Sunday, August 19th, 2012
U.S. Equity Market Radar (August 20, 2012)
The S&P 500 Index rose 0.87 percent this week, as dormant news flow from Europe proved a relief to developed markets in general. Trading volume has been characteristically anemic in the summer heat, but investors have not given up hope on potential policy change ahead of the Federal Reserve Chairman’s Jackson Hole speech at the end of the month. Cyclical areas continued to exhibit strength this week with technology, discretion, and financials leading. Defensive sectors including utilities, telecom, and healthcare were laggards for the week.
- The technology sector was the best performer this week, rising 2.3 percent driven by a rally in communication equipment and internet software and services. JDS Uniphase, Cisco, Ebay, and Google were among the best performing names.
- The discretion sector also performed well with housing-related names particularly strong. Both PulteGroup and The Home Depot rose around 7 percent as U.S. building permits surprised on the upside in July with a 6.8 percent sequential jump.
- Sears was the best performer in the S&P 500 this week rising by 15.7 percent as its second quarter loss narrowed due to lower inventory costs.
- The utilities sector lagged as rotation into more cyclical areas continued for the week. Utilities also became the worst performing sector over the past three months.
- Telecom also underperformed this week, in synch with a change in risk preference.
- Staples, Inc. was the worst performer in the S&P 500 this week, falling by more than 15 percent. The company reported lower-than-estimated sales for the second quarter and lowered annual sales and earnings guidance citing slower growth in the U.S. and sluggish demand in Europe.
- The market is looking past the current economic weakness and remains focused on the potential monetary policy action from the Fed, the European Central Bank (ECB), and China.
- The S&P 500 has almost reached its April high, a technical resistance level, and could be vulnerable to any disappointments from global central bankers.
Tags: China Threat, Communication Equipment, Ebay, ECB, Economic Weakness, Federal Reserve Chairman, Google, Home Depot, Inventory Costs, Jackson Hole, Jds Uniphase, Laggards, Market Radar, Quarter Loss, Risk Preference, Sears, Sluggish Demand, Staples Inc, Summer Heat, Technology Sector
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Saturday, August 11th, 2012
by Mark Hanna, Market Montage
The general market has been consolidating last Friday’s move the entire week. Each morning we have had a gap up or down (not big ones) and then after 11 AM the market is listless. There is no volume out there and it appears everyone with big pockets went to the Hamptons. If it were not for all the gap ups in a row Fri-Tue (can’t see it on the stockcharts.com chart) this would be a little bit more of an assuring pattern, but take those away and you have a solid bull flag forming on the S&P 500.
While a quiet week on the surface, sea changes are happening underneath. This week’s strength is mostly concentrated in names that were the laggards of the past few months as we have seen the makings of a large rotation. Note the bull flags in semis, commodities, and industrials. (Transports, which I flagged yesterday continue to be an exception)
Meanwhile the “technical leaders” have not had quite the performance – the PDP ETF (based on intermediate term relative strength measures) is below Friday’s close. Perhaps they need to make a “technical laggards” ETF for times like this.
Of course the leaders of the past few months have been the laggards in this move – namely REITs and Utilities. (Healthcare is a mixed bag)
So in the big picture that is the action you want to see if you are an intermediate term bull although the reasons for it happening (central bank action) rather than economic expansion is rewriting the playbook. In fact after I reviewed all the news out of China and Europe this week it is amazing that pro-cyclical is the leadership group since last Friday. But this is the new market where central bank action supersedes everything.
Speaking of…gold continues to perk up. A break over this $158-$159 level on the Gold ETF would be technically constructive.
Copyright (c) Market Montage
Tags: Big Pockets, Complexion, Economic Expansion, Fri, Gap, Gap Ups, Gold Etf, Hamptons, Industrials, Laggards, Last Friday, Leadership Group, Mark Hanna, Market Changes, Pdp, Playbook, Relative Strength, Sea Changes, Technical Leaders, Ups
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Tuesday, February 21st, 2012
The latest report from Morgan Stanley’s Graham Secker can be summarized simply as follows: i) in January everything has disconnected as traditional linkages between asset classes have broken down, ii) also in January every major asset class (equities, treasurys, gold, oil) was up materially, iii) such a phenomenon has been seen only 5 times in the past 5 years, iv) a double digit decline followed 3 of the past 4 such surges. Then again, as Bob Janjuah lamented earlier, when a bunch of bespectacled economists who have never held a real job in their academic careers since transplanted with banker blessings to various central bank buildings, and who continue to plan the fate of the world in secrecy (a fate that can be summarized as follows: CTRL+P), as the only marginal decision makers, who really cares anymore?
