Thursday, March 29, 2007

The Dow Transports & Commodities

The positive correlation between the Dow Transports and the various other asset classes has been discussed previously on here. While there was a flurry of positive comments made recently when the Transports hit a new high, I remained dubious of the arguments presented. The historical precedence being quoted is very inaccurate. With commodities booming, imports booming and oil elevated, rails in particular have done exceedingly well this cycle. Given the Transport Index is comprised of only twenty components, how easy would it be for smart money to manipulate short term pricing to achieve the positive reaction we saw in the press? Or, for those who believe the transportation market provides excellent value to push prices higher?

Below is the Dow Transport ETF, IYT, along with buying pressure for the Dow Transports. While anything is surely possible in the future, it does appear as though professional interest is waining. This past move to new highs was the first time this cycle we had a major move (last summer lows to new highs) with minor buying pressure. With commodities and late stage industrials trying to launch a serious move higher, the Transports should eventually follow with similar enthusiasm. If not, one of the two markets is wrong. Let's watch and see.

posted by TimingLogic at 9:26 AM

Tuesday, March 27, 2007

Gross Imbalances

It seems no matter where I turn, the concern over foreign investment in U.S. Treasuries is heating up. Most recently, much has been said in the U.S. Congress regarding such investments. Specifically, as it pertains to China. I view this in some way as a mild form of xenophobia and the rumblings of a global return to nationalism. Nationalism and even relative isolationism is a key global phenomenon to watch very closely. Images of foreign concerns owning national assets is a pervasive fear across the globe be it in Germany, Japan, the U.S. or elsewhere. I cite these societies as examples but in most countries nationalism is so intense that foreign ownership is prohibited or severely regulated in some form or another.

The disconcerting issue isn't that foreign entities are acquiring U.S. debt, it's that the Federal government needs to gain control of its spending. It's paradoxical that spend happy politicians are arguing against foreign entities buying debt created by their fiscal irresponsibility.

For those who incoherently babble that the Chinese or some other nation are setting up to dump U.S. Treasuries, let's take a stroll down economics 101. What would happen if this came to pass? What happened when frightened equity investors finally capitulated in 2002? Smart money bought hand over fist. And, what would happen if the Chinese were to dump U.S. Treasuries. They would surely do so at a loss just as equity investors did in 2002. And, given the U.S. bond market is very deep and liquid, smart money would be more than happy to pick them up at a significant discount. Smart buyers would profit and China would lose. How often does one get an opportunity to buy the world's benchmark bond at a discount? Don't bet on China doing any such thing. What better way to create global stability than to have global entities intertwined in the issuance and purchasing of other's assets versus isolationist policies of decades past?

While I generally believe government deficits aren't a major concern unless they reach extremes, the reality is world governments are not an efficient "user" of capital. If they were, we'd all be communists. Thus, I generally view government overspending as a negative development in that it takes away from private investment and private job creation. Is it a coincidence U.S. government spending is up significantly and private job creation is weak? I think not. There are two major causes of overspending in the U.S.; military spending and medical spending. Today, the U.S. military spending far exceeds that of the remaining 192 countries on earth, combined. In addition, today the U.S. spends more on healthcare as a percentage of GDP than any major economy on earth yet healthcare is totally broken for a significant part of the population. Thinking in big picture themes? One could argue it doesn't get much better than this for military related stocks. Strange political bedfellows will likely unite at some point to curb military spending as social liberals and fiscal conservatives join to curtail spending for different reasons. And, the U.S. is soon (relative) due for a transformational market driven solution to healthcare that could have positive implications for innovation. At the same time, it could create profit squeezes for those benefiting under the current system.

As an aside, now is a perfect place for one of my favorite quotes by former U.S. President Dwight Eisenhower. "In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist."

I state these imbalances for purely economic reasons not as any type of political statement. These imbalances have contributed to an unbalanced economy. Whether they are the cause or the effect is debatable. Is a return to volatility in asset markets a result of volatility in global politics and macro events? Most likely they are. These imbalances contribute to the U.S. current account deficits. We have a current account deficit for two intertwined reasons. One, we don't make enough of what the world wants and two, the world generally does not have economic policies that stimulate their own domestic consumption thus increasing the demand for U.S. goods and services. I guess one possible solution to this issue is to get the rest of the world to buy more missiles and tanks. That would definitely increase macro volatility.

