Archive for June 16th, 2009
Roubini: Oil and Gold Look Overpriced
Tuesday, June 16th, 2009
Nouriel Roubini, of RGE Economics, declared at a Reuters Summit Tuesday that Oil and Gold are not reflecting their fundamentals and have come too far too soon.
Reuters: Oil and gold are overvalued at current prices, which do not reflecting their market fundamentals, economist Nouriel Roubini said at the Reuters Investment Outlook Summit on Tuesday.
Roubini, who is known for having predicted the financial crisis that rocked the global economy in the past two years, painted an economic backdrop of deflationary risks and warned that if oil keeps climbing toward the $100 level it would deal an “economic shock” similar to the one last seen in 2008.
The recent rally in oil, which sent prices to an eight-month high above $73 per barrel, was “too high too soon,” Roubini told the Reuters Investment Outlook Summit in New York.
U.S. crude oil reached a record high near $150 per barrel in July 2008 based on overly bullish global demand expectations, but prices have since more than halved with the global economic slowdown.
Roubini, who is chairman of economics research firm RGE Monitor, said the current price of gold looks overextended as deflation is likely to outweigh any risks of inflation in the near term.
“For the next two years, deflationary pressure is going to be dominant, and it is going to become a time bomb down the line if and when we keep monetizing large deficits. It may be too soon to hedge with gold,” he said.
“Unless we have high inflation, or…other risks like depression, gold looks toppy,” he said.
Gold could spike again whenever there is rising risk aversion, he said, though noting that bullion prices had declined after the Lehman Brothers debacle in September last year.
Source: Reuters, June 16, 2009
Tags: Bullion Prices, Crude Oil, Current Price Of Gold, Debacle, Deflation, deflationary pressure, Economic Backdrop, Economic Shock, Economics Research, Global Demand, Global Economic Slowdown, Global Economy, Investment Outlook, Lehman Brothers, Market Fundamentals, oil, Price Of Gold, Reuters, RGE Monitor, Risk Aversion, Time Bomb
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Michael Lewis: The End of Wall Street
Tuesday, June 16th, 2009
Michael Lewis, the trenchant author of Liar’s Poker, Money Ball, and Home Game, discusses what he calls “The End of Wall Street,” in this 5:33 minute segment. It’s an enlightening discussion, I promise. Don’t miss it. Click play to see it.
Lewis explains how he went out of his way to talk to the people who seemed to have known the crisis was coming, and discovered that they were the less sophisticated, net-long breed of hedge fund investors, and not the genius financial engineer cum alchemist types.
In essence, these were, as in one case, portfolio managers who poked holes in the ratings system. In his example, Lewis tells of the story of the investor who asked Standard and Poor’s to explain how a whole whack of BBB mortgage paper could fetch a AAA rating? This was followed by the question, “What would happen if housing prices start falling?” to which the S&P official responded, “there is no place in the model to insert negative numbers.”
Lewis does a great job of explaining what the critical factors were that contributed to “the end of Wall Street.”
Read the whole article here.
Tags: Amp, Array, Ball Game, Bbb, Critical Factors, Financial Engineer, Fund Investors, Genius, Hedge Fund, Holes, Home Game, Investor, Liar, Liar Poker, Liar S Poker, Michael Lewis, Minute Segment, Money Ball, Money Game, Mortgage Paper, Negative Numbers, Poker, Poker Game, Portfolio Managers, Wall Street, Whack
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Technical talk: S&P 500 turning down from 950 again
Tuesday, June 16th, 2009
The comments below were provided by Kevin Lane of Fusion IQ.
The S&P 500 Index is stalling again and now turning down from the 950 area. Given the large run-up off the lows it should not be a surprise to anyone to see the market starting to stall, pause or retrace. However, just as the market bottomed and rallied in the face of bad news, we are now getting the exact opposite where the news flow is improving or good and the market is selling off. It is this action of selling off on good or less than bad news that troubles us more than anything.
Early warnings of the loss of momentum can be traced back to early May when the S&P 500 broke below two faster-accelerating trend lines and then subsequently failed to climb back above them. To keep things in context, Monday’s action looks like a small blip so far, but we have to be aware that the S&P 500 has now failed on numerous attempts to get back above 950 and is now testing a less accelerated trend line while its RSI momentum diverges from price. Any movement below that aforementioned trend-line level would suggest the market may want to test the next level of support near 875.