Breadth of positive returns across asset classes is rare …
Reading the January version of our global cross-asset strategy team’s excellent ‘Global In The Flow’, it struck us just how unusual performance trends were last month. While we’re all aware that we’ve just witnessed the best start to the year in equities since 1994, what was more interesting to us was the sheer breadth of positive performance across a wide array of assets. Effectively, the only major asset to fall in value in January was the dollar, and the only other laggards we could see were corn, coffee, coal and natural gas.
… and has often preceded equity market corrections
Unfortunately, the report in question hasn’t been in existence long enough for us to see just how rare such a breadth of positive performance is. So we have screened the past five years to identify periods of coinciding monthly price appreciation in the S&P, Treasuries, Oil and Gold. As shown in Exhibit 1, January 2012 was only the fifth month in the past five years when all four of these major asset classes have risen in unison. More interesting, on three of these four prior occasions that month proved to be a significant peak in equities and was followed by a substantial double-digit decline.
The traditional relationship between equities, treasuries and gold has broken down in recent months
While this analysis doesn’t guarantee that the market is about to suffer a reversal, it probably does reflect an abundance of liquidity plus rising investor optimism that this liquidity can lift asset prices across the board. Exhibit 3 and Exhibit 4 chart the longer-term performance of equities relative to USTs and to gold, and both clearly show a breakdown in the relationship in recent months. Of course, it is possible this gap can close through either falls in stocks or declines in the other assets, but we think it is unlikely this disconnect will continue for very long.
We see the breadth of recent strong performance as a warning sign
While we believe Exhibit 1 is a powerful argument to position for a market pullback, investors should note that this rule-of-thumb was less compelling in prior years. For example, although it gave correct sell signals in June 2000 and August 2002, it also gave a number of false sell signals during 2003 and at the end of 2004, as shown in Exhibit 2. We believe the macro environment going forward is more akin to the last five years than the preceding decade, and hence consider this signal is an important warning sign; however, we acknowledge that others may take a different view. [yes, like ChairSatan]
Speculators are bullish on equities, bonds and oil …
In seeking corroborating evidence to support the rule-of-thumb suggested by Exhibit 1, we have analysed CFTC positioning across similar asset classes. Exhibit 5 plots CFTC net speculative longs as a % of open interest for the NASDAQ (historically this metric has been a good predicator of European equity performance), US treasuries and the oil price. Within the chart the grey shading indicates areas when investors were net long all three asset classes based on a rolling 3-month moving average basis. To illustrate its efficacy for stocks Exhibit 6 then shows the S&P and MSCI Europe with the same periods again shaded grey.
… which has provided strong sell signals over the last decade
If anything, we think Exhibit 6 suggests the CFTC analysis is even more powerful than that shown in Exhibit 1, as there do not appear to be any false sell signals (although it was a little early at the tail end of 2010) even when we take the analysis back to 1999. Further, Exhibit 7 details some standard performance analysis around this data – for example, since July 1999 the average 6-month return from MSCI Europe has been 0% and the probability the market rises (hit ratio) is 54%. However, when we measure performance from periods when net longs were present across the three asset classes, we find the average subsequent 6-month return was -6.6% with a hit ratio of just 19%.
Tags: Academic Careers, asset class, Asset Classes, Asset Strategy, Bank Buildings, Decision Makers, Fate Of The World, Laggards, Linkages, Morgan Stanley, Performance Trends, Price Appreciation, Secker, Secrecy, Sheer Breadth, Strategy Team, Surges, Treasuries, Treasurys, Unison
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Saturday, February 11th, 2012
U.S. Equity Market Radar (February 13, 2012)
The S&P 500 Index ended with a weekly loss for the first time this year. Technology, consumer staples and consumer discretionary sectors were the best performers, while materials, financials and health care were the laggards.
- The technology sector had a strong week, as Apple rose 7 percent as the company is expected to release the new iPad3 in early March. Apple is the largest company in world based on market capitalization at $460 billion and is the largest weight in the S&P 500.
- Elsewhere in the S&P 500 Technology sector, Computer Science, Akamai Technologies and JDS Uniphase all jumped more than 12 percent this week.
- In the consumer areas, tobacco stocks were very strong as Lorillard rose nearly 10 percent for the week and Philip Morris International rose 5 percent. Both companies reported earnings this week and reported solid pricing power.
- The materials sector lost more than 2 percent this week with broad-based weakness across the sector.
- Financials fell by more than one percent as concerns began building again regarding the Greek bailout.
- Among the worst performers in the S&P 500 this week were TripAdvisor, Joy Global and Western Union, all falling by more than 10 percent.
- Earnings results have been encouraging so far and the market has responded, and while we have passed the peak, we still have another week of numerous earnings announcements.