Let's take this a little further. The calculation is too complex but if one adds up employment figures for state, federal and local government; defense related industries; retail employment; financial services; and the secondary jobs created in support of those sectors; what would one come up with as a percentage of the total employment figure? As a percentage of total GDP? How would this compare to historical figures? I suspect a disproportionate amount of the U.S. population is working in retail, making missiles, working for the government or trying to sell you a mutual fund or mortgage.

In a self-correcting economy one should never expect trends to last forever. I consider the U.S. to be the ultimate self-correcting system for many reasons including the fact that capital flows are the least restricted of any major economy on earth. While capital moves at a dizzying pace, the democratic process moves at a glacial pace. Personally, I believe this disconnect exacerbates unsustainable trends. It takes near crisis for social and democratic change. But, were governments more efficient, we'd see them taking an even more active role in mucking up the economy and stifling personal freedoms. This is exactly why the founding fathers made the political system require near crisis to create meaningful change. In the end, gridlock is a major reason why the U.S. economic system is so successful. Ultimately the process must find some type of balance. Are we nearing enough of a crisis that constructive change creating more economic balance is imminent? We are moving in the right direction or the wrong direction depending on one's view.
posted by TimingLogic at 8:37 AM

Friday, March 23, 2007

Is This An Exhaustion Run Or A Major New Move Up?

Since I've got a little extra time today, let's do a little speculating about the short term. Above is a four week intraday chart on the S&P 500. We have what appears to be a micro double bottom or something similar. The upside target on this pattern would allow for the S&P and likely all other indices to fill the gaps created on the "dump" day. A day we were told China's market was down big as I recall. As an aside, it's funny we haven't heard anything out of China in the last few weeks. Did the lunacy of buying stocks on credit cards-Bloomberg report-disappear? Compartmentalization. That greatest of human abilities to persevere in the struggles of life. Not so great of an ability for investing.

Back to the U.S. market. I have seldom seen the kind of sustained ramming unleashed over the past week. Over eighty S&P points in a week. At this pace, the S&P would accumulate three quarters of a century of gains in a few months. Mostly on weak volume. This shove tells me there are a tremendous amount of people viewing the 500 point drop in the Dow as a buying opportunity. Attracted to dividend yields in finance stocks is a common view I hear. I'm going to expand upon this in coming posts. From panic to euphoria in a few weeks. Such is the world of volatility.

Similar patterns exist on other major indices. One could speculate this ramming as possible exhaustion. I've seen "insanity" readings of wrecklessness not seen in the past decade. This is happening at a time when the risk to world's economic future is higher than any time in the last few decades. Not that market participants can't become even more irrational. The precedence is overwhelming that they can and many times do as as witnessed by 2000's huge equity bubble. So, is there one more shove to close the gaps? The generally accepted view seems to be that the move on Wednesday was the start of a new upward run because of the lopsidedness of advancing to declining issues. Those notions are dubious given the focus of short term traders and electronic trading of today's market. It's usually a fool's game to attempt short term predictions about major market events but why not. It's a slow day. Now, I preface this with the statement that chart reading is not a science and chart patterns are not highly reliable predictors of future activity. But, there is somewhat of a self fulfilling aspect as many traders follow them and base their moves accordingly. Therefore, this is a little bit of Ouija board analysis with plausibility. Let's see if I can embarrass myself.
posted by TimingLogic at 9:40 AM

Thursday, March 22, 2007

Quick Comments On Yesterday's Action

It was reported that yesterday's move was the largest upward thrust in years. I seem to recall larger days in the Dow but be that as it may, it was a large day. We've had some reasonably large moves in both directions.

Where did all of the bearish sentiment go? There has been zero bearish action on the part of market participants in the last two weeks and no sign of any concern. Alot of people who were calling for a correction have revised their forecast to new highs. Those who said the recent sell off was a normal cleansing view yesterday as proof positive they were right. Goldilocks is back after a very short hiatus.

