Posts Tagged ‘Global Markets’
The Race for Resources
Sunday, August 5th, 2012
The Race for Resources
By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors
The world watched in awe as American swimmer Michael Phelps became the most decorated Olympian of all time. I’ve read he’s been training in the pool for an average of 6 hours a day, 6 days per week, which equates to about 30,000 hours since age 13 and about 10,000 calories burned during a training day. It’s inspiring to see the incredible results of his tremendous sacrifice and commitment.
Investing in global markets requires the same sort of stamina, especially at times like this week, when the month’s reading on the manufacturing industry was not encouraging. The J.P. Morgan Global Manufacturing PMI of 48.4 for July was the lowest since June 2009.
However, I believe there are encouraging pockets of strength to energize and inspire investors.
For example, we’re coming up on the anniversary of the first stimulus move that kicked off the global easing cycle. On August 31, 2011, Brazil unexpectedly cut rates by 50 basis points, and since then, ISI says 228 stimulative monetary and fiscal policy moves have been initiated across several countries, including the Philippines, China, France, and Colombia.
In June and July alone, there were nearly 70 moves—the most since the world began this massive easing.
Generally, by the time central banks make a fiscal or monetary easing move, economic deterioration has already occurred. Even with these moves, it still takes several months for the stimulative measures to take effect and work their way through.
But while the world wades in the shallow end of the pool waiting for the economy to warm up, Asia has taken a deep dive into the energy space as they’ve recently announced acquisitions of Canadian resources companies.
In my presentations, I’ve discussed how resources companies have significantly underperformed their underlying commodities. During 2009 and most of 2010, the performance between oil and the S&P 500 Oil & Gas Exploration and Production Index was closely correlated. By the middle of 2011, oil and oil stocks started to separate, with crude continuing to rise while stocks deteriorated. Even with the recent drop in oil prices, oil stocks have continued to lag.
I’ve also discussed the strikingly similar trend occurring between gold and gold stocks. There’s been a spectacular pop in gold stocks recently, but it hasn’t been enough to catch up to gold’s performance.
The disparities mean that the cheapest resources are not found in the ground—they’re listed, and it’s been confirmed by recent energy company acquisitions.
Chinese oil company CNOOC put in a bid of $15 billion to purchase Canada’s Nexen. This was at a 61 percent premium to Nexen’s share price on July 20, according to Bloomberg. As you can see below, not only did the takeout announcement close the gap, now the company is outperforming the price of oil.
If CNOOC’s deal is approved, the state-run oil giant gets even bigger, gaining access to significant energy stores in several areas of the world, including Canada, the Gulf of Mexico, Colombia and West Africa, as shown below.
With a rapidly growing middle class and rising urbanization, Chinese leaders know they need to fill their country’s tremendous energy demands and are continually finding innovative ways to keep their country powered. CNOOC’s acquisition is one way China continues to acquire not only the resources needed to power the country, but also the technological innovations that come from countries with free markets and lower barriers to entry. According to The New York Times, China “has been garnering advanced production technologies to better draw oil and gas from nontraditional areas like deepwater fields and hardened rock formations.”
The other announcement came from Malaysia’s state-owned and natural-gas giant Petronas, which will purchase Canada’s Progress Energy Resources Corp. Petronas is one of the largest producers and shippers of supercooled LNG fuel in the world. According to the Vancouver Sun, the company is “anxious to increase its market share in Asia, where analysts expect demand to surge 75 percent by the end of the decade.”
After Petronas’ original bid was announced, Progress increased 74 percent—a record gain for the company, says Bloomberg. As shown below, Progress now dramatically outperforms the underlying commodity.
Ready to be a Buyer like Asia?
If you’re contrarian investor, there may be an additional reason to jump into the market today. According to research from J.P. Morgan, institutional investors have become extremely negative, as hedge funds “essentially short the market,” meaning that their expectation is that stocks will fall.
J.P. Morgan looked at the rolling 21-day beta of macro fund returns compared to the S&P 500 Index returns and found that the ratio is at an extreme level of -0.26. Research shows that the last two times the ratio fell this low—in September 2010 and February 2012—stocks rallied. In 2010, the S&P 500 climbed 26 percent in five months; in 2012, stocks rose 8 percent in two months.
These signs the market is sending out make it an especially attractive time to “mine” for investment opportunity. In July, we began to see energy stocks and oil get recharged, as the energy sector in the S&P 500 was the second best performer, increasing 4.17 percent and crude oil rose 3.68 percent. Unlike the start of an Olympic race, in investing, there isn’t a signal sounded to let you know when to dive off the starting block into the markets. Just make sure your portfolio is poised to participate in the race for resources.
Tags: American Swimmer, Basis Points, Canadian, Canadian Market, Canadian Resources, Central Banks, Chief Investment Officer, Deep Dive, Economic Deterioration, Frank Holmes, Global Markets, J P Morgan, Manufacturing Industry, Michael Phelps, Monetary And Fiscal Policy, Pmi, Policy Moves, Stamina, Stimulus, Training Day, U S Global Investors, Wades
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We Are All Alone
Thursday, July 19th, 2012
by John Nyaradi, Wall Street Sector Selector
Investors are on their own and cannot count on the Federal Reserve to save their portfolios.
Global markets seem to be pricing in a new round of quantitative easing from the Federal Reserve. Dr. Bernanke and his colleagues will likely comply sometime between now and December. However, even with more quantitative easing, investors can’t count on the Federal Reserve to rescue the stock market and their portfolios. We are on our own, and here’s why:
1. Europe’s Debt Crisis
Europe is the crisis that just won’t quit, with Spain, Italy, Greece, ad nauseam , all running out of money. There is simply no solution to this problem as there is simply not enough money in Europe to save Italy and Spain. When the piper finally demands to be paid, no central bank on earth will have the firepower to stop the global financial avalanche that this crisis could trigger.
