely due to a firewall if you have one.

Next week I'll follow up on my housing post with some Fed commentary as I had promised this past week. I'm trying to frame it in my head so I don't sit down and write a book.
posted by TimingLogic at 9:44 PM links to this post

Friday, November 10, 2006

Conspiracy Theories And The Drop In Oil

It seems rather vogue in the blogosphere to be blaming the drop in oil on Goldman's re weighting of a commodity index and an attempt to manipulate the outcome of the U.S. elections. While there is no definitive answer on why oil dropped, I could give a dozen facts rather than conspiracy theories. Fact: Fundamentally we have oil coming out of our ears. Fact: There is more excess oil in the system than when oil was less than $20 a barrel. (Forget about the stories of peak oil. It's not real. At least at this point it isn't.) Fact: The global economy's growth rate has dropped and smart money knew it would months ago. That is bad for oil. Fact: Oil executives were selling more shares of oil than at any time in history as I outlined on here months ago. Or, in Valero's case, as I recall the extremely savvy Bill Greehy sold more shares than he had over his entire cumulative career. Fact: Speculators were driving an enormous and unsustainable premium in oil. Below is an inventory chart of the OECD that I found somewhere on the net a few months ago. From where I can't recall but thanks to the IEA.

Now, I've been stating for some time that oil was due a correction and maybe more and we've backed it up with facts and quantitative analysis. Many oil stocks including one of my favorites, Valero, are up nearly 1,000% this cycle. I started talking about Valero as a weakening stock about six months ago. So, let's look at buying pressure on a daily Valero chart. My definition of buying pressure is not a price oscillator. In fact, it's not an oscillator. And, it's based on volume because I want to know what smart money is doing not what conspirators are saying. So, Valero peaks then attempts another rally with a lower peak and much lower buying pressure then it dumps. That pattern was in process months before Goldman re weighted its index. The same weakened buying pressure with an attempt at higher highs is on the crude futures chart and just about every other oil related chart as well.

And what about coal or natural gas? Isn't the strength in coal stocks tied to the same fundamentals as oil? Well, then how do we explain the 50-60% drop in coal stocks? Is that tied to some re weighted index as well? Below is Fording Coal which has been decimated since a peak in April. Or, what about natural gas which cratered and caused the Amaranth hedge fund to lose $6 billion in a month? Is that tied to some conspiracy as well? Do you realize what scale of conspiracy all of these events would take to happen simultaneously? It would truly mean we are living in an Orwellian society and everything you thought to be true was a total lie.

So, is it seemingly odd that elections coincided with the the drops across the entire energy complex? Sure it is. But, what about fundamentals don't you understand? Awash in oil in 2006 with a weakening economy and a speculative fervor which was climaxing? Since oil demand is tied to economic vibrancy, do we ultimately blame the Democrats for weakening the economy before the election so that they could take control of the Congress?

Conspiracy theories are generally perpetrated by those who don't have a firm grasp on facts and therefore cannot explain phenomenon with solid argument. So, what more realistic conclusion might you draw from the above data points? Global demand for energy is going to drop? The fundamentals are weakening? Speculators have driven energy to excesses not sustainable? More likely the reason for the drops across all energy stocks are for a reason with a perfectly valid set of facts.
posted by TimingLogic at 10:48 AM links to this post

Thursday, November 09, 2006

Home Builders Are Weakening Once Again

A few months ago I had written that the home builders would attract value players soon enough. Well, the value players have been out in force. Below is a chart of Ryland Homes with a measure of buying pressure overlaid on price.

The first thing to notice on the chart is the double top. Notice how buying pressure made a significantly lower top on the second price top. The best way I could describe this action is the smart money or conservative investors likely liquidated on the first peak and the underperforming mutual funds, retail investors, true believers and speculators likely reloaded in an attempt to push the stock to a new high that ultimately failed.

A few weeks ago in a home building index post I had mentioned there was alot of buying in the home builders over the last few months. Notice how buying pressure exploded over the last few months. There's something very appealing about buying a stock with a PE of 3 or whatever home builders are trading at now. I would assume the general line of thinking is that with a PE of 3, how much lower could the price go. Unfortunately, not everyone has learned you don't get something for nothing very often. In other words, it's not a secret these stocks are trading on the cheap. If the savviest investors in the world aren't driving prices up, there's a pretty obvious reason.