And, where has the buying been concentrated? The same commodities, energy, metals, deep cycle industrials, selected consumer stocks and brokers that they've been buying since this bull market began. In other words, some are betting on more inflation, more global demand for basic industrials, continued weak capex, more lack of demand for capital fueling mergers and a Fed who soon cuts rates. Compare that to action in the bond market. It doesn't seem to match up. More on that in one of the next few posts.

By many measures we are the most overbought we've been this entire bull market. By some measures, we are the most overbought of any time in the last decade on a short to intermediate term basis. That means the market is ripe for a pause at best or a sell off at worst. So, those who have taken yesterday's action to call for significantly more upside might just be disappointed. Regardless, we'll likely see more days like today in both directions as we discussed many times this year in regards to increased volatility.
posted by TimingLogic at 7:52 AM

Wednesday, March 21, 2007

Right On Time

Want a little volatility? I come back from a meeting and am greeted by a huge move up at 2:15. Did all of the money dumped into the market at 2:15 have an epiphany? Jim Cramer is telling us the Fed is going to cut in May. I'll take the opposite side of that trade all day long. I see no precedence to remove a tight bias with the macro conditions we are witnessing. Frankly, the Fed would have to panic to cut in May.
posted by TimingLogic at 3:19 PM

Contrary Thinking, Prevailing Thought And The Crowd

If you've read my blog for long, you probably know I tend to take a contrary view of many topics. I believe contrary thought is key to much of life's success for many. That includes investing. Warren Buffet, Ben Graham and George Soros are examples of contrary investors. That doesn't mean you have to always be on the other side of a debate or on the other side of an investment but you should be on the lookout for overly compelling arguments. If it sounds too good to be true, it typically is. Much of my thought processes are based on the prevailing view of a particular topic and comparing that to historical outcomes or anticipated psychological responses. Obviously, this is how many try to use sentiment to their advantage on Wall Street. But, there seems to be a tendency to out-sentiment the sentiment these days. It can be confusing at times.

Let's develop this as it pertains to investing. If you are looking for Wall Street to tell you the future of equity markets, I wouldn't hold my breath. People paraded onto TV are typically reactionaries not the visionaries. The Wall Street visionaries let their actions speak for them and most have no desire to inform their competition of what they are doing. It is no different than HP and Dell competing in the market place. Is Dell about to tell HP what it's product or marketing plans are? As unthinkable as it sounds, Wall Street's smart money has a vested interest in keeping the average investor duped. Paul Farrell, a former Wall Streeter himself, has written about this extensively. As I write this, we are in pre-market activity awaiting the Fed's 2:15 statement on rates. Most of the time, pre-market activity will determine which direction the market will move at 2:15. Yet at 2:00, the TV analysts will line up to anticipate what the Fed will say and by implication what the markets will do. Recently the market has rocketed higher before anyone has any time to dissect the results. In other words, right at 2:15 before anyone has opportunity to read the minutes. But, Wall Street wants you to believe it was the Fed statement that drove the market and that is what you read in the following day's newspaper. "Market Explodes With Fed Decision". When I posted that I was dubious as to the carry trade causing a sell off, it was because I've looked at the dynamics of the yen, the futures market positions and the historical correlation to said market moves with similar positions by professionals. There were many past time when the markets should have shown significant volatility as a comparative to recent events and they didn't. Therefore, other macro events are likely at work. Yet, again, the set of events unfolds where someone prints a story about the equity sell off being the Yen carry trade. Remember, markets are the great deceiver. Just as in any free market, there are winners and losers. Investing for crumbs is what the uninformed do. Making a living as a speculator is what professionals do. And, it is in their best interest to keep the uninformed well...uninformed. Why is it any different than two titans like GE and Toshiba competing to win a nuclear power plant project? It's not. Back to the Yen Carry Trade. Maybe the first story is accurate. But, what if it isn't? Before you know it, without hesitating, nearly every commentator on financial markets are printing stories about the carry trade. What is it? What does it mean? What happens if it unwinds? Who actually validates it to be true? Did any of the reporters or bloggers or otherwise ever take the time to validate it? I doubt it. It was all based on that first report. So, all of this hand wringing by thousands and thousands of bloggers and journalists is probably based on the first story. Was it accurate? Why would journalists and bloggers believe it? Because we are conditioned to believe it. Now, this may sound conspiratorial but it's not. I don't believe in conspiracy theories as I've written. But, psychologists and sociologists readily acknowledge the concept of social conditioning. The "American Dream", as an example, is social conditioning. I'm not saying it is bad just that it is so. I aspire to achieve some form of the American Dream. Is it so bad to want to own a house, have enough money to live a reasonable life, have civil liberties and enjoy your new car. That dream was much different one hundred years ago but it was still there.

