Thursday, May 31, 2007

Why Isn't Anyone Talking About Russia?

''As they say in poker, 'If you've been in the game 30 minutes and don't know who the patsy is, you're the patsy.' .'' --Warren Buffet

I've talked about Russia's bubbles on here at least once. How many times I cannot recall. Everyone seems focused on China but Russia's equity market has surged well past China over the past few years. Dueling bubbles amongst the communist capitalists. Who can screw up the most appears to be the question. Think China's money supply growth and financial underpinnings are akin to chop suey? Russia's appears to be as bad or worse. I haven't done any digging on the Russian central banking web site but I read a while ago broad money supply measurements grew 50% last year. That is enough to cause a myocardial infarction if true. Some have speculated Russia's banking system could melt down. As I wrote on here before, Russia knows it and hired a reformer to try to gain control of the banking system. He was assassinated as I recall. (I don't want to take the time to read my older Russian posts so I'm going from memory.) I have never, ever heard of money supply growth beyond 20%, (China's being the only economy with such outrageous growth of 20% and has done so for half a dozen years.) in a leading economy. I'm starting to have a cow. This is likely going to be one hell of an unholy mess in emerging markets.

Russia is likely the most important energy based economy on the planet. The Templeton Russian Fund shown below has not budged for months. In fact, unless it picks up steam, it is looking like a double top has completed its formation and appears ready to tank. Unless the formation on the chart changes, I expect the fund to eventually drop 70-80% from its peak. That'll fix the money supply problem. And, if central bankers try to reflate these overheated economies, then life will really get interesting. Want to see a rapidly rising dollar? That'd likely do it.

That bodes ill for oil, commodities and likely the global economies. Now, I don't know where I can get access to the Russian equity market data other than through this fund but I doubt the data points are much different.

I've talked about it repeatedly since starting this blog but emerging markets do not have the transparency, investment controls, economic controls, regulations and investor protection people in developed markets have taken for granted for decades if not centuries. I believe I used the term "Wild West" to describe their lack of sophistication. I'm beginning to wonder if emerging market messes will stunt globalization. That is an out of bounds statement but these appear to be out of bounds situations. We'll have to wait and watch but I'm dubious of these countries being able to handle the risks and imbalances mounting in their economies.

posted by TimingLogic at 8:00 AM links to this post

Wednesday, May 30, 2007

Incoherent Ramblings On Commodities

Well, I started to type this a handful of days ago and ran out of time. I was going to say that gasoline prices were likely going to drop after Memorial Day. They did. Let's see how far. I am looking for a confirmation of a lower high in oil over coming months. Crack spreads are ungodly high and it is solely because of trader euphoria. Yes refinery capacity is high but shortages? Come on. If I saw lines at the pump and rationing, I'd say gasoline would have a valid economic reason for being where it is. (Crack spreads are simplistically the margin companies receive for breaking oil down into its refined products including gasoline.)

I am bored with the social engineering of Hubbert's Peak and gasoline refinery problems as excuses why energy prices are so high. There is zero evidence that we are running out of oil. We may some day but we have more oil reserves than at any time in history. That is after we have used all of the oil known to exist in the 1970s. Based on knowledge available then, we shouldn't have any oil. In other words, it's the same old paranoia and reason for Wall Street to jam commodities. There is an interesting argument put forth by a NASA scientist that may imply the planet's carbon energy supplies will never be depleted. Some time I'll post more on that. Gasoline shortages are what we saw in the 1970s when there were long lines at the pump and rationing. Ever had any problems over the last five years getting gasoline regardless of where you live in the world? Even in Nigeria where rebels supposedly threaten my ability to fill up at the pump? Did you know global demand growth for oil has risen about 3% per annum and we've seen oil rocket many times higher. Yet, in the 1950s, global demand growth was 9% and we didn't see this environment? Or as I read recently, President Carter told us we were going to run out of oil and a few decades later it was bout $10 a barrel? (My indifference to political babble must have started at a young age because I don't remember.) Group think can be a very powerful phenomenon. Is it really different this time? I'm extremely dubious. Especially since we now have more excess oil in the system than we did when oil was $15 a barrel. Now, that said, oil may be one of the most reasonably valued assets in the world. Considering a Starbucks Tall Frappuccino equates to about $1,500 a barrel and oil is $70 a barrel with economic value, I'd be more inclined to ride the oil wave up and down until we break this cycle as opposed to buying Starbucks' stock. (That is the likely reason oil is inflated in a time of very high global risks, oil has become a "safer" haven.)

Regardless of whether we've built new refineries or not, the markets will eventually punish the crack spread expansion that is totally unsustainable. $40-50 this cycle based on fundamentals? Maybe. The rest is likely Wall Street or OPEC or both in the futures market. I tend to believe that it is Wall Street as energy companies have complained to Congress of distortions in the futures markets from hedge funds. (An interesting Congressional report on hedge fund manipulation of the oil markets from 2006. Google it and it might still be out there if you are interested. I read it a long time ago and couldn't find the URL on a quick search.) Statistic after statistic on the number of CTAs trading energy, the amount of energy contract expansion, the alternative investment crowd pushing pensions into commodities, etc. Now, all of this said, the rumblings out of politicians to tax energy company profits is not a good thing. It's noble to want to make the world a fair place but we've seen this replayed time and again. What is fair? Do you want politicians deciding what is fair? The same ones capable of bungling nearly everything they touch? US financial profits are about seven times energy company profits. Do we tax the banks for making too much money? Or hedge funds for charging exorbitant fees? Markets will eventually figure it out. Maybe next politicians can decide if your kids go to college or not because of what is fair. Or decide if you live or die based on the cost of medical treatment? Capitalism is not democracy as I have written before and needs a framework at times to prevent those that would run over everyone else in the name of power and greed. Why not provide a market based incentive for energy companies to invest their capital in green technologies or a market based incentive to foster competition with oil? Competition and market based systems work better than taxes which have unintended effects.