- The year began with five weeks of gains in equities and the market suffered its first minor setback this week. After such a strong start to the year, a pullback or consolidation in the market would not be surprising.
Tags: Bailout, Computer Science, Consumer Areas, Consumer Staples, Earnings Announcements, Earnings Results, Jds Uniphase, Joy Global, Laggards, Lorillard, Market Capitalization, Market Radar, Materials Sector, Minor Setback, Philip Morris International, Pullback, Technology Consumer, Technology Sector, Tobacco Stocks, Western Union
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Friday, January 13th, 2012
The nature of this rally in its ‘exclusivity’ has been quite striking. While I said near the turn of the year we needed to see a broadening into new sectors for the rally off the December 19th low, I – nor anyone – could anticipate how things turned on a dime in terms of sector rotation. One does not expect the previous sector leadership to completely be abandoned in lieu of the new sectors – instead the general playbook is a broadening of strength with new groups taking the baton from the old, but both (the old and the new) doing well in a relative sense Usually
all most groups will participate in a broader market upswing, but that has not been the nature of this leg of the rally; it has all happened in 3 broad sectors. These were of course the laggards of latter 2011 so you had to do a complete flip out of the winning sectors and into the laggards – or have a very difficult time generating any performance.
Let me show you graphically (using sector SPDR ETFs) how mutually exclusive this rally has been thus far.
This first graph is roughly a 5 week period leading up the December 19th bottom – one can see the defensive sectors leading: consumer staples, healthcare, utilities. All other groups were either flat or sharply negative.
[click to enlarge]
While not broken out below (as the chart is from Dec 19th forward), the first week or so if this move off the Dec 19 bottom actually was focused on the same groups listed above – hence the underperformance seen below since Jan 1 in utilities and consumer staples is even worse than the chart shows. Then on the turn of the year it is as if a light switch went on and all the money was moved into the new 3 new winning sectors: financials, materials, and industrials. All of this movement has essentially been post Jan 1.
[click to enlarge]
If you are like me, staring at a gaggle of stocks (many former leaders of late 2011) on watch lists that are (a) doing nothing or (b) retreating in 2012 – while the broader indexes continue to either move sideways (6 sessions this year) or gap up (2 sessions this year) – this is your explanation. If you are not positioned in this select group of sectors, you have had little to no opportunities of late to make money on the long side. Worse, anyone who shorted “weakness” coming into the year received a double whammy. 2011′s “weakness” is where the money has been made thus far in 2012 – almost exclusively.
Side note – it is strange that technology, as a broader sector, has been flat in 2012 – as it would generally move with the ‘growthy’ sectors that have been this year’s favorites. It looks like whatever strength has been seen in semiconductors (a very cyclical group) has been offset by weakness in other areas such as software. Energy has also generally been a laggard in 2012 relative to materials (generally they move together); another quirk of this new year rally.
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
Tags: Br, Consumer Staples, Exclusivity, Gaggle, Graph, Industrials, Laggards, Light Switch, Market Upswing, Money, Nature, New Groups, Playbook, Rally, Relative Sense, Sector Leadership, Sector Rotation, Sectors, Stocks
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Monday, October 31st, 2011
Energy and Natural Resources Market Cheat Sheet (October 31, 2011)
- The commodities complex, including industrial metals and crude oil, gained across the board as markets welcomed a deal by the eurozone leaders this week. West Texas Intermediate (WTI) crude oil gained nearly 7 percent and copper jumped more than 14 percent this week as investors’ risk appetite exploded. Commodity-related equities also rallied which drove gains in the Global Resources Fund (PSPFX).
- Macquarie Research highlighted that U.S. durable goods orders, excluding transportation equipment, rose 1.7 percent in September. This was greater than the consensus expectation and is the strongest reading in the last six months.
- Scotiabank noted that copper inventories in Asia are falling at a rate of 50,000 tonnes per week, creating upward pressure on the copper price. The rapid decline means there’s potential for zero inventories by Christmas.
- Rising oil prices have led to a rise in corporate earnings for energy companies. Major producers including Exxon Mobil, Royal Dutch Shell and France’s Total reported strong earnings results for the third quarter this week. Both Exxon Mobil and Royal Dutch Shell reported earnings 40 percent greater than a year ago, while Total’s profit rose 13 percent over the same time period, according to Resource Investing News.
- Despite positive numbers across the board for the week, the Alerian MLP Index and the Baltic Dry Ships Index were laggards in the sector. However, each saw positive gains, up 3.1 percent and 3.8 percent, respectively.
- A Macquarie report this week noted that the latest SteelBenchmarker assessment by World Steel Dynamics has again highlighted the pressures facing the steel industry. The benchmark World Export hot rolled coil (HRC) price fell 4.2 percent over the past 14 days to $656 per tonne, the lowest since December 2010.