I highly recommend a book I've referenced before on here. It is the brilliant little book from written over one hundred years ago. It is Gustave Le Bon's "The Crowd". You can pick it up on Amazon for less than $10. The concept of crowds and contrary thinking go hand in hand. Likely every major advance made by humanity was made by individuals or small groups of people. It's no coincidence greatness does not come from large groups of people. The point? As time consuming as it is, one should learn to nurture original thought processes. Or, as ancient Asian thinkers wrote, learn to unlearn everything you believe to be true. Now, I'm not advocating everyone erase all of their beliefs but maybe the next time someone tells you something and there is no conclusive evidence, consider a contrary opinion. If someone tells you they weigh 150 pounds, that is likely not worthy of contrary thought. But, when the Treasury Secretary tells you he believes the housing market has bottomed and his position is a political appointee, you might question his motives such as winning the next election or maintaining an orderly flow of capital markets or not inducing panic in the general population.

I'll finish with a quote from Le Bon that I have posted on here before. “In it’s ordinary sense the word ‘crowd’ means a gathering of individuals. From the psychological point of view the expression ‘crowd’ assumes quite a different signification. The sentiments and ideas of all the persons in the gathering take one and the same direction, and their conscious personality vanishes. A collective mind is formed, doubtless transitory, but presenting very clearly defined characteristics. It forms a single being. The most striking peculiarity presented by a psychological crowd is the following: Whoever be the individuals that compose it, however like or unlike be their mode of life, their occupations, their character, or their intelligence, the fact that they have been transformed into a crowd puts them in possession of a sort of collective mind which makes them feel, think, and act in a manner quite different from that in which each individual of them would feel, think and act were he in a state of isolation. This very fact that crowds possess in common ordinary qualities explains why they can never accomplish acts demanding a high degree of intelligence. In crowds it is stupidity and not mother-wit that is accumulated.”
posted by TimingLogic at 9:51 AM

Tuesday, March 20, 2007

Charlie Rose & Robert Rubin Interview

I'm not a big YouTuber but the ability to find certain TV shows or video events I may want to watch or may have missed is nice. (In the future, we'll surely have this ability directly through our TV.) This interview with Charlie Rose aired in late January in the U.S. I've talked before regarding my fondness for Robert Rubin as a thought leader and Charlie Rose is simply one of the best TV journalists. The interview, which is approximately 30 minutes long, is a very direct and honest attempt at framing many economic and structural dynamics facing the global economic expansion. Regardless of where you live in the world, these issues will likely resonate with your country's dynamics as well.

To go to Google Video and watch the interview, click here.

posted by TimingLogic at 9:15 AM

Sunday, March 18, 2007

The Yen Carry Trade And Other Ridiculousness

“I cannot help but raise a dissenting voice to statements that we are living in a fool’s paradise and that prosperity in this country must necessarily diminish and recede in the near future.”

--- E. H. H. Simmons, President, New York Stock Exchange, January 12, 1928

It appears the restless natives have been calmed by our devoted leadership telling us all is well and good. We simply had an unwinding of the Yen carry trade. 500 point down days are good for the markets because we were getting a little frothy. There was a glitch in the computer system in the NYSE or Dow Jones or whatever. That glitched caused the Russian exchange to drop about 30% and every other market across the globe to shudder. Anything else you want to know?