While it seems as though Wall Street has done a reasonable job of convincing society that commodity price rises are from Chinese demand, and that may be partly true, Wall Street is printing money off of these commodity moves. So, is that all bad? Well, Wall Street has become rather excessive but that too will pass. But, it is mostly American and European firms playing in the commodity trading patch. That is wealth created in Europe and the US. Both are able to digest higher commodity prices comparatively. So, these profits may find their way into future innovation, new technologies and private investment years down the road. Thus, eventually creating sustainable wealth in other industries. In other words, emerging markets need commodities and regardless of where they come from, European and American firms are making a killing off of their consumption. The same thing is happening with the large commodity trading firms playing in the global agriculture market with those commodities. American firms are making a killing off of high agriculture prices and not the local farmers in emerging markets. All of this is bad for emerging markets. This begs a question. Are emerging markets really ready to compete in a globalized world? Seriously? I am starting to question the sustainability of globalization in its current form. European, American, Japanese and other leading economic countries and companies may create too many imbalances for emerging markets to digest. It's like watching a wave of locusts. This is potentially a positive impact long term for the American and European economies where the profits are being made but are emerging markets really benefiting? I haven't thought it all through but I suppose they are comparatively. In a circular kind of way, regardless of where the profits are made, it eventually does help the world. But, the flip side is that the wealth created is concentrated in a small percentage of the population. Maybe future investment will change that. Entrepreneurs looking for capital may find it in the form of Wall Street commodity profits.

I expect we are likely seeing the formation of a second commodities top as I wrote in April. Markets have been levitating with almost no movement for over a month. A potential double top is setting up in copper, oil, and some of the other industrial commodities. Since industrials are late stage performers, we very well could be putting a top into the overall asset markets sooner than I expected. We just have to see how dynamics unfold. I believe much of the smart money exited the commodities play last May and this attempted move back up has been significantly weaker from what I see.

I do not profess to be a copper, oil or uranium expert but I do consider myself to be an expert in identifying what isn't factual, trader mentality and Wall Street think. When reporters on TV and in the media become copper experts, the time has come to invalidate their stupidity. How about this: copper production is supposed to surge 500,000 tons past demand in the coming year? Sound like a reason to bid copper to nearly $4 when it has never been past $2 in the history of mankind and has spent most of its time substantially less than $1. Copper at $4 a pound is a little like charging someone for a pet rock. I heard a famous Wall Street type on TV talking about all of this demand for copper. One source of demand was electric motors requiring copper for hybrid cars. Well, I don't know what percentage of global copper consumption that is but that seems a stretch to me. Also, who said hybrid cars were a long term solution? Who said energy storage devices or batteries needed to be chemical as opposed to electrical or mechanical re zinc and lead? And, that somehow lead or zinc was going to be required as euphoric traders pound metals into the stratosphere? Wall Street traders don't know what scientists will discover. It's group think. They are looking in the rear view mirror.

A few weeks ago a well known pit trader who has become quite famous on American TV was talking about buying Cameco stock because of the demand for uranium. Excuse me but the time to buy Cameco was when no one wanted it. Uranium has gone from about $7 to $125 per pound. When pressed for where the demand was coming from, he said nonspecifically new nuclear plants. I guess there are quite a few going up in China but enough to drive global uranium prices up 1,500%? When told we have ten year licensing and building processes he said it was the existing American energy companies as power demands were soaring. Hmm. Now, that is pure hooey and he really looked stupid. I have an opinion about pit traders that they don't have to be very astute because they are playing off of the emotional dynamic in the pits rather than "with the program". Not all but many. That was surely a ridiculous statement yet that is what we are told by the supposed experts on financial TV.

Here's one. This morning I hear Mexican farmers are burning blue agave fields to grow corn for ethanol. Maybe. Well, blue agave is the plant used to make the world's finest tequila and it takes years to grow. Corn takes a few months. Now, I grew up on a farm and I bet a farmer in January, who was also planting corn for the ethanol craze, that soybeans would be higher on percentage terms than corn at the end of the year. The US is planting the largest corn crop in history. I'll bet anyone a life time supply of baloney that corn will not play a role in energy production in the long term.

The list goes on and on with other commodities and other ridiculousness. It reminds me of the Ben Graham statement oft quoted on here; "Wall Street learns nothing and forgets everything.". In this case, is it really Wall Street or main street?
posted by TimingLogic at 8:11 AM links to this post

Friday, May 25, 2007

Cinnamon Toast Crunch

Okay, this has nothing to do with anything relevant to my blog but I thought I'd give some shameless recognition to a couple of great young guys. One of my best friend's son and his roommate are obviously Cinnamon Toast Crunch fanatics. Personally, I think General Mills should give them a year's supply for promoting their product on Youtube. Of course, if General Mills were hip, they'd be paying kids a small sum to make these viral videos. Hint, hint, General Mills.

One of the guys in the video just signed on to co-op as a sound engineer for the Goo Goo Dolls tour. That's very cool!

posted by TimingLogic at 10:42 AM links to this post

Thursday, May 24, 2007

Volvo truck sales fall 57 percent in U.S.

Gulp. Never seen a number like that from any vehicle manufacturer. Of course, the employment picture is quite cheery. Or, so we are told. Won't be very cheery at AB Volvo unless sales make a miraculous rebound. (Not to be confused with Volvo's auto operations owned by Ford.) Click on the Detroit News Auto Insider link at the right hand side of my blog for the story.
posted by TimingLogic at 1:02 PM links to this post

Kuwait Abandons Dollar Peg. Is This A Sign From The Currency Goddess?

Could this be a sign of a long term dollar bottoming process? We are at very long term and very strong support for the dollar composite and Kuwait capitulates by abandoning their dollar peg. Not the most brilliant move of all time. Of course, pegging in the first place wasn't so brilliant either. Looks a little like the stock market participants who held through the entire post 2000 correction only to dump stocks faster than you can say "uncle" in late 2002 as the market reversed and a new bull market began.