- Non-OPEC oil supply outages have been running twice the level seen in 2010. Further evidence of the supply-side deterioration was seen in the extremely poor set of August numbers for U.K. domestic production. At 808,000 barrels per day, total production is at its lowest levels since 1978.
- Data compiled by Bloomberg this month shows that traders have rising bullish expectations for the agriculture sector. Options traders are snatching up protection against declines in agricultural stocks at the fastest rate in four years. Puts to sell the Market Vectors Agribusiness ETF outnumber calls by more than 2-to-1, the largest discrepancy in almost a year. Over the past month, $2.7 million has been invested in the agribusiness ETF, second-most among all U.S.-listed global equity ETFs.
- China will be reporting its October HSBC Manufacturing Purchasing Managers Index (PMI) on Monday, October 31. The flash PMI announced this past Monday showed expansion in the Chinese manufacturing sector for the first time since mid-summer and the country contributed more than half of global incremental oil demand for the month of September, according to the Financial Express. An accelerated PMI could have a meaningful effect on commodities.
- A shortfall in diesel fuel supply is spreading across China. The Xinhau news agency is reporting that private gas stations are scouring the country for diesel supplies and lines are growing longer at filling stations in major cities. Diesel fuel shortages are common in the winter but longer and heavier-than-usual refinery maintenance mixed with a reduction in retail prices could create the perfect recipe for a squeeze once again this year. PetroChina imported 120,000 tonnes of diesel fuel in October to meet the increasing demand while China National Petroleum Corp. (CNPC) is running its refineries at full capacity. Refinery runs have increased 5.7 percent on a year-over-year basis and the company has encouraged refineries to reduce naphtha output to allow for higher diesel production. Further, CNPC has said that it will raise refinery runs to the second-highest level on record next month in order to maximize diesel output.
- Resource Investing News says rising production costs are putting downward pressure on fertilizer profits. Fertilizer production is very energy intensive, with production requiring significant amounts of sulfur, ammonia and natural gas. Analysts worry that rising input costs and shrinking margin profits may negatively impact the entire industry. However, Potash Corporation of Saskatchewan anticipates improving margins over the near future due to “economy of scale” in terms of potash production. According to Potash, “with demand expected to rise, we believe our expanding potash capability provides a unique growth opportunity. The powerful levers of selling more volumes at higher prices, with the potential for lower per tonne operating costs, offer significant gross margin potential in the years ahead. Beyond the opportunity for margin expansion, the potential for lower per-tonne mining taxes and improved earnings from our equity investments provides significant growth potential.”
- September PMI data across Emerging Europe will be released on November 1. Roubini Global Economics (RGE) is forecasting further weakening in manufacturing conditions, reflecting a decline in export orders and weakening growth outlook in the eurozone.
- On Wednesday, Freeport McMoRan declared force majeure on shipments of copper concentrates from its Grasberg copper mine in Indonesia as an increasingly acrimonious labor strike over pay and conditions continued into its fifth week. Mineweb suggested that this would mean that the company is not anticipating a protracted period of disruption at the mine.
- In the midst of earnings reporting season, Resource Investing News reported that many analysts are skeptical about producers being able to reach their production targets. As an example, Exxon Mobil will need to pump out 5 million barrels a day to reach its 4 percent growth target for 2011. For the September quarter, Exxon Mobil reported producing 4.28 million barrels a day. Analysts have speculated that one problem for the producers is that companies must sign production-sharing contracts with local governments in some countries. This means oil producers receive a smaller output when countries cash in on rising crude prices. Such agreements are prevalent in Africa, which accounts for 20 percent of Exxon Mobil’s crude oil supply.
Tags: agricultural, Alerian Mlp Index, Commodities, Copper Price, Corporate Earnings, Crude Oil, Durable Goods Orders, Earnings Results, Exxon Mobil, Hot Rolled Coil, Industrial Metals, Laggards, Opec Oil, Outlook, Rapid Decline, Resources Fund, Rising Oil Prices, Risk Appetite, Royal Dutch Shell, Same Time Period, Steel Dynamics, West Texas Intermediate, World Steel Dynamics, Wti Crude Oil
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Sunday, July 17th, 2011
Commodities 2011 Halftime Report
By Frank Holmes, CEO and Chief Investment Officer
U.S. Global Investors
Commodities don’t all perform in the same way. In any given year, a particular commodity will go gangbusters and outperform the group. However, that commodity will typically come back to Earth and underperform the following year or the year after that. This is why active management is important when investing in commodities. Active managers can benefit from rotating from winners to laggards or by investing in the companies which produce, farm or mine commodities most effectively.