Now, let's be serious. There are people out there with no direct knowledge telling us the carry trade is unwinding. Maybe it is. How do they know? Because someone started a story and it sounds plausible. A little mind engineering perpetuated by the media? Funny, that it coincides with a statement made by a Bank of Japan official basically saying things never last forever in regards to the carry trade. The reality? No one knows how big the carry trade is, what it's invested in, when it will unwind and what the ramifications are. Estimates place the trade at somewhere in the $100 billion to $400 billion range but there no absolutely no way to measure it. Borrow money in yen at a low rate and invest it elsewhere. How much of any such trade is invested in equities? U.S. equities lost more than $1 trillion alone. Frankly, I would assume most of any carry trade would be tied up in other asset classes such as bonds. Corporate and emerging market bonds haven't really budged through any of this. In other words, they aren't unwinding. The sum total of data available makes me very, very dubious of these claims that this was a temporary phenomenon or based on the Yen carry trade. Don't confuse correlation with causation. That's an infamous Wall Street trick. That is, unless you believe everything you are told.

Let's say this was based on the Yen carry trade for arguments sake. And? So what's the point? Is that some how supposed to make me feel better? A rationalization? Just like the rationalization made by the President of the NYSE in 1928 as quoted above? There's always a rationalization for any market moving event. Did those rationalizations ever make you money? I really like the rationalization that the Plunge Protection Team is holding up U.S. equities because it is self evident the end of the U.S. is nigh. I guess the Fed's "invisible hand", to bastardize a phrase coined by Adam Smith, reaches well beyond the U.S. shores because he's propping up nearly every global equity market, commodities, global real estate, art, and everything else money can buy.

The more plausible reality is that very smart money has decided to take some risk off of the table. Now, here's what you should be really asking yourself. Why? If all is well and good, why would money capable of creating such an enormous single day loss be reducing their risk exposure? Maybe they were attempting to shake out the weak hands. Maybe they hit their profit or price targets. Maybe they realize a highly correlated investment world is on borrowed time.

I've even seen many a professional contemplating this as a climactic down day with such a high TRIN reading. Well, that's novel. The difference between what happened a few weeks ago and those other high TRIN readings of the last half century is this TRIN reading came within days of a multi-year market high. In addition, high TRIN readings tend to come in clusters. In other words, life could remain interesting. Not a whole lot of precedence for such a lopsided dump as markets are making multi-year highs. In fact, none that I know of. What does that tell me? The force and speed with which fast money can move global asset markets is frightening. Why is this so? For reasons I've previously mentioned. Many enormous financial institutions are now trading their own money as a greater source of income than the money earned managing client assets. Therefore, if one wants to compare this to any historical period of time, it should be the 1920s when rampant speculation and trading by large financial institutions and stock pools was legal. I wrote of stock pools and their effects here. In addition, there is simply a massive amount of money focused on short term performance through hedge funds. There seems to be little tolerance for investing in the world of dementia defined by the highly sophisticated trading community. Finally, smart money knows the party is going to end at some point. If the world's assets do not find a way to become uncorrelated in a profoundly benign manner, we are still in for a serious mess. Whether it results in a bout of full fledged deflation or rampant inflation is the real question. Have bonds been telling us the answer since 1997? I do chuckle at those who say deflation is an impossibility given central banker's authority. I guess they forget about Japan's multi-decade deflationary funk. We are seeing examples of asset deflation all around us. The equity bath in 2000, the housing bust of today, equity market busts in the Middle East and low bond yields. I can assure you a fact as clear as the sun rising tomorrow is that copper prices at $3 a pound when it costs 7 cents to mine is about as sustainable as locomotion by horse and buggy was a century ago. And, the associated equities of commodities are going to suffer asset deflation accordingly.

So far, the bulls in the S&P have held their ground. That is where the smart money roams. My intermediate term model has weakened significantly and has toyed with a sell signal for months. But, not yet. I see people citing alot of sentiment data including the put/call ratio as a sign of bearishness. Well, I can cite other sentiment that isn't bearish. The put/call statement is made with the assumption dummies are buying options. As individual and professional investors become more sophisticated in their use of derivatives and asset protection, I wonder when we will see an erosion of this doodad. I suspect it is only a matter of time. Otherwise, if we are down about 5% and the put/call ratio is negative enough to fuel a substantial rally, we are in a new environment where this phenomenon will continue ad infinitum therefore fueling a rally in perpetuity. Or, as John Maynard Keynes once quipped (paraphrasing from memory) before 1929, we won't have any serious stock market corrections ever again. What's the reality? Smart money never forgets the tripod of investing mechanics includes sentiment, fundamentals and technicals. In other words, there is significant historical precedence for sentiment to turn bearish and stay bearish. Those using sentiment as their primary investing tool are showing complete disregard for the long term investing thesis. In other words, they aren't the smart money. So, go back to eating your brie and drinking your Riesling because life is still very good.