Kuwait blames the falling dollar for higher inflation. Please spare me your incompetence. You created your own inflation by printing money to peg your currency. Just like those central planning communist dummies over in China I have written about time and again. Speak of which, the Chinese just announced an increased trading band of the Yuan against the dollar for similar reasons. Global dollar sentiment is so bearish I could feast off of it for a millennia.

Dollar analysis isn't something I focus on but I am reasonably confident a top in global equities will coincide with a bottom in the US dollar. "Roar!", said the dollar bear. Let me preface this by stating unless there is some exogenous event like the US government deciding to devalue the currency for trade reasons. Yet, any thoughts of such an action have completely vanished now that Paulson is at Treasury and the Democrats control Congress. (No, that is not a political statement but a sociological one. I have enough venom for all snakes.) But, dollar strategy by US government officials seems more of hope and wish than strong dollar policy. That too will change. Half of the world governments have an active policy of trashing their own currencies just to shovel more junk in the American trunk. Yet whenever the dollar weakens, the "end of America" bozos claim an end to all thinks dollar. This is the reason why dollar bears and bears on the US are always wrong in the final analysis. They are binary thinkers. The world is not binary. It is analog. And, just like in my prior world, analog circuit designers were the rock stars. The geniuses. Digital or binary designers are bozos. I was a bozo. The great analog computer designers and circuit designers are likely comparable to Newton and Einstein in creative intellect. That is also why the holy grail of computing is a pipe dream and instead we plod along using these ungodly crude computing devices of today. Where was I going with this? Oh, dollar bears don't get it. Yes I rant.

If you are an equity market bull, you had better pray for continued inflation and a weak dollar because inflation is the only thing holding up global assets and your portfolio. Isn't it funny how people all cheer that inflation appears to have been beaten with the recent readings? Group think of the herd. Programmed by social factors to respond without thinking. At this point, as odd as it sounds, the best case outcome likely means we should wish for inflation. Err, but then the ridiculous Fed model I wrote about a week ago would eventually tell them to dump equities. Hmm.....It's fourth down and I think I'll punt because the game plan is too unclear.

I've said before that currency dynamics are hard to predict because of the many variables driving the markets but if I were a currency trader, I surely wouldn't be taking any long term positions against the dollar here. Macro factors have historically pointed to a higher probability of a stabilizing, if not strengthening dollar. Sorry for all of you dollar bears who wish doom on the dollar and the US in your emotionally unwell schadenfreude. You don't get it. No, I don't mean you don't get to see an even weaker dollar by saying "don't get it". I mean you don't get the head. I'd recommend a trip to the doctor if you need to feel better.

Again, I'm not the dollar Buddha but it seems awfully clear to me. Time will tell who gets it and if America is comparatively going to hell in a hand basket and communists will rule the world. Gawd, that is a hilarious notion.
posted by TimingLogic at 9:55 AM links to this post

Tuesday, May 22, 2007

I just did a quick look and the market as defined by the S&P has moved a little over one percent since the beginning of May. Are you kidding? If you turn the TV to the monkey channel, the roar of bullishness is deafening. New highs every day. Yeah, by one tenth of one percent each day. Is Wall Street about done lulling investors into a stupor with the daily headlines of new highs? Got as much money in the market as possible before a dump? Wake me up when it gets interesting.

posted by TimingLogic at 3:03 PM links to this post

Monday, May 21, 2007

I Had To Put Up This Interview With Marc Faber

Today a video interview popped up on Bloomberg with Marc Faber. If you click on the link, you may have to do so with Microsoft Explorer as sometimes there are problems viewing Bloomberg videos with Firefox. This may be the best interview I have seen on Bloomberg and you do not want to miss it.

I believe Marc Faber is one of the world's most brilliant investing minds and he has a track record to prove it. Although, I also believe Marc has been extremely wrong about the demise of the US comparatively that he has been predicting for some time. It appears his position has moderated somewhat with this interview. I might even interpret his comments as mildly bullish comparatively on the US. He must be reading my blog because he's almost said verbatim what I've been saying about this cycle. Haha. It's ironic I wrote on here early in 2007 that Detroit real estate was looking extremely attractive to me. Of all of the assets in the world, he mentions Detroit real estate as about the only undervalued asset globally. Oh, and farm land. I have a post started regarding farm land that will go up some time in the next few months.

Marc, if you read my blog, email me on the front page link. I'd like to talk to you.
posted by TimingLogic at 11:41 AM links to this post

Friday, May 18, 2007

It's Time For A Lesson In The Peter Principle

"Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as they have predicted. I expect to see the stock market a good deal higher within a few months."
-- Dr. Irving Fisher, Professor of Economics at Yale University
October 17, 1929 (The Dow fell 85% soon thereafter)

"Yet I believe the opposite is true and think that the current valuation of the stock market is very favorable for investors."
-- Dr. Jeremy Siegel, Professor of Economics at University of Pennsylvania
April 30, 2007

First, I want to be fair. I'm sure both of these gents are qualified professors and very able contributors to society. This post is in jest but I'm attempting to make a serious generalization using a recent article by Professor Siegel as an example. When I read the recent article on Yahoo Finance, (referenced in my prior post) it appeared Siegel was feeling his oats. He clearly slammed a few titans of Wall Street including Jeremy Grantham who just so happens to manage a few hundred billion in cashola and appears to be one of the few who understands what is going on from a macro perspective. Might I add, Grantham was also was very bearish into 2000 as well.

In my prior post, I had mentioned the Peter Principle. For those of you who don't know what the Peter Principle is, I'll share a quick and loose definition. I'm sure there is a better one on Wikipedia or elsewhere if you are interested in more detail. In any hierarchical organization, successful people are continuously promoted to new challenges. Most of the time those challenges require new skills and core competencies. At some point an individual is promoted to a position they are unqualified for at best or at worst totally incapable of. The Peter Principle then surmises those people are then left to languish in that position without promotion and reign their complete incompetence on those around them and under them. In a single sentence the Peter Principle states you are promoted to your level of incompetence. For many, that just so happens to be CEO. In my estimation, the most grand example of the Peter Principle are politicians. Especially ones who take claim for creating the internet, tell us the economy is great based on Ouija board analysis, claim to be the experts in global warming, take claim for solving world hunger and claim credit for economic growth in the American culture of innovation they so luckily live under. But, I digress. You may be a shining example of the Peter Principle. I might be an example. The Peter Principle doesn't mean the person is a fool. Just that one has reached a level of "unqualifiedness".