After two straight years of tremendous gains for many commodities, the first six months of 2011 haven’t been as kind. As of the end of June, only two commodities (silver and coal) saw double-digit increases, and only six of the 14 commodities we track—less than half—were in positive territory.
Silver was the leader, rising more than 12 percent, followed closely by coal (up 11.95 percent). Other commodities increasing in value included gold (5.6 percent), crude oil (3.83 percent), lead (2.16 percent) and aluminum (1.73 percent).
Returns are based on historical spot prices or futures prices. Past performance is no guarantee of future results.
Silver prices got ahead of themselves earlier this year, climbing 58 percent to nearly $50 an ounce. This registered a four standard deviation move, representing extreme territory on our models. Thinking silver, which has historically been a narrowly-traded market, had become a potential haven for speculators, officials stepped in and raised margin requirements on the Comex. This quickly deflated the bubble and prices naturally reverted back toward the mean but remain well above where they began the year.
Strong demand from reconstruction projects in Japan along with reduced supply because of flooding in Australia, Indonesia, South Africa and Colombia led coal to be the second-best performer.
No country was more affected by the lower supply than China as coal powers the Chinese economy. The country is the world’s largest consumer, gobbling half of the world’s coal. Coal accounted for 71 percent of China’s energy in 2008—more than three times the United States’ share. The Electricity Council estimates that China’s coal demand will reach 1.92 billion tons in 2011, up nearly 10 percent from 2010. Chinese electricity use was up 13.4 percent on a year-over-year basis in May and is now expected to rise 12 percent this year. (Read: Coal Use in China Shines Light on Growth)
Gold prices passed $1,500 for the first time ever in mid-April of this year and ended the quarter just slightly below that mark as a mixture of the Fear Trade and Love Trade proved to be an enticing concoction for investors here and abroad. The World Gold Council reported that demand for gold as an investment was up 26 percent on a year-over-year basis during the first quarter. In China, demand for gold was so strong it outpaced the combined gold demand of the U.S., France, Germany, Italy, Switzerland, the U.K. and other European countries. (Read: Asian Tiger Sinks Teeth Into Gold)
Although gold prices held steady during the first half of the year, the share prices of gold companies have lagged. Ralph Aldis and I discussed this hot topic in depth a few weeks ago. (Read: Will Gold Equity Investors Strike Gold?) Many gold companies’ corporate cash flows and earnings per share have been rising, and more companies are paying dividends. Gold stocks also appear cheap compared to the price of gold. We believe investors will be drawn to these qualities, lifting gold stocks along with the strong bullion price.
After two straight years of solid gains, oil prices finally surpassed the $100 per barrel mark once again early in 2011. This time, it was a dose of geopolitical risk and a natural disaster that sent oil prices shooting upward. Oil prices have since bounced around the $90-$100 range for West Texas Intermediate (WTI). That range has held up despite U.S. consumers cringing at gasoline prices, the International Energy Agency (IEA) releasing an additional 60 million barrels of oil to the market and China’s ardent attempts to cool its economic growth. (Read: Playing Cat and Mouse with Global Oil)
Despite tightening measures, China’s per capita oil consumption has retained its upward trajectory and is headed toward levels similar to Taiwan and South Korea. There’s still quite a gap to close before that happens, but China’s oil consumption per capita has increased over 350 percent since the early 1980s to an estimated 2.7 billion barrels per year in 2011. Nearly 100 percent of that has taken place in the past decade. In addition, oil consumption per capita has risen sharply in recent decades in other Asian countries such as Malaysia (nearly quadrupled) and Thailand (doubled).
Looking Forward to the Second Half of 2011
We think commodity price movements will fare better during the second half of the year. Goldman Sachs wrote in a report last week that it expects global economic growth to be “generally supportive of rising commodity demand” and “this demand growth will be sufficient to tighten key commodity markets over the next six to 12 months.” We believe gold, oil and copper are some of the commodities which could see the biggest gains. For the sake of brevity, we’ll highlight gold here today.
As BCA Research puts it, “[gold] prices have benefited from a ‘perfect storm’ in recent months: falling real interest rates, a weak dollar, fears of a U.S. recession and/or debt default, and European stress.” Those factors, which I affectionately refer to as the Fear Trade, are what sent gold prices flirting with the $1,600 an ounce level this week. There was also the release of Federal Reserve meeting minutes that showed QE3 is possible, though not yet probable given Chairman Bernanke’s testimony this week. By the way, if you haven’t already seen Bernanke’s exchange with Congressman Ron Paul on gold, go to YouTube and check it out for a good chuckle. Washington’s reluctance to present a solution to the debt ceiling issue also contributed heavily to gold’s performance.