Unless we see a change pretty quickly, all of that buying did nothing but create a bearish continuation pattern over the last few months. We could be getting ready for another dump. If the home building index breaks its 52 week low, we will likely see a downside acceleration in selling. Next we'll look at the Fed and what their actions may mean for the housing market.

posted by TimingLogic at 12:01 AM links to this post

Wednesday, November 08, 2006

History Does Rhyme

Below is a link to a prescient article surrounding the 1974 mid-term Congressional elections and the issues of the day.

The parallels to today are amazing. The same article could be written today with different dates and names. From war to questionable CIA operations to corruption to economic malaise to foreign policy to national security to uncontrolled spending to globalization to high energy prices to American competitiveness. The U.S. truly does have a self correcting political system.

It's not terribly difficult to understand the collective consciousness of an open society. When things are going well, the masses don't really care what politicians are doing. When things are not so cheery the collective consciousness wants a more active government. What would be more easy to predict at the peak of a long wave expansion than a message of minimal government intervention and low taxes as happened in the 2000 election? What would be more easy to predict than a correction of that consciousness in today's environment?

Many try to divine the future of investments based on historical statistics of investment returns when we have a Democratic President and a Republican Congress or whatever the variation is. Investment results with conservative or liberal government representation is really missing the point. The issue is what macro issues lead to a change in society's collective psyche. The reality is investment results have little to do with what party controls the Congress or Presidency because the government has little to do with the economic cycle. They may tweak it around the edges with stimulus or spending or tinker with too much involvement depending on the macro issues but politicians have very little impact on the long term economy.
posted by TimingLogic at 3:08 PM links to this post

Monday, November 06, 2006

Don't Be A Dope

If I hear any more from the perma-dopes out blathering about how the Fed is going to save the economy, I'm liable to end up in a stupidity induced coma. I "hope" they are right right along with I hope everyone in the world becomes a millionaire. If I had a dollar for every time the Fed did NOT save the economy, I'd be significantly richer than when they did. A soft landing, were we just experiencing a real estate bubble, might be possible. That is why real estate's over investment in the late 1990s didn't break. I don't know how many posts I can make about the automobile sector's importance to the American economy but how about one more. These are auto headlines from newspapers across the Midwest in the last week.

  • Thyssen to close plant
  • Delphi's losses grow
  • Auto chains limit orders
  • Ford to cut production in 2007
  • US auto factory jobs fall to 14 year low
  • Dura teeters on the edge of bankruptcy
  • Supplier C&A slashes jobs
  • American Axle offers buyouts
  • Metaldyne to begin layoffs next week
  • BorgWarner to cut jobs
  • Lear lowers earnings outlook
  • Ford & GM to source more from China
  • Ford retirees face tough medicine
  • Visteon cuts jobs, shifts work abroad
It's not just housing. It's a large chunk of the economy outside of pushing around excess liquidity enjoyed by the few. That is why I've stated the finance industry is likely peaking. Not everyone can leave every sector and go to work for a bank. There's a little too much crowding into one side of that trade. Yet, that is what we are seeing with accountants, real estate agents, banks, mortgage companies, Wall Street, CFA licenses, etc.

That reminds me of dozens of conversations I've had with people who say the Midwest housing sector isn't vulnerable because it didn't see the rapid rise in appreciation experienced on the coasts or hot markets. Really? Ever heard of the term "Rust Belt"? I don't think those housing markets had any such large appreciation before they cratered. Not that I'm predicting what housing in the Midwest will do but I doubt it will be pleasant for quite some time.
posted by TimingLogic at 1:45 PM links to this post

Friday, November 03, 2006

How's The Consumer?

Since I started this blog I've tried to keep a consistent message as it pertains to the most important data point this cycle. How's the consumer? That may be obvious given the consumer makes up two thirds of the American economy, but it is not the most important data point in every cycle. We've talked about housing, discretionary industries, cyclicals, retailers, consumer oriented technology companies and durables.

Over the last few days we've seen Wal-mart announce their worst same store sales figures in about six years as I recall. Wal-mart has enough problems in a foolish change in strategy they are attempting let alone any economic weakness. There's a general consensus the "wealthy" will pull through this slow down. Or, as you may have heard it said, this is a great economy if you are a skilled worker. I surely beg to differ. Such a premise denies the basic principals of economics and capitalism. The wealthy become so by riding on the backs of the middle class either figuratively or literally. Or, if you want a simple analogy, look no further than nature's stasis. Upsetting the food chain or ecosystem usually has consequences well beyond the obvious. Often the smallest change may have catastrophic consequences. How might this play out economically? It could be the companies wealthy Americans own or run have products the middle class relies upon. It could be that with wage disparity or wage malaise, the masses elect politicians who are more focused on more equitable income distribution. It could and likely will be a whole slew of reasons. But, ultimately, when the masses are not enjoying wealth appreciation, that is not a good sign for society as a whole as we've seen time and time again. Most specifically, as Eric Hoffer would point out, societies where the masses have already tasted success.