In today's society, it doesn't just apply to organizations and politicians but to those whom the masses rely upon for expert opinion. You see it in the financial press constantly. Someone on Wall Street is asked about Google's future or what's going on in China or ethanol as an alternative fuel. Now, some on Wall Street are qualified to give opinion but most aren't. Yet, we tend to believe what they say regardless. I'd guess it's society's application of the Peter Principle to those we view as hierarchically above us on achievement ladder. e.g., We are prone to believe an expert in economics makes them an expert in the stock market. For some that is true but it isn't what they learned as economists that makes it so. For most, the answer is just the opposite. Frankly, how do you know I am qualified to even write this? You don't. And, maybe I'm not. As I've said on here before, one goal of mine is for readers to question everything they believe to be true. If that includes what I write, so be it. I give no one a free pass and don't expect to get one in return. So, believe what I write below at your own risk. Or, don't believe it at your own risk. All people deserve respect. That doesn't mean deference. I respect Jeremy Siegel for his achievements. I don't believe that means deference to a statement I know is not accurate. Wading through the jungle of falsities is not easy when we are hammered every day by media and messages from all directions. This includes the "experts" Yahoo pays to give us guidance on particular life matters.

Jeremy Siegel's premise is that stocks are cheap. In his article he shares what I view as alot of alchemy and baloney when explaining why stocks are cheap. Share of proprietor's income is dropping? Dividend rates? Blah, blah, blah. Well, share of proprietor's income may be dropping but how is that relevant historically to equity valuations? He's stating it's different this time because of such. (By the way, the drop in proprietor's income is not a good sign and I have written about this in the past and will likely do so again in the future.) Real dividend rates are negative. How great is that? When someone uses mumbo jumbo, it's usually an attempt at baffling us with hooey.

I interpret Siegel's generalized strategy with equities to be that investors should buy indexed value stocks for the "long haul" to use his terminology. That's a reasonable supposition I guess. He says dividend paying stocks outpeformed the S&P for the last forty years. Well, before the bubble, that is not true. And, if you really wanted to outperform for the last three decades before the bubble, the Nasdaq or Nasdaq 100 really crushed dividend stocks up through 2ooo. Post 2000 commodities crushed index based value funds. So, I guess there's a little bit of statistics, damn statistics and lies in his analysis. There is nothing wrong with buying indexed dividend stocks. They are sometimes the only voice of sanity and I appreciate some form of safety in this market. Yet, what does that have to do with market valuation metrics, market cycles, and market timing around quantitative analytics? That is what Siegel is attempting to do by stating stocks are cheap. He is of the opinion that buying today is "very favorable for investors" to use his direct words. The good professor has proven to me he knoweth not what he talketh about with his recent article.

I'll put a little fact behind some prior statements I've made on this blog. Just a little. :) Let's go back and look at a few statements I've written about. Some ad nauseam.

--Earnings are the most cyclical in fifty years
--Earnings at risk and not current or expected PE more appropriately defines this market
--This market is very expensive and by implication...........
--The Fed valuation model is worthless in this cycle
--The bulls looking for their PE expansion have already gotten it in small caps, commodities,
commodity related stocks, transports, utilities, financials, consumer stocks, etc.
--The financial industry is peaking over a very long cycle
--Bubbles usually come in pairs

Now, I don't post alot of charts based on fundamentals or specific quantitative data points. There are two reasons for that. One, because you can find fundamental data on hundreds of blogs or in the financial press and two, because I know some professional money managers read my blog and I prefer not to post work that has taken a life time to develop just so that it can be lifted at a five finger discount. Not that I mind sharing as I do share alot on here. But, a few of us may monetize our work because I believe it is better than most anything I've seen out there. I'm going to show you a chart that I haven't seen anywhere else to stimulate your creative thinking. A picture is worth a thousand words and sometimes worth your life savings. It's not proprietary but as simple as it is, it's far from common knowledge either. Wall Street is too busy basking in its glory and telling us the S&P PE is only 17 or 18 or 21 or 15. I'm sorry, but between GAAP earnings, core earnings, pro forma earnings, operating earnings, twelve month trailing earnings, as reported earnings, earnings excluding negative earnings and all of the other shenanigans now played on Wall Street, it's hard to keep up with the truth. What ever happen to plain old earnings I could use to determine the real price-to-earnings ratios? For those of you wondering, the proper measure is GAAP earnings.

Let me say I don't appreciate single variable analysis as is used by so many on Wall Street and the media. Housing tanks so the prognosticators say the Fed is going to cut. I said months ago in a post that the Fed was not going to cut rates. I don't base that on opinion. It's based on quantitative data. Now, there are moments of panic that the Fed may do ridiculous things, ie LTCM in 1998 but without some type of out of bounds event, the Fed is not about to cut rates. Single variable analysis failed those who have been telling you a rate cut should have happened by now. How many meaningful problems were solved using a single variable? "My dog Spot was running ten miles per hour towards home. Home was two miles away. How long did it take for Spot to get home?" You get the picture. That said I am only giving you one variable in the chart below but needless to say, I don't use a single variable to determine my work.