At this point the low-hanging fruit has been picked and easy money has been made and traders/investors need to be more selective while the market corrects the excesses of the run off the lows. It doesn’t mean money can’t be made on the long side or we that we have to have a full retest; it just means being patient, and buying the next corrective wave may make more sense than chasing. To get a renewed bullish outlook, 950 will need to be taken out on a solid upside breadth day (i.e. good ratios for advance/decline and up/down volume).
Source: Kevin Lane, Fusion IQ, June 16, 2009.
Tags: Bad News, Blip, Breadth, Bullish Outlook, Cape Town, Corrective Wave, Easy Money, Excesses, Iq, Low Hanging Fruit, Lows, Momentum, Next Level, Postcards, Ratios, Retest, Target, Trend Line, Trend Lines, Volume Source
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Have Stockmarkets Run Away From Reality?
Tuesday, June 16th, 2009
The predictions of the members of the Barron’s mid-year Roundtable discussion over the weekend were in agreement that the March lows of the stock markets would not be broken. This reminded me of one of the famous “Investment Rules” of Bob Farrell, legendary former chief stock market analyst at Merrill Lynch. Rule # 9 stated: “When all the experts and forecasts agree, something else is going to happen.”
Meanwhile, many stock markets yesterday registered their worst single-session percentage losses in a month. Commodities also faced heavy profit-taking, but government bonds rallied and the US dollar strengthened against a basket of currencies. “We could be seeing one of those occasional all-change signals in short-term trends,” said David Fuller (Fullermoney).
Richard Russell, veteran writer of the daily Dow Theory Letters, commented on Monday: “I’m of the opinion that this bear market rally is in the process of topping out. When a counter-trend rally tops out within an ongoing primary bear market, the odds are that the stock market will break to new lows during the period ahead. That means that the stock market will break below its March 9 lows in coming weeks. A violation of the March 9 lows would be a shocker to most investors, and it would be a forecast of an even worse economy coming up.”
As mentioned on Sunday, the S&P 500 had recently been mapping out a trading range between 925 and 950, as shown in the chart below. Yesterday’s close of 924 took the Index below the bottom of the range. As stock markets have started to show exhaustion (also seen from the low volume characterizing the last few days’ increases), the odds are that this could be more than a “false alarm”.
Source: StockCharts.com
An analysis of the moving averages of the major US indices shows all the indices still trading above their respective 50-day moving averages, but the Dow Jones Industrial Index has again fallen below the key 200-day line, rejoining the Dow Jones Transport Index. With the exception of the Nasdaq Composite Index, all the indices are below the early January peaks. Importantly, the levels from where the rally commenced on March 9 should hold in order for base formations to remain in force.
Click here or on the table below for a larger image
Based on pronouncements at last weekend’s meeting of the Group of Eight finance ministers, “green shoots” seem to be wilting somewhat, leaving investors questioning whether the recent reflation trade has not been getting ahead of itself.
The “less-bad-than-expected” school of thought is largely based on survey data such as the Purchasing Managers Indices (PMIs). It therefore makes for interesting reading to revisit the historical relationship between the PMI and stock market movements. The example below shows the US composite (services and manufacturing) PMI plotted together with the 12-month percentage change in the S&P 500.
Source: Plexus Asset Management and I-Net Bridge
For some fun with numbers, I have done a regression analysis of the two series, resulting in an R2 coefficient of 0.76.
Source: Plexus Asset Management and I-Net Bridge
Applying the regression results to a range of PMI assumptions, the expected changes in the S&P 500 are as shown in the table below.
Click here or on the table below for a larger image
The figures show that a “pessimistic” scenario of a stagnant PMI would result in a decline of 23.4% in the S&P 500 (i.e. an index level of approximately 700). Even a “realistic” scenario of gradually increasing the PMI by 1% per month between now and November would still result in the S&P 500 being 8.7% lower by the end of November. Interestingly, the stock market seems overpriced under all scenarios over the next few months and only reaches positive territory again in August under the “very optimistic” scenario and in November under the “optimistic” scenario”.
And lastly, John Murphy (StockCharts.com) concurs, remarking: “As good as the spring rally has been, I believe the market is still in need of some corrective action (or consolidation) before moving substantially higher. V bottoms are extremely rare. W bottoms are a lot more common. So are head and shoulder bottoms. It seems unlikely that the market will continue to rally in a straight line. More basing activity is most likely needed. And that’s going to require more time.”
Tags: Bear Market, Bob Farrell, David Fuller, Dollar Strengthened Against, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Index, Dow Theory Letters, False Alarm, Fullermoney, Government Bonds, Investment Rules, Market Rally, Merrill Lynch, Moving Averages, Profit Taking, Richard Russell, Stock Market Analyst, Stock Markets, Veteran Writer
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