posted by TimingLogic at 11:55 AM

Thursday, March 15, 2007

Manufacturing Down Again

The Empire State Manufacturing Survey shows economic activity in the manufacturing sector continues to fall precipitously. I see time and again that manufacturing accounts for less than 15% of the economy. That is absolutely false. Of course, those are the same people telling you housing won't spill over into other sectors. Inflation up, output down. By the way, inflation lags so much that without strong economic output and sustained rising wages, it is a not the most important data point at this time in the cycle.

The economy is going to the dogs but I'm going to the NCAA Basketball Tournament so who cares? Worrying will be put on hold until next week.
posted by TimingLogic at 9:11 AM

Wednesday, March 14, 2007

Happy March 14th or Pi Day

Today we celebrate March 14th or 3-14 or 3.14. There are many who would say Pi, the number 3.14159...., plays an inexplicable role in the natural rhythm of financial market volatility. e.g., Pi squared determined the number of days from the market peak in 2000 till its bottom in 2002. Or, the global markets peaked on approximately March 14th in 2000. There are an eery number of dates associated with Pi and financial markets but I won't bore you with the details. Is March 14th, 2007 another ominous approximation for volatility returning to financial markets?

So, what do circles have in common with financial markets? As one traverses the circumference, or "perimeter" of a circle, the path is repeated. If you traverse the circumference of a circle as a function of time, one produces a sine wave. What's a sine wave? Nothing more than a cycle. What defines financial markets? Cycles. Frankly, what defines life? Cycles. Everything around you is defined by a cycle. Seasons, the earth's rotation, the gestation cycle, time, light, life itself, electricity, birth & death, the human heart's rhythm, business, greed, Presidential elections, electromagnetics, the oceans, sleep, global warming and cooling, and on and on and on.

Think you've got life figured out? Think science has all of the answers? Think again. What if the future was already determined? The cycle of life was already determined? You want to know reality? Science knows nothing. It is simply the limit of man's feeble imagination. Happy March 14th.

Update: I sort of left the punch line hanging. My point with this post was that there is an argument to be made that regardless of what central bankers or world business leaders do, volatility might be a time based phenomenon which cannot be impacted by human actions. In other words, predetermined. A concept most will find difficult to accept or even disturbing. But, then again, most people thought the earth was flat just a short time ago. So, what do we really know in the sum total of universal truth?

posted by TimingLogic at 9:38 AM

Tuesday, March 13, 2007

Plunk! The Russell 2000 Is In Trouble

Yesterday we saw a run right back up to 1410 on the SPX cash market for what was likely the final failed attempt at breaching that level to the upside. The blathering herd has been telling me that small caps are still outperforming. I don't measure out performance using the same methodology as most because it leads to whipsawing too often. So, as I've stated, small caps have underperformed since May. Might I add, that's the first time since this bull market began that I can say this.

Now we are back below the May of 2006 small cap highs as defined by the Russell 2000. We've had this rally for what some would say is ten months. I'd say eight months but we are splitting hairs. Small caps as defined by the 2000 companies in the Russell have yet to deliver a positive gain in that period of time. All I heard during this past rally was how small caps were out performing and would continue to out perform. The return is actually negative now. The question remains: Is this a false breakout? As I have said before, the market is the great deceiver. If one doesn't understand that there are very sophisticated competitors in financial markets who want to take your money, you need to wake up. Just as every job entails competing in the market place for profits, so is the world of the professional investors and traders.

posted by TimingLogic at 10:48 AM

Monday, March 12, 2007

Another Hedge Fund Blow Up. Is The Industrial Metals Mania Ending?

First off, I've noted my disdain for most financial reporting in the U.S. It seems much of it is more of a cheerleader symposium rather than an objective, thought provoking analysis. There are a few names I've mentioned in the past as exceptions including Alan Abelson and Paul Farrell. I really appreciate Paul Farrell because he is a former Wall Street insider and his commentary is free at Marketwatch. He's a prolific writer and author of many books as well. If you are interested in more information on Farrell, here's the link to his personal web site. He has a free e-book on his site regarding stress management. I haven't read the book but I plan to. Who doesn't need new stress management tools in today's world? Oh, and who doesn't like free from a great journalist?