Paul was bringing attention to the threat of currency debasement, a major reason investors all over the world are turning to gold. According to U.K. research firm Capital Daily, the U.S. monetary base has increased more than 200 percent since September 2008. Meanwhile, gold prices have risen only about 70 percent over the same time period. Capital Daily says “if the two had been directly related, gold should already have risen to around $2,800 [an ounce].” That’s obviously a lofty expectation but illustrates that gold prices haven’t appreciated nearly as much as currencies, such as the U.S. dollar, have been debased.
In fact, don’t believe what you read about record high gold prices. Yes, gold hit a high in nominal terms, but the price is more than 30 percent below the 1980 peak of $2,400 an ounce if you adjust for inflation.
This was a banner week for the Fear Trade but don’t count out the Love Trade. Gold is about to get even more attractive because we are heading into the fall and winter gift-giving season. This is the time of year when gold jewelers typically do their biggest business. The kickoff is the Muslim holy month of Ramadan, which starts next month and ends with generous gift-giving in early September.
The key to this seasonal strength over the past few years has been demand from China and India. You can see from the chart that the rise in gold prices has been closely tied to the rise in gold demand from China and India. Back when the average per capita income in China and India was well below $1,000 a year, gold prices hovered just above $200 an ounce. As average incomes have approached $3,000 a year over the past decade, gold prices have followed. With the long-term outlook for wages in both these economies rather rosy, gold demand should continue to feel the trickle-down effect.
Those investors looking for more of a technical indicator can take a look at the ratio of gold and oil. Capital Daily says that the ratio of the price for one ounce of gold to one barrel of oil (Brent crude) is currently 13.5. Since 1970, the average has been around 16. Gold prices would need to rise to $1,870 an ounce in order to reach historical ratio levels with $117 per barrel Brent crude oil, according to Capital Daily.
Based on seasonal demand strength and sovereign debt fears of the U.S. and several European countries, we think gold prices could be headed higher.
Tags: Active Management, Chief Investment Officer, Coal, Comex, Commodities, Crude Oil, Digit Increases, Extreme Territory, Flooding In Australia, Frank Holmes, Futures Prices, Gangbusters, Halftime Report, India, Investing In Commodities, Laggards, Margin Requirements, Reconstruction Projects, Silver Prices, Speculators, Standard Deviation, U S Global Investors
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Thursday, January 27th, 2011
by Jill MacRae, JZechner Associates, Inc., Sub-Advisor to NexGen Financial Funds
Wow – will anything match the volatility of 2010? It was definitely a year of ups and downs with some of the most extreme swings in month by month in history. What kept the market churning throughout the year? News kept coming from global economics (debt woes of Greece, Ireland and Portugal; China’s efforts to ease inflation and curb speculation in real estate) US politics (health care reform, mid-term elections and a new round of quantitative easing) and some natural disasters (oil well blow-outs in the Gulf of Mexico and a freak volcano eruption in Iceland that paralyzed much of Europe). Against this backdrop, American corporations and consumers continued with the work of regaining their health and strength while still feeling the impact of the financial crisis.
The S&P 500 finished on a high note to record a gain of 12.8% for the year. Financials and Materials led the way and the laggards were Utilities and Consumer Discretionary stocks. The full year story paints a different picture. The top performing groups were Consumer Discretionary – led by Netflix and Priceline as well as Abercrombie and Limited Brands; followed by Industrials where Cummins, Caterpillar and Deere were amongst the leaders. The laggards for the year were Utilities and Health Care.
The [NexGen Financial] American Growth Fund was well served by its overweight in Materials with good contribution from Alpha Natural Resource and Freeport McMoran. Freeport declared a special dividend of $1.00 per share payable at the end of the year and announced a plan to split the stock 2 for 1 at the end of January. Within the Financials, Citigroup, Bank of America, Principal Financial Group and Sun Trust were all strong performers. Bank of America told regulators it has met the financial conditions to repay the government’s bailout funding. The U.S. Treasury successfully sold its remaining 2.4 billion shares in Citigroup in the market. In the end the US government made a $12 billion profit on its position. Hewlett Packard gave conservative guidance for the year ahead and Oracle announced its third straight quarter of beating expectations.
Looking ahead, we continue to be constructive on the outlook for stocks in the next 12 to 18 months although this does not preclude the possibility of corrections along the way. This outlook is reflected in the way we have positioned the [American Growth] Fund. The fund is overweight Materials, Consumer Discretionary and Financials and underweight Consumer Staples, Telecom, and Health Care. The cash balance in the Fund ended the year at its lowest level for all of 2010 but has come up since then with some strategic profit taking early in January.
We believe that the next year will be shaped by a few key themes and we will be monitoring these themes for their impact on the investment landscape.
6 Key Themes
- Global growth will be led by the emerging economies of China, India, Brazil and Indonesia. However these countries will be joined by a return to growth in the United States and leading European countries which will start to contribute to the global demand picture.