The chart below shows corporate profits as a percentage of GDP. Simple enough. See anything unusual? How about that we are seeing the most cyclical earnings in fifty years? Sound familiar? (I don't make this stuff up that I post even if I don't always share the data points.) Earnings are at ten percent of GDP. In the mid 1980s before the great bull run they were at three percent. Seventy percent less than today! I'm sure many who would see that chart would say earnings are so far above historical norms because of globalization. That is also hooey. So, the last time we had earnings this far out of trend, the markets peaked soon thereafter and didn't make a new high for nearly five years. That's not so bad compared to the seven years we've gone so far with the Nasdaq and S&P not making new highs. Now is it? As I write this tongue in cheek. Look at 1973. Earnings were forty percent less than today in relative terms, the S&P had a PE of 18 and the S&P fell 50%. Don't think earnings can fall like they did in 1973? Fed killed the economy in 1973 but that cycle had some core differences. Are earnings at ten percent of GDP sustainable? New bull run starting? Time to load up for another 500% run in stocks over the next decade? GDP based earnings going to fifteen or twenty percent of GDP? (Laugh. That's a joke.) Well, if you read my post of earnings at risk a few weeks ago, you know what I think. What's Siegel's statements based on? Mumbo jumbo, some arcane rationalization and apparently the position of the his head in relationship to the planet Uranus. Ever been to Uranus? It's not a place where deep thought takes place.

Lack of investment, no demand for capital, capital equipment investment in the ditch, payout of huge earnings streams in the form of buybacks versus investment, borrowing money to buy back stock, hard assets at one hundred year price deviations from the norm boosting cyclical profits, global infrastructure demand expected to last forever, energy utilities still functioning under a regulated business model of majority earnings payouts in an unregulated world, every nation on earth ramping up investment to service demand from America while doing little if anything to stimulate domestic demand by reforming their pathetic domestic economic policies. That is a marvelously long sentence and probably grammatically incorrect. Need I go on and on? Earnings and underlying economic fundamentals simply are not sustainable at these levels. Additionally, as a point of reference this global economic expansion is not as large as the World War II reconstruction effort in comparative terms. Not everyone in India and China are getting a new house. It's generally a city based development not the entire country. At least not yet. Nor is the demand for basic materials and commodity related assets greater comparatively. Yet, it didn't help equity markets then and this mess being created won't help equity markets when someone wakes up and realizes what the herd on Wall Street has done.

So, what does this cyclicality really mean? It means we have the mother of all corporate earnings bubbles that is going to end at some point. Earnings are up an incredible 300% this cycle. Is your portfolio up 300%? Are major averages up 300%? Not even close. Even if you bought the S&P 500 at the exact date of its low before this market started north, you are up about 80%. Is it really that hard to figure out why this is so? Think about it. Of course not. I'm going to paraphrase a Ben Graham quote because I can't remember it exactly. It goes something like this: Short term the market is a slot machine, long term it is a weighing machine. Short term is a cycle. Long term is decades. Not the impulsive view that short term is this week that global investors have developed. Mr. Market knows this isn't sustainable so he is discounting the current earnings cycle. I can also tell you that corporate balance sheets aren't as pristine as people would have you believe either. (I'll leave those data points to your own investigation but I can assure you that is a fact as well.) Needless to say, that tells me corporations aren't generally prepared for a large loss in earnings and neither is Wall Street. Are you?

Liquidity, liquidity, liquidity. That's the new mantra. We are awash in money so no need to worry. I had an acquaintance tell me there is too much money floating around to let the market go down. I guess they don't have a memory beyond six years. Remember 2000 when there was the largest global wealth creation the world had ever seen over a twenty year period? Enough liquidity to keep the Nasdaq from going down 85%? Enough liquidity to save the home building stocks over the last few years? How about the 30-odd sub prime mortgage lenders that have gone bust or the others that have seen their stocks drop by 90%? More hooey.

Professor Siegel tells investors the market is cheap and by inference his investment thesis of value and indexing is attractive. Well, I would say he is making that statement very close to a peak in value-based assets including equities. Again, when I say close, I'm talking this cycle not tomorrow. For when this ends, I can only guess. But, I believe it isn't very far off. I said on here quite a long time ago that bubbles usually come in pairs. Here's what I didn't say. The second bubble is a value concentrated bubble. We are in a value bubble whether you define it by dividends, basic materials, stuff stocks, hard assets or however else it is sliced.

I can't find the web site where I read it, but someone was just talking about John Maynard Keynes putting his name on a mutual fund in the 1930s. Keynes, similar to Siegel today, was very well respected at the time. The fund went kaput as his mutual funds were brought to market near the peak and the grand Peter Principal experiment went kaput. Today, Jeremy Siegel has recently become a financial beneficiary and shameless promoter in Wisdom Tree ETFs. ETFs focused on value investing. Is history repeating itself? Is Jeremy Siegel the 2007 equivalent to the 1937 John Maynard Keynes? Has Siegel overstepped his core competency into the world of the Peter Principle? I find the parallels with Keynes very interesting. Almost eery.

--Both well respected economists
--Both professors
--Both deciding to jump into the professional money management space
--Both using their reputation as economists to parlay into investments
--Both doing so during a value bubble
--Both doing so after a bubble collapse in 1929 and the other after a collapse in 2000
--Both doing so in a liquidity driven commodity cycle

So, what happens when corporate profits return to trend or even fall below trend as they sometimes do? Do you know that this bull market started with the S&P PE at 28ish after the 2000 bust? That's about where it was in 1929. Do you also know there has been no substantial new cyclical bull market that started with a PE of that general level? So, what does the Fed model say about stocks if these incredibly cyclical earnings return to trend or less and the market PE would again be astronomical? The Fed model every bull is relying on works when it works and that's about it. We have seen a PE and underlying asset multiple expansion in value. We will see a return to trend. Growth builds wealth for the masses. What we have now is a liquidity driven value bubble. How does inflated oil, commodities and food create wealth for the masses? The outcomes, the cycles and the consequences are not even close to being similar.

Care to guess what will happen concomitantly with a return to trend of earnings? The driver of those cyclical earnings will also return to trend.

You read it here first. Fair and balanced to steal a phrase from Fox News. I'm not a bull and I'm not a bear. I listen to what the data tells me. Or put another way my models don't lie but people do. Ha!

"Rule No.1 is never lose money. Rule No.2 is never forget rule number one."

