"They!?"
by Jeffrey Saut, Chief Investment Strategist, Raymond James
November 22, 2010
âIt was always the ubiquitous they, those indefinable conspirators who would inevitably force the market to go the opposite way you were playing it. They were the rumormongers who forced stock and commodity prices to fluctuate wildly regardless of the economic climate. They were the ones who toyed with the military-industrial complex of the fifties and sixties and then with the oil powers of the seventies. They profited from those long lines of gas-hungry cars and the shortages of everything from aluminum to wheat. They were the brains, the real insiders with all the money to manipulate the markets to make more. They were the immovable forces that gave you that lonely feeling that you were up against it, the ones that always profited by your mistakes. They were the ones who used pit gossip to create doubts about your stature as a shrewd trader. They were the enemy; heartless, calculating, always on the offensive, forever elusive. They were everything you werenât. Paul had become obsessed with the they factor to the point where he would rationalize away his own trading blunders. They, of course, were always around to take the blame for his poor judgment. Damn, were they cunning. Sometimes they would suck you into the market by letting you win first; then, like a shifty hustler, they would wipe you out. They would always see you as just a small-time Charlie Potatoes, a Fast Eddie Felson squeezed between Minnesota Fats and Willie Mosconi in a game of cutthroat nine ball. It always worked. You could never learn your lesson. They knew just how greedy you were and that small profits would never satisfy you. And just when you were raking it in, inevitably they would lower the boom.â
. . . The New Gatsbys, by Bob Tamarkin
Obviously Iâm back in the country after a 10-day hiatus from watching the markets. So what have they done to the markets in my absence? Well, the âbuying stampedeâ that began on September 1st is still intact since the D-J Industrial Average (DJIA/11203.55) has yet to decline for more than three consecutive sessions before resuming its upward onslaught. Recall that âbuying stampedesâ typically last 17 to 25 sessions with only one- to three-session pauses and/or pullbacks before exhausting themselves. Itâs true that some have extended for as many as 30 sessions, but it is rare to have one go for more than 30 days. In fact, I can count on one hand the stampedes that have lasted for more than 35 sessions. That day-count sequence, when combined with the short-term overbought condition of late October, is why I turned cautious (but not bearish) before the mid-term elections. Clearly that stance was wrong-footed, yet in these markets it is better to âlose face and save skin.â Interestingly, the overbought condition that existed at the beginning of November has been corrected by the ~4% pullback in the DJIA, as can be seen in the chart of the McClellan Oscillator (overbought and oversold indicator) on page 3. Said pullback also saw the DJIA successfully test its 50-day moving average (currently at 11009). Moreover, I have learned the hard way it is tough to turn the equity markets down between Thanksgiving and Christmas.
That jubilant seasonality becomes especially true in mid-term election years, for as the good folks at Bespoke Investment Group note, âThe S&P 500âs performance following mid-term elections is quite positive. One year after election day, the S&P 500 averages a gain of 15.8% with positive returns every year (since 1946)!â Bespoke goes on to comment about comparisons between now and the 1994 stock market environment. While many people remember the stock market rallying right after the 1994 mid-term elections, the rally didnât actually begin until mid-December. A more apt comparison might be 1966 when the Democrats lost 48 seats in the House, and three seats in the Senate, leaving the DJIA range-bound between 780 and 824 into year-end before embarking on a rally that would lift the senior index 26.7% from its pre-election low (744.32) in October of 1966 into its September 1967 high (943.08).
Speaking of seasonality, while our energy analysts have been correct in their negativity on natural gas, history shows that NATGAS tends to make a price low in the September/October time frame. And despite both supply and demand dynamics currently skewed bearishly, NATGAS appears to have bottomed last month around $3.21 per MCF and currently changes hands at $4.16 basis the December 2010 futures contract. Moreover, I have to ask the question, âWhat do they know that we donât know?â Plainly this is a reference to CNOOC (Chinese National Offshore Oil Corporation), which entered into a billion dollar deal with Chesapeake Energy (CHK/$22.64/Market Perform) on its Eagle Ford Shale project. While Eagle Ford contains oil, it is largely a natural gas play. As well, what does Chevron (CVX/$83.94/Outperform) know that caused it to purchase Atlas Energy (ATLS/$43.58/Not Covered) last week, which is another largely natural gas company. Of course both of these deals follow last yearâs Exxon Mobil (XOM/$70.54/Market Perform) $25 billion takeover of NATGAS producer XTO Energy. Obviously over the long-term some industry heavyweights believe natural gas is a viable investment. Still, in the intermediate-term our energy analysts are likely right in their negative stance. However, in the short-term NATGAS prices look higher to me (please see the second chart on page 3); and itâs worth mentioning that of the more than 100 markets I Monitor on a weekly basis NATGAS was the largest gainer last week with a 4.8% rally (basis the Henry Hub spot price). That near-term bullish view of natural gas also âfootsâ with my forecast of a colder than anticipated winter due to the strengthening La Nina weather pattern and the large amounts of volcanic ash in the atmosphere. That combination has played havoc with the Hadley Cell Winds, causing the âtropicsâ to expand (see previous reports for details). For these reasons I would continue to overweight energy stocks in portfolios.
As for the economy, while I was traveling exports out of Long Beach surged 14.4%, the NAHBâs housing starts were revised upward for July and August (and increased slightly in September), the NFIB Index of Small Business Optimism rose, Manufacturing Industrial Production improved and is growing at an +8.2% annualized rate, the Fedâs Senior Loan Officer Survey indicated banks have eased their lending standards, the U.S Trade Balance narrowed, retail sales rose 1.2% (and are up 7.7% year-over-year, reinforcing my belief the Christmas âselling seasonâ will be stronger than most expect), and the Philadelphia Fed Index jumped to 22.5 in November versus +1.0 in October. All of this suggests real GDP for 3Q10 is on track to be revised upwardly to approximately 2.7%. While thatâs not great, itâs not bad either! The âbadâ remains employment; and while that looks to be at âsteady stateâ rate, private sector job growth is not strong enough to lower our unemployment rate. Hereâs the problem, in my opinion. The first two-thirds of this decade saw production employment decline by approximately 2.4 million jobs. Most of those displaced workers found jobs in the construction industry. However, in 2007 the construction industryâs âbubble burst,â with an attendant loss of those jobs, exposing the structural unemployment problems we are currently experiencing. Unfortunately, the U.S. is ill-equipped to deal with this in the short/intermediate-term. Over the longer-term I am confident âcreative destructionâ will cause labor, and capital, to move from dying industries to growth industries, thus ameliorating the employment situation. Yet the risk is our politicians wonât wait long enough for this sequence to occur. Indeed, for political reasons they may take the route of âcavingâ to the employment figures due to an outbreak of populism that leads to protectionist policies aimed at China. Ladies and gentlemen, while politically popular, slapping punitive trade tariffs on countries like China is a dangerous road to travel.