For whatever reason, I find much international journalism to be a breath of fresh air and a typical injection of reality so I'm constantly searching for new perspectives. While digging for more information on Red Kite, the most recent hedge fund blow up, I found a South African site, They have a very prescient article on the state of the hedge fund industry and some very interesting comments by Jim Rogers. For those of you who don't know, Rogers is George Soros' former partner. Now, as I type this, I remind you of the quote I posted from John Kenneth Galbraith on January 30th. Don't assume that just because people are involved with success, they are experts. Rogers may be an expert or he may not. He's definitely no dummy. I just finished browsing Roger's book "Hot Commodities" and must say I am extremely dubious of some perspectives in the book. I give kudos to Rogers for writing a book which foretold commodities would rise after paper assets reached the most extended level in two hundred years. That said, one doesn't receive general deference for such a call. Most informed investors and forward thinkers on Wall Street knew it would happen because they were going to make it happen by shoveling billions into said markets.

One of Rogers' recent claims is that we will see $100 or $150 oil. He is basing this on extremely loose arguments. Over the past one hundred years, the 1970s still remains an anomaly in many respects. One is the OPEC extortion tactics that exacerbated the commodity bubbles of the time. Betting the 1970s will repeat itself nearly verbatim is a something I'm not convinced of as a foregone conclusion. In any event, commodities did not experience a 20 year bull market in the 1970s. Rather, they experienced yo-yo moves which were either very profitable or very devastating. Buying commodities at the wrong time during the 1970s would have decimated investors even more so than the stock crash in 2000-2003. So, we may see higher highs in oil or we may not. Regardless, oil and metals are in manic bubbles and the only question is if oil gets to be a bigger bubble. If oil does go higher, it will likely purge much more to the downside before doing so. I'm quite confident metals will not see a bigger bubble as I've noted this is the biggest bubble in one hundred years of data and likely the biggest bubble ever. In any event, plan to work alot longer because your retirement is now invested in this mess courtesy of Wall Street and London telling them they need to diversify into commodities. What do I mean by that? Your pension plan, if you are lucky enough to have one, has a high probability of being more underfunded after this debacle plays out.

That doesn't mean that I believe Chevron or Exxon or other large dividend paying energy companies are a bad investment. Energy stocks have a bright future regardless of whether they correct by a large amount or whether oil is at $15 a barrel or $100 a barrel or whether alternative energy takes a big chunk out of long term oil demand. I've said before I would much rather own Exxon than Google for the long term. Exxon has predictable dividend growth, tremendous balance sheet, low valuations, massive cash positions, tremendous intellectual capital and management, a wide moat, significant physical investment and a predictable business model.

Anyway, back to the article on Moneyweb. Rogers has some prescient comments cited in the Moneyweb article. Or, at least I think they are prescient because it's what I've been squawking about for a year on this blog. Here's one of his quotes: "Right now we have 25,000 or 30,000 hedge funds around the world. We don't have that many smart 29-year-olds in the world. I assure you, we are going to see a lot more blow ups." To read the entire article and more of his comments about private equity and hedge funds, click here.
posted by TimingLogic at 12:47 PM

Friday, March 09, 2007

Irish Housing Starts Off 39%

Just a quick update to an interesting Friday. I've noted time and again that the building boom was a global phenomenon. And, that many of the most overheated real estate markets were outside of the U.S. A few days ago it was reported that housing starts in Ireland were off 39%. The Finfacts article also mentions home building is a much larger percentage of GDP than in the U.S. As I've said repeatedly, the U.S. economy gets all of the attention because a disproportionate amount of the world's wealth has been created through American consumption. But many international and underdeveloped capital markets will be severely reprimanded at some point for not focusing on their own economic and political reforms.
posted by TimingLogic at 11:06 AM

Wednesday, March 07, 2007

The Bull Is Back! Updated End Of Day Thursday

Update To The Original Post From Wednesday: I replaced the above chart with one reflecting the pricing action on Thursday. The market was turned back right at the next Fibonacci level around 1410 as expected. Much of technical analysis is gibberish but Fibonacci levels are watched very closely by professional traders. Hence they tend to have a self-fulfilling effect. Tomorrow's action is very important for the bulls. Another failure at 1410 will likely result in another down draft.