--Warren Buffett, Berkshire Hathaway Chairman

"I think he's (Siegel) demented. He tries to compare apples and elephants in making accurate projections (about the stock market)." --Charlie Munger, Berkshire Hathaway Vice Chairman

Those who compare this to 1995's mid cycle slow down are living on Mars. Those who compare this to the mergers mania cycle in the mid 1980s are living on the moon. In this cycle, the worst of all cycles, I prefer to live by Warren Buffett's rule. Preservation of capital is my primary objective. Feeling left behind? Want to run out and load up on equities? Believe in the Peter Principle? Enjoy the ride.

Next post will probably be a week or more away because of the time spent putting up this post.
posted by TimingLogic at 8:09 AM links to this post

Wednesday, May 16, 2007

Dirty Dollar! Rocking Industrial Metals and Dow!!

A quick comment before getting to the post. Sometimes when I put a long post like the one coming up on Friday, it will be the only post for a week or so. It takes some time to put together. When I am traveling or getting ready to travel or busy, it might be more than a week. This will be one of those circumstances. It doesn't mean I am not interested in my blog. I would like to post every day if I had the time but sometimes I don't. Hopefully, the upcoming post will be worthwhile.

I've written on here a fair amount about the dollar. Recently the dollar has had a massive slide and sentiment remains unbelievably bearish. While the dollar will do what the dollar will do, I would expect the dollar will start to gain strength as everyone realizes global growth is waining. Today, the outward appearance is that global growth is great but America is weak. Hence, the dollar weakness. Or a reason for the smart money to sell off the dollar to get dollars bears frothing that the end of America is nigh. Of course, maybe they are right and the end is nigh. Comparatively the answer to that statement is no way. Not because I live here but because of fundamental reasons.

If economic weakness spreads, and it will, forex traders will realize that dirty dollar is a safe haven. And, how will that help the large caps that are rallying because a large portion of their profits are international? Uhhh.... Now, a quick comment. Does anyone see a correlation of activity on this chart of the dollar? Dropping dollar and rocking industrial metals and Dow? Yep. Dropping dollar is good for repatriated profits internationally as we saw in the first quarter. And a reason to shove metals. Dollar quits dropping and the markets quit going up. Hmm...coincidence? If you aren't capable of utilizing intermarket relationships to divine the future of investments, you are missing the entire understanding of financial markets. The quants and scientists developing investment mechanics for Goldman, Morgan, etc, aren't using MACD and stochastics to determine the direction of investments. They are building sophisticated intermarket trading systems amongst other strategies. Eventually their work will likely blow up but that's for another post.

posted by TimingLogic at 11:32 AM links to this post

Friday, May 11, 2007

Retail Sales

Just a quick note here. I won't be posting my follow up to the last post till this weekend or early next week. But, I have a few moments and I want to make a quick comment. It seems each time new data points come out which don't suit the "global synchronized bull" advocates, it is dismissed for some reason or another.

I have worked with retail clients for a long time. I'm very familiar with the inner workings and strategies of many leading retailers and the retail segment in general. I can tell you that I have never seen comps or same store sales numbers like the ones being reported. They are likely the worst numbers since the 1970s or the Great Depression without any data points to validate data that far back. Wal-mart's same store sales may be the worst in its history as a publicly traded company. I've talked about Wal-mart's doomed strategy to move upscale and compete with the likes of Target and if this were contained to Wal-mart, I might give less credence to the data as macro in nature. But, Target's same store sales were even worse.

The headlines are that this was unexpected or that it was against difficult comps or it was against weather related back drops or it was one month and one month does not make a trend. This is jaw boning at its finest. The trend in retail sales, however it is sliced, has been down for some time. That includes ex-autos. People react no differently than corporations. Expenses rise and the outlook becomes less clear so you start raising cash and cut back on discretionary spending. This doesn't mean the world is coming to an end but this data should not be overlooked as an anomaly. I am quite confident those in the retail segment are seeing this as a very, very worrisome sign. Discounts, cut backs in new orders and subsequent economic impacts of said actions should be expected in future months.
posted by TimingLogic at 12:22 PM links to this post

Wednesday, May 09, 2007

The Bullish Case

I like to read commentary with alternative perspectives from time to time to keep my outlook balanced and to gain insight into thoughts I might not have taken into consideration. I might seem awfully bearish on equities, emerging markets, commodities and equities today but as I've said before I am very bullish about the long term global prospects for growth and innovation. If I could stomach a 30-50% portfolio drop in my investments and concurrently deal with any prospects of losing employment income, I'd just stick my head in the sand and wake up in five years. Because I suspect that is about how long it's going to be before we launch the next major assault on growth. I don't expect the world to come to an end and experience a five year recession but I expect we'll have alot of economic gyrating.

Of course, I could totally be wrong and equities might be on a new and sustained bull market for the next ten to twenty years starting in 2003. Ok, I guess I could be wrong but I'm not. The only issue is when not if we will have a devastating correction. I don't say that with irrational confidence. I say that because the bulls are irrationally confident. I don't mean sentiment surveys either. I mean from an underlying fundamentals perspective. Yes, believe it or not, fundamentals do matter.

I'm posting a link to Jeremy Siegel's recent article on Yahoo Finance where he outlines an overwhelming bullishness for equities going forward. The professor is obviously a bright guy and has published some interesting work over the years. I'm going to come back in a handful of days and give the professor an education in the Peter Principle. Obviously not a topic that is part of his finance curriculum at Wharton.
posted by TimingLogic at 1:31 PM links to this post

Time Bomb: The Shanghai Composite

Whoa! That's pretty much all I have to say. If you had the stomach to invest in something like the FXI ETF over the past few months, you've made more in Chinese stocks than U.S. major averages in the last four years. That's four years combined.

So, what happens when all of these Chinese consumers lose their savings in addition to the equity investments they have put on their credit cards? The answer is much different than the same question applied to the U.S. and European markets in 2000. Tick tock.