So what about the upper income segment of the economy? I consider Whole Foods a proxy for upper income Americans. To a certain extent, shopping at Whole Foods is a luxury. It is discretionary. Indeed food stuffs are a staple but paying four times the cost of merchandise available down the street at Wal-mart Superstore is not a staples business. Well, Whole Foods is definitely taking it on the chin over the last year. When the consumer is cinching their belt, $4 per pound apples aren't at the top of their shopping list. Today, as I post this at 2pm, Whole Foods is down $14 or 25%. Any down turn of significance will be shared by all.

posted by TimingLogic at 1:23 PM links to this post

Thursday, November 02, 2006


@The US is in a recession right now.
@We should view this slowdown as very welcome.
@We still don't see the probability of recession as being particularly high. It wouldn't be over 35 percent.
@The weakness is spilling over from housing to the auto sector to manufacturing to retail. We're at a 90 percent probability of a recession.
@ Lehman's Shin says recession chances are nowhere near 90%.
@ Merrill Lynch's Rosenberg said in a report that the odds of recession are 51 percent
@The decline in oil prices is a real positive.

Are you kidding me? First off, the grand prize goes to the genius who welcomes a slow down. I'm sure all of the people who are currently losing their income feel the same way. What's all this percentages mumbo jumbo? Let's be precise here. I'd say there is a 99.99999% chance none of these predictions are based on any type of model calculations or historical evaluation of specific economic data points and trends determining the future. Can I get a job like this? I can do this too. "By the end of the year, I'd be surprised with we weren't in a recession." That was my brilliant prediction some time ago. Now, given where we were in the cycle, I had at least a 50% chance of getting the answer right. Do I win a cookie? GDP was essentially zero according to a post Barry Ritholtz made. Fuggedabout how the government defines a recession, GDP at or below zero is a recession. Even if it's only for one quarter. We are in a recession. Now, how long it lasts is another story.
posted by TimingLogic at 6:20 PM links to this post

Wednesday, November 01, 2006

Volume At Price Part II

A few months ago I posted similar volume at price charts to the Apple and Google charts below. I received some feedback asking for clarification of how to interpret the charts, so I figured now would be an opportune time to do so since there is a fair amount of evidence both are are carving out tops.

Volume at price charts and their meaning are very simple so my first comment is not to read too much into them. The data provided is a distribution of volume at specific prices over a period of time. The time frame used is arbitrary. Day traders may use the price at volume charts to look for support or resistance of the prior day's action. Support and resistance ranges are typically found where 70% volume distribution is found on the prior day's chart. Obviously, support if the price closes above yesterday's concentrated volume distribution and resistance if it closes below yesterday's volume distribution.

Let's look at an example to clarify the concept. Yesterday, prices in the crude futures market started at $10. By noon, prices had risen to $11. By 4pm prices had fallen to $10.25. While looking at the price at volume charts for crude intraday, we find that 70% of the volume was distributed at $10.75 to $11. A plausible interpretation might be that sellers were in control and were distributing shares as prices rose to $11. So, although the price of crude went up, were the buyers actually in control? The next day, traders would consider this information to determine their trading strategy whatever that might be. Obviously an extremely simple example which I am limiting to keep my typing to a minimum.

For more explanation including breakouts, breakdowns and other interpretations, I'd recommend reading more about the Market Profile, which I loosely consider analogous to volume at price charts. The market profile does more of the work for you but the concept is similar. To read more of Market Profile tactics and how to interpret Market Profile data, please visit the Chicago Board of Trade site here. There are links for studies, books and educational material from the Market Profile home page.

Let's look at how this data might be used on a longer term basis looking at the Apple and Google charts. Long term volume at price charts can give clues to areas of support and resistance. Again, as I said before, resistance above and support below the current price. There is no magic in determining the time frame. You may choose to use since the start of this bull cycle to help determine where a buy point may be on a normal pull back. You may choose the last ten years as I have. Let me tell you why I am using ten years of data. It is strictly based on fundamentals. For reasons I have outlined on this blog as well as other work I have done, I believe we are in a negative cycle and that stocks have not finished their correction post 2000. Especially consumer stocks. So, I want to see pockets of large volume at specific prices to anticipate where support might be in the event of a correction. ie, Those are points where buyers likely stepped in and initiated heavy support just as I discussed on the intraday strategy above. I'll marry that data with support & resistance, trend line and some proprietary fundamental and quantitative analysis to determine a resultant guesstimate. Now, with the stocks going up, I'm making a pretty bold statement by posting this. Maybe I'll get my head handed to me. But, unless something changes, my work is telling me these stocks are weaker than their prices reflect.