Yesterday was a purely technical rally. In other words, it has absolutely nothing to do with the intermediate term market trend. At least not yet. We reached multiple market conditions that brought a wide range of buyers into the market, be it cash or futures. I wouldn't say the probability of a strong reflex was 100% but there aren't many better set ups than we had today for very short term traders or any type of trader able and willing to play a short term technical condition.

On the chart above is the S&P cash index, SPX. The SPX was rallying off of the 38% Fibonacci retracement level. This is typically a very strong level of short term support in most market moves. The 23% retracement right above has tremendous congestion and will likely provide formidable resistance for any attempted follow through. If we make through 1410 before we see another move down, I'd be rather surprised. I'm not really focused on the very short term, but I thought I'd throw down the gauntlet and give Mr. Market a chance to humiliate me.

What is worrisome is the general apathy on Wall Street. The "We need a correction and this is a buying opportunity" crowd seems to be in the majority.
posted by TimingLogic at 9:31 AM

Sunday, March 04, 2007

The Shanghai Composite And The Communist Manifesto

So, we hear the Shanghai stock market has stabilized thanks to government intervention. I can't believe my ears. There are people on TV and in print actually saying the Chinese government is not going to allow a stock market crash and neither are other governments around the world going to allow their exchanges to experience a similar fate. I've even read where the correction in China was engineered by the government. That the Chinese government has more than $1 trillion at its disposal to stop a possible crash. This is preposterous. You mean like the crash in China less than a decade ago? Or like 2000 in the U.S.? Or maybe the Middle East in 2006? Or Russia in 2006? Or the FTSE in 2000? Or the Nikkei in 1990? The list is endless and so are the asset class corrections and eventual crashes throughout history, be Tulipmania or the South Sea Bubble hundreds of years past or more recent manias.

The communists have decreed a reduction in speculation? Of course, my dear comrade Lenin. Does this chart of the Shanghai Stock Exchange look like a chart of stability? The air pocket on this chart is very disconcerting. To assume any entity can determine the fate of any stock exchange is ridiculous. To say this drop was engineered is equally ridiculous. The global equity markets have been working their way towards some type of dump for months. Dumps are never without warning. Ever. Just because you don't know it's coming doesn't mean someone else doesn't. I say this not because of my opinion but because of what I see. Let me give you an example. I've developed a very creative method of modeling large investor volume. I've never seen it implemented anywhere else. I doubt it's an original thought. In fact, I'm quite sure many have similar capabilities but they aren't going to share it and neither am I. The only question on this dump was when the trigger would be pulled and where it ends. This "correction" has nothing to do with the Chinese politburo's "corrective" policies. Or as Mark Twain said, "A lie can travel half way around the world while the truth is putting on its shoes.".

Let me be blunt. Free market and democratic investors participating in a communist market is unprecedented and yet the world of fools is not. (Yes, I know the restrictions on buying Chinese stocks on the Shanghai exchange.) Do you want your money invested in a police state with no transparency, little regulatory control, terribly weak financial markets, massive corruption and central planning? If so, good luck. There's enough risk (and return) for me investing in transparent societies with strong regulatory control, deep financial markets, strong liquidity and market driven investments. For me, that is basically Japan, Europe, Canada, Australia and the U.S. If someone wants an outsized return, it isn't necessary to invest in poorly regulated shallow markets. Energy, metals, gold, home builders, industrials and many consumer discretionary stocks far outperformed this cycle in stable Japanese, European, Canadian, Australian and U.S markets without many risks associated with emerging markets or communist regimes.

The only stability I see in the Shanghai Composite is after a 50-70% drop. Let's see the Chinese government prop up the stupidity of hack investors leveraging their homes to buy government controlled companies. Maybe we've achieved a Brave New World. In the U.S., the bulls have held support so far. Let's see what happens in the coming weeks. Will they be able to drive us higher or will we break down from here?

posted by TimingLogic at 4:44 PM