Has anyone heard anything about Chinese equities lately? Anything? Not I. That is because of the deafening roar of American equities being on a roll with the Dow being up an annualized rate of somewhere around 100%. So, I guess the Dow is going to double this year to 25,000.

posted by TimingLogic at 9:54 AM links to this post

Monday, May 07, 2007

Markets Can And Are Timed. If Goldilocks Is So Great Why Is Buffett Swimming In Cash?

"I am out of step with present conditions. When the game is no longer played your way, it is only human to say the new approach is all wrong, bound to lead to trouble and so on. On one point, however, I am clear. I will not abandon a previous approach whose logic I understand (although I find it difficult to apply) even though it may mean foregoing large and apparently easy profits to embrace an approach which I don't fully understand, have not practiced successfully and which possibly could lead to substantial permanent loss of capital."
- Warren Buffett in a letter to his partners in the stock market frenzy of 1969.

How often have you heard markets cannot be timed? The correct interpretation of that statement is "I cannot time the market.". Warren Buffett has been one of the greatest long term timers of our generation. He cashed out in 1969 and waited until the market crash of 1974 to buy with wreckless abandon. Five years of waiting. Do you have that kind of discipline? He bought massive amounts of silver in 1998 and sold out in 2006 as I recall. As I've said before, Buffett times the markets and does so regularly. Maybe not down to the day but for long term cycles. And, he is willing to wait years for overbought markets to collapse as they always do. Does it give you peace of mind his company is sitting on nearly $50 billion in cash? Patience can be defined in years to the savvy investor who feels no emotional compulsion to buy assets that are ridiculously valued for fear of being left behind. Today global markets are ridiculously valued. Of course, I've said that so often I now need an appointment with a psychiatrist. Mega caps are cheap I am told. I see no better example than one of the mega caps which have done quite well since the dump last year. A company I've written about as being very overvalued, IBM, is closing in on six times book value. If you think now is a good time to buy any company with a paltry dividend and single digit growth at that valuation, you need to pick up Fun with Dick and Jane and start your education over again.

The position I adopted long ago is to never give investing credence to anyone who does not professionally and successfully manage money on a large scale through good times and bad and never take trading advice from someone who isn't a successful trader themselves. I don't mean traders who failed yet proudly tell you they "used to be" a trader. And, I don't mean pit traders we see on CNBC either. They cheat. They play off of the emotional vibe in the pit. When they leave the pit, they don't typically have any trading models and their trading skills are usually worthless without knowing that Exxon Mobil or some other massive player has dumped a huge order into the pits that they can play off of in an open outcry environment. In other words, unless you are Bill Miller, Warren Buffett, David Dreman, Jesse Livermore, Ben Graham, Jim Simons or someone equally successful, I don't really care what what you have to say about the stock market because it's nothing more than uninformed gibberish. It's no different than me giving a neurosurgeon advice on spinal cord surgery. (There is actually an interesting story behind this statement that I might share some time.)

There are many methods and many time frames under which one can time the markets. Markets can be timed in minutes, hours, days, months and years. The more granular the timing, the more transient data plays a role. Below are system generated timing signals to a key component of my intermediate term trading system overlaid on the weekly S&P 500 cash market. System generated meaning they are programmed to yield a signal when certain events come to pass and not determined by my emotional state. In other words, I don't use my arbitrary state of mind to determine what the markets are doing or what I should be doing. The trading system is designed around the S&P 500 cash market. It is a trading system which is in the market at all times. Trading signals are issued at the weekly close of the S&P 500 cash market and new positions are to be taken at the open on the following Monday. ie, The arrows on the chart are long and short signals generated at week's end to be taken on the following week. In the last ten years, it has generated 35 signals and 33 have produced positive results. That's almost a 95% success rate. That is better than anything I have ever seen publicly shared by any Wall Street trading firm. In other words, it's pretty darn good. It's not perfect but there is no perfect trading system. The largest draw down has been 7% and I use filters to stop out before any 7% loss would ever develop. It works quite well in trending markets, up markets, down markets and range bound markets. I can reduce or increase the sensitivity by varying the feedback just like an engineering control system. In layman's terms, what is most important is that I can reduce the number of signals which theoretically increases the accuracy over time. Do they teach that in Harvard's MBA program? I think not. That's why Wall Street's trading machine is really run by scientists in the back rooms of quantitative investment firms such as Goldman, Morgan, Renassiance and elsewhere. Not that I don't admire Harvard MBAs. Where else can you learn to jettison research & development, treat employees as an expense, pay yourself 250 times an average salary while investors suffer sub par returns and employees do without raises, offshore manufacturing because you are clueless to lean production techniques, hoodwink company shareholders to go private to escape the pressures of Wall Street & saddle them up with debt and send them public again and finally learn to value markets such that you thought equities were going to Dow 50,000 in 2000? May I please join the club of under performing shameless self-promoters? I'm trying my best. I kid. But, I am starting to develop serious issues with some of our MBA programs. They seem to be great for Wall Street but are grounded in no reality of main street skills. That's a shame because I've often thought of getting my MBA.

The signals below are out of the box with no filtering. Two weeks ago it issued a sell signal yet nearly everyone I hear in the professional investment community seems rabidly bullish. Even the bears are bullish. Need I remind anyone this market is only up about 5% this year. Yet all I hear constantly is the deafening Orwellian brain bending implying that if you aren't invested, you are being left behind. Wall Street is quite good at that. Not only are they good at it but they are prone to believing their own foolishness. That herd mentality contributes to asset bubbles. In other words, smart money is only smart until it is no longer smart. Didn't the great philosopher Yogi Berra say something like that? Put another way, Wall Street isn't really smart money. It's market moving money. And, you never want to be on the wrong side of market moving money. That is why I don't really care how disjointed markets get. I can ride the pig to the moon just as easily as anyone else. Unfortunately, I do become concerned about more important issues such as global economic prosperity and the well being of my fellow humanoids across the globe. Shoving global equities to stratospheric levels doesn't generally portend good news for the rest of us. Wall Street is always wrong eventually. Always. Just as perma-bears are always wrong eventually. And, yes, I'm wrong my fair share of times too. But, if I admit that, do I still get to join the club?