The odds are not with Apple or Google that they will continue higher forever. The market always reprices risk. There is so much excess and one way thinking priced into these stocks that it wouldn't take that much to see a change in sentiment for either company. Remember, both of these may be great companies but it was just a handful of years ago Apple was a retread. Now, because of one limited-life product the company has somehow achieved enlightenment within the investment community. All I will say is Apple has been this overpriced only a handful of times in the last twenty five years. Each of those times it was considered on the path to nirvana. Following said thinking the stock proceeded to decline between 50% and 80%. So, I'm quite confident those who believe Apple's future is without risk do not have the odds in their favor. I don't think I need to say alot about Google as I just recently posted about Google. Even if the long term fundamentals remain positive, the odds are the market will reprice risk at some point. Again, you are being paid nothing in the form of a dividend to own these stocks. Therefore, investors are betting. Neither Ben Graham nor Warren Buffett, the two most successful investors ever to grace our presence, would buy either of these stocks today unless they changed their longstanding discipline.

So, looking at price at volume and nothing else, where might we find support for these two stocks?

Again, the information on this site is provided for discussion purposes only and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
posted by TimingLogic at 1:45 PM links to this post

Why I No Longer Watch CNBC

There comes a time when you need to do your own unbiased homework and no longer listen to the mad crowd. CNBC is the mad crowd. Seldom do they have a serious intellectual discussion worth listening to. Instead it's a five minute core dump of everything any guest can think of to substantiate his or her opinion or a five minute unprofessional screaming match between opposing views. If you want to learn anything, personally, I'd watch Bloomberg.

Today, Mark Haynes, whom I really like as a host, had a guest interview. Now, I had a temporary loss of sanity because I like Mark but the exchange goes something like this. I am paraphrasing from memory.

Guest:Is housing soft? Yes. Will it get any worse? I don't think so. (Emphasizing a patronizing tone.) It is a mistake to ever bet against the consumer.
Haynes: What about capex?
Guest: If you expand capex to include a, b and c, it is doing fine.
Haynes: So, if the consumer is fine and capex is fine, what is there to worry about?
Guest: Exactly. (Emphatically) We hear the same thing every year.

Well, let me ask a question of the guest. If capex is fine and the consumer is fine, how come GDP was essentially zero if calculated without anomalies? In other words, the facts are showing the consumer and business aren't fine. How can you resolve everything is fine if the business sector and consumer sector facts aren't supporting your opinion?

Or the Richmond Fed survey, the Philly Fed survey, the Chicago Purchasing Manager Survey, the ISM data, CEO confidence survey, automobile sales data, housing data, Wal-mart sales data, technology stocks and everything else are showing below trend weakness? Weakness which, in many cases, is the worst since before the last recession? Now maybe we are at the bottom economically but the current data still does not support anything the guest was arguing. So, why would he say it? Does he believe it? Are his biases clouding the reality? Is he trying to calm his investors who may choose to pull money out of investments he is managing, thus hurting his business and his wallet? In other words, personal gain? I have no idea.

So, what about housing? Well, here's a chart of the housing index. My work shows alot of money has flowed into housing stocks since this most recent uptrend started. Yet, all we have to show for it is a very weak bounce in the stocks. In fact, the pattern on the chart is a consolidation pattern which by my estimates should be broken to the downside any day now. (Likely post election.) That doesn't mean we are headed right to zero but that we should expect to see a break to the downside as we saw on the last consolidation pattern identified on the chart. Opinions are nice coffee talk but the charts are telling me facts of what the home builder stocks are actually doing. The fact is unless the housing index can break this negative pattern or gain upside momentum soon, we are setting up for more housing weakness. Before it is all said and done, I expect many of the home building stocks to fall as much as 90% or more from their peaks. This is based on historical precedence, cycles and chart patterns as opposed to opinion. Now, I have to say that the future may change those estimates as new data points flow in. But, with the data available right now, that is what my work would provide as an estimate.

Courtesy of a prior guest, the information on this site is provided for discussion purposes only and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.

posted by TimingLogic at 10:03 AM links to this post