- A long awaited return to growth in jobs will drive demand for goods and services within the United States. Consumer confidence will continue to rise and purchasing will migrate beyond early stage restaurants and apparel sectors. Automotive, housing, and infrastructure related industries will benefit.
- Investor appetite for risk will start to show itself again after a long absence. Investment funds that flowed steadily into bonds and income investments for most of 2010 will start to flow into the equity markets again. Evidence of higher interest rates will make investors less keen on the bond market. Stock valuations are currently attractive enough to support this move.
- With the sales of General Motors and Citigroup and the repayment of TARP funds, the participation by the United States regulators in Financial, Health Care, Housing, Auto and Communications will slow. With increasing public confidence, a whole batch of new Republicans in the house and an election to look forward to in 2012, policy makers will take a more hands off approach and ease the regulatory burden on corporate America.
- Growth in corporate profits will be driven less by expense control and more by top line revenue growth. The companies that emerge as winners will be those who are meeting a need, addressing customer demand. Cost cutting alone will not be enough. Companies that outperform will be the ones that make things customers want to buy.
- Merger and acquisition activity will continue in all sectors of the economy. Corporate America is sitting on a pile of cash and investors will start to demand a return on it.
The picture we are painting is one of a gradual return of investor confidence. In the face of increasing global economic growth, healthy corporate profits and relatively low stock valuations, we think the stock market affords the opportunity for healthy returns. This is not to say we believe stocks are going straight up. We caution investors that this market, like any other year, will be characterized by overshooting in some areas, unexpected distractions in others, and noise from exogenous global forces that cannot be foreseen. But more than ever we believe that stock selection will be the key to adding value in this environment. There will be winners and losers. We will focus on good businesses that make things that consumers want to buy and return cash flow to their investors.
Copyright (c) NexGen Financial
Tags: American Corporations, Bank Of America, Brazil, China, Consumer Discretionary Stocks, Debt Woes, Emerging Markets, ETF, Freeport Mcmoran, Global Economics, Health And Strength, Health Care Reform, India, Laggards, Limited Brands, Macrae, Mid Term Elections, Natural Disasters, Netflix, Principal Financial, Principal Financial Group, Sun Trust, U S Treasury, Ups, Ups And Downs, Volcano Eruption In Iceland
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Tuesday, January 25th, 2011
by Trader Mark, Fund My Mutual Fund
2010 was very much the year of commodities as almost any on earth ex natural gas, cocoa, and rice shot through the roof.
Year to date performance as of Dec 23, 2010:
[click to enlarge]
As if a switch was flipped on Jan 1, 2011 – speculators have migrated from the winners of 2010 and into the laggards. Who are the 3 leaders this year thus far? The 3 laggards of 2010. It’s as if speculators ran from the overbought names to the oversold name physical supply and demand suddenly changed between Dec 31st and Jan 1st.
A couple key developments – first Ivory Coast’s government has put forth a one month ban on exports as of yesterday. Now this is not a stable government so we’ll see how it goes, but with the country’s dominant position in the commodity (one third of global exports) it will be interesting to see what develops. But chocolate is a treat for the world’s well off; more worrisome is the action in rice. Remember, for all the wheat, corn, and soybeans surging that is more of an issue for the relatively rich West. The staple food in the East is rice, where many more are in poverty, and that commodity was shielded from The Bernank in 2010. This was the commodity that caused all sorts of troubles overseas in 2008; so if the current path continues expect some ‘excitement’ in the coming months. [Mar 19, 2008: Philippines Brace for Rice Shortage] [Apr 6, 2008: Agflation Hits Rice - Prices Up 50% in 2 Weeks] This certainly could be another reason we are seeing such weakness in many emerging market stocks as the U.S. and Europe whistles Dixie.
More on the cocoa situation:
- Cocoa prices are surging after a one-month export ban was imposed in the Ivory Coast, where there is an escalating struggle for control of the government.
- Cocoa futures on the Liffe commodities’ exchange in London were up 3.9% Monday to 2,223 pounds per ton, the highest since early August, after trading as high as 2,290. Cocoa traded as low as 1,770 pounds in November. Prices have risen 12% since Jan. 5th.
- Alassane Ouattara, the internationally recognized leader of the African nation, on Monday imposed the export ban as he tries to take control of the government away from incumbent president Laurent Gbagbo, who is refusing to step down.
- The export ban was proposed …. as a move to choke off funding for the incumbent. It is unclear whether the ban will be heeded by cocoa growers or how it will be enforced.
- In Washington, the Obama administration announced it was supporting the ban on cocoa exports.