This past few month's rally has been a short covering rally regardless of what the bloviating herd on CNBC tells you. Traders push their advantage when they have it and that is what we have been seeing in this rally. When Amazon jumps almost 50% overnight on a massive short position, it has nothing to do with fundamentals. It is roaming bands of marauders jamming stocks with huge short interest to make a small fortune while creaming the shorts. When the shorts have been rooted out, what drives the market higher? Liquidity? Insanity? PE expansion? Aliens? God? As I said before, I expect more volatility this year and I expect a good dose of it is coming up soon enough. If I filter this signal, I don't yet have an elegant and pure short yet as I stated a few posts ago but what this does tell me is there is a very high probability time is running out on the Goldilocks crowd. Higher highs at some point? Never underestimate the ability of group think. I do quite often.

posted by TimingLogic at 9:57 AM links to this post

Friday, May 04, 2007

Where Did The Bulls Go?

How about a pre Cinco De Mayo post. I had said a few weeks ago that some of the work I was looking at was pointing to a correction soon. Three dates I was looking at were April 20th, 21st and May 5th. Since two of those days were on a weekend, I had guesstimated the following Mondays as replacement dates. Tomorrow is the third estimated date I had given to be replaced by this coming Monday. Now, to be honest, I'm not seeing the confirmations I need to put on any short positions but I thought I'd post an update regardless.

Below is a chart of the NDX over the last few months along with a buyer participation gauge. I pulled the chart this morning at 10:30 eastern US time so it is current through today. Seems the bulls have walked away since the minor correction earlier this week. Are they looking at the same date I am? May 5th is a mysteriously important date to many traders. No, it's not because it is Cinco De Mayo. The origins of May 5th being an important turning day are unknown as far as I know. Maybe it is because it is 5-5, both Fibonacci numbers. A little bit of market voodoo. Maybe I should have chosen 5-8 as a replacement date with both being Fibonacci numbers rather than Monday 5-7. Are the bulls coming back? Only time will tell.

posted by TimingLogic at 10:25 AM links to this post

Thursday, May 03, 2007

A Little Hilarity To End The Week: This Is A Great Ad.

posted by TimingLogic at 7:41 PM links to this post

Much To The Chagrin Of Many, I'm Back!

I'm back in town and will try to get a post up this weekend. Until then I thought I'd post one of the comments from my capital equipment post that is both interesting and thoughtful. Enjoy.

JKW's Post:

It all comes back to consumer spending. Businesses will only invest in themselves when they expect consumer spending to grow. The economy will only grow if consumer spending grows. The business cycle is caused by consumer spending.

There is an inherent instability in pure capitalism because consumer spending can't be larger than consumer income for very long, but middle class income is driven down by productivity enhancements and competition. As productivity increases, unemployment will rise unless consumption increases by an equal amount. The upper class doesn't tend to spend all their income, so high corporate profits lead to low growth (since most corporate profits won't be spent and they reduce the middle class's share of income). The worst-case scenario is when productivity is rising while consumption falls, which can lead to a positive feedback cycle (positive in a control sense, not a value judgement). Every year, less is being produced and what is being produced requires fewer people working, so unemployment rises. This was the scenario for the great depression.

The only way out once you get into the positive feedback cycle is confiscatory taxes with wealth redistribution to the middle and lower classes. A wealth tax is ideal, because it tells people that if they won't spend their money, it will be taken away and given to someone who will. WWII provided the only acceptable spending program that the upper class were willing to accept such high taxes for. The generous veteran benefits (high pay, good home loans, etc.) and the tight employment during the war provided enough strength to the middle class for about 2 decades of growth (building the national highway system helped too). After that, people weren't pushing hard enough for higher standards of living, so growth slowed.

The 70's were a continuation of the depression, but with very loose monetary policy. The result was high inflation during a recessionary period. It sort of worked, in that it didn't quite get into the positive feedback cycle of ever increasing unemployment leading to reduced spending leading to reduced employment. Businesses could borrow money easily at below inflation levels, so they still hired people.

What finally led to growth again was another major infrastructure change: computerization of everything. Millions of new jobs were created for people to install and maintain computer systems. That started in the 80's and really took off in the 90's. There is little question that the growth in the 90's was almost entirely due to the expansion of computers and the internet. But that infrastructure change has been finished now, so it won't produce any more significant growth.

We are now back in a recessionary phase. The reason it has been mild is that easy money has allowed consumer spending to continue with falling incomes. The housing bubble has provided sufficient money in the form of mortgage equity withdrawals to keep everything from falling apart for the past 5-7 years. That is coming to an end, but credit cards are still offering interest free loans, so money is still available.

In order to have growth going forward, we need to either have another major infrastructure development or some form of wealth redistribution. The most likely infrastructure development we could have right now would be clean energy. If we started a major program to completely replace all of our power plants with zero emissions plants, it would provide enough spending to cause growth for probably at least 20 years. The next most likely area would be something from biotech (I don't know much about biology, so I have no idea what could be coming out of the field). Or it could be something that is so small right now that most people haven't even heard of it (how many people had heard of personal computers in 1978?).

Growth will never come from investment. It is the other way around. Where there is growth, people will invest. To the extent that government policies favor investors over spenders, they are anti-growth. The most pro-growth policy you can have would be one that guarantees a minimum income somewhat above the poverty line and has roughly equal spending and revenues averaged over the business cycle. Beyond that, you want to provide as much freedom as you can to people (not necessarily businesses) and let consumer spending dictate where growth will be. The only time the government should interfere in the marketplace is when people are making decisions which are good for themselves, but are causing problems on a larger scale (such as preventing pollution/forcing cleanups, safety regulations, and anti-fraud laws). In other words, the government should primarily intervene in markets to prevent people and companies from externalizing costs. There is also some argument that the government should ensure that the country is self-sufficient in certain ways, so that if we go to war we won't have critical supplies cut off.
posted by TimingLogic at 10:24 AM links to this post