- Ivory Coast was divided into a rebel-controlled north and a loyalist south by a 2002-2003 civil war. The country was officially reunited in a 2007 peace deal, but the long-delayed presidential election was intended to help reunify the nation. Instead, the U.N. says at least 260 people have been killed in violence since the vote.
- Ivory Coast exported $2.53 billion worth of cocoa in 2009, according to government statistics. Ivory Coast’s production has been declining, from 38 percent of global production in 2007-2008 to 33 percent in 2009-2010.
- “The real risk is that if this escalates into military conflicts, which is distinctly possible, the first things to be targeted will be cocoa trees and cocoa fields,” said Spencer Patton, founder and chief investment officer for hedge fund Steel Vine Investments LLC.
- Marcia Mogelonsky, U.S.-based global food analyst for Mintel, said retail chocolate prices are destined to rise even if the political situation in Ivory Coast stabilizes in the next few weeks. “The prices will go up because cocoa is now more expensive,” and the price of sugar is also rising,Mogelonsky said.
- More recently, she said, some manufacturers have, in effect, been raising chocolate prices by shrinking the size of their products.
Conclusion? If you are an American time to start hoarding that 24 oz chocolate package, before it turns in the 18 oz package (same great price!). [Jan 5, 2011: [Video] ABC News – Consumer Reports Shows People are Paying for Less] One of the hundreds of millions poor in Asia who need rice? Just log in to your Etrade account and invest in the U.S. stock market to make up for the inflation in foodstuffs. The Bernank can make us all rich…. you just need a brokerage account.
Copyright (c) Trader Mark, FundMyMutualFund
Tags: Cocoa Futures, Cocoa Prices, Commodities, Commodities Exchange, Dominant Position, Early August, Emerging Market Stocks, Export Ban, Global Exports, Ivory Coast, Key Developments, Laggards, Liffe, Pounds Per Ton, Reversal Of Fortune, Rice Prices, Soybeans, Speculators, Stable Government, Staple Food, Whistles
Posted in Commodities, Markets | Comments Off
Saturday, October 16th, 2010
Emerging Markets Diary (October 18, 2010)
- China’s passenger car sales accelerated in September, rising 19.3 percent month-over-month thanks to an expanding list of subsidies for energy efficient cars and rising concerns that some auto stimulus might be phased out next year.
- China’s foreign exchange reserve surged to a record $2.65 trillion as of the end of September, adding another $194 billion in the third quarter and $101 billion in September. The surge was a result of a stronger euro, Japanese yen and British pound, as well as, net inflows of overseas capital.
- Aviation traffic in Brazil in September grew by 30 percent year-over-year in the domestic segment and 27 percent in the international segment. Brazilians are clearly travelling more internationally to take advantage of the strength in the Brazilian currency.
- Retailers in Brazil continue to post solid numbers—CPD Pao de Acucar posted a 12.5 percent increase in same-store sales during the third quarter, while Hering recorded a 35 percent rise.
- Brisa, the Portuguese toll-road operator sold a 3 percent stake in the Brazilian toll road operator CCR, wiping out 8.2 percent of the market capitalization in a single day. We expect some stock overhang until the end of the year as Brisa gradually reduces its 10 percent stake in CCR.
- Anticipation of a fresh round of quantitative easing in the developed world may have already triggered a comeback of foreign capital flows into Emerging Asian markets as investors seek higher returns and sounder currencies. Indeed, positive correlations exist between foreign capital inflows and Asian equity market performance in the past five years. Foreign liquidity may benefit some of the regional laggards, especially China, betting on an economic soft landing and further yuan appreciation.
- America Movil is rumored to increase the company’s share buyback program, as well as, propose higher dividends as the company accumulates cash on the balance sheet. Most recently, the company had $12.5 billion on its balance sheet.
- With September housing prices and transactions recovering in China, especially in first- and second-tier cities, and the prospect of domestic interest rate hikes diminishing, further upward pressure on housing prices is tangible and might sustain investor perception of more draconian government policies toward the property sector.
- There are fears that Televisa in Mexico is likely to walk away from its planned $1.44 billion investment in NII Holdings, which would give it a 30 percent stake in Nextel Holdings and create the first quadruple play in Latin America.
- HSBC is believed to not be bidding for a stake in South Africa’s Nedbank after performing due diligence on the company. The company’s stock declined 7 percent on the news.
Tags: America Movil, Asian Equity, Asian Markets, Aviation Traffic, Brazil, Brazilian Currency, Capital Aviation, Capital Inflows, China, Domestic Segment, Emerging Markets, Energy Efficient Cars, Exchange Reserve, International Segment, Japanese Yen, Laggards, Market Capitalization, Market Performance, Pao De Acucar, Passenger Car Sales, Positive Correlations, Share Buyback Program, Stock Overhang
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