2. Earnings
Second-quarter earnings season is shaping up as a weak affair with downgrades coming from most every sector. As we all know, stock prices eventually are based on earnings, and no amount of monetary policy, low interest rates or quantitative easing can add profits to corporate bottom lines. Monetary policy can set the stage for, but cannot create, demand.
3. Global Recession
This item is part and parcel of Items #1 and #2. Recession is quickly spreading across Europe. China’s economy, while still growing briskly by developed world standards, is rapidly slowing. The United States limps along with a 1.9% growth rate and recent GDP estimates have been sharply revised downwards. Like antibiotics for a sick person, Dr. Bernanke and his Fed can help but the disease must run its course and the patient must have the physical strength to survive on his own.
4. Diminishing Returns of Quantitative Easing
Each round of quantitative easing has smaller impact and brings greater risks for the global economy. Last week’s interest rate cuts by the European Central Bank, the People’s Bank of China and more quantitative easing from the Bank of England were largely ignored by global markets which, in the “good old days,” would have rallied hard on this sort of same-day global intervention. Like antibiotics fighting a virus, quantitative easing is losing its effect as the virus grows immune and mutates to offset continued attacks.
5. The Dreaded Fiscal Cliff
Dr. Bernanke has made it quite clear in recent testimony to Congress that the “fiscal cliff” coming up in December is too big for him to manage and that it needs to be resolved to avoid a significant economic shock. The hit to GDP from the fiscal cliff would likely trigger another recession in the United States (See Item #3)
ETF strategies for difficult days
So what are we supposed to do as we try to protect capital, prepare for retirement and secure our financial futures? Several options come to mind:
A. Cash: Cash is king, particularly in deflationary, depression-like environments. The U.S. dollar, represented by PowerShares DB Bullish Dollar ETF (NYSEARCA:UUP) is up some 5% since early May as capital seeks the perceived safety of the U.S. dollar. Cash doesn’t have to be U.S. dollars, either, as Swiss francs have been on a roll, along with the Japanese yen (NYSEARCA:FXY)
B. U.S. Treasury Bonds: Like the dollar, the U.S. is still seen as the safest harbor in an uncertain world and U.S. Treasuries are near record low yields and high prices as money flocks to the perceived safety of Uncle Sam. The biggest moves will probably come in the long end of the curve and iShares Barclays 20+ Year Treasury Bond ETF (NYSEARCA:TLT) is up some 14% since early April. iShares Barclays 7-10 Year ETF (NYSEARCA:IEF) has gained more than 5% in the same time frame. One day, the “short” bond trade will be the position of a lifetime, but that day does not look like today.
So now it’s summertime, but the living is not likely to be easy, at least for awhile. (apologies to George and Ira Gershwin, “Porgy and Bess”) We can’t count on Dr. Bernanke and his Federal Reserve to save us from what lies ahead but we can use the power and versatility of exchange traded funds to navigate through these challenging times. We are all alone.
Get Wall Street Sector Selector’s Free Stock Market Warning Indicator!
Disclosure: Wall Street Sector Selector actively trades a wide range of exchange traded funds and positions can change at any time. Wall Street Sector Selector holds a position in (TLT)
Copyright © Wall Street Sector Selector
Tags: Ad Nauseam, Bernanke, Bottom Lines, Debt Crisis, Diminishing Returns, Downgrades, Earnings Season, Enough Money, Firepower, Gdp Estimates, Global Economy, Global Markets, Global Recession, Interest Rate Cuts, Italy Greece, Low Interest Rates, Physical Strength, Second Quarter Earnings, Sick Person, Stock Prices
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Follow the ETP Flows: Corporates Rule
Wednesday, July 18th, 2012
by Dodd Kittsley, CFA, iShares
One of the advantages to working for the largest exchange traded product (ETP) provider in the world is that you have a lot of data at your disposal. In my role as the Global Head of ETP Research for BlackRock, I deal in data every day, particularly as it relates to the in- and outflows of the 4500+ global ETPs currently in existence. As you can imagine, examining flows can be a great way to spot investment trends, take the temperature of the market and reveal sentiment shifts.
Right now, for example, global ETPs just experienced their largest first half inflows ever. ETPs attracted net new assets of $105 billion during the first half of 2012, representing a 16% increase on the $90.6 billion of flows posted during H1 2011. Total industry assets now stand at nearly $1.7 trillion.
Not surprisingly, fixed income ETPs were a main driver of growth. As global markets continue to be volatile, investors have increasingly been using these products to capture new and diversified sources of income. Fixed income ETPs attracted 41% of all inflows with $42.0 billion on the year, or 114% above 2011’s comparable YTD figure of $19.6bn. In fact, June was the 18th consecutive month in which global fixed income ETPs have attracted net inflows. Total assets invested in fixed income ETPs now exceed $300 billion and account for over 18% of total industry assets.
But here’s something you might not have guessed – within fixed income, investment grade corporate ETPs were the clear leader, bringing in $15.5 billion. Throughout this year, investors have consistently committed new money to the category, with monthly flows ranging from $1.7bn to $3.2bn. It appears that many investors may agree with Russ K’s feeling that investment grade debt is the place to look for relative safety (albeit less than Treasuries) with the opportunity for positive real yield.
So what do we think is in store for the second half of the year? Well, if volatility remains an issue (and Russ K believes it will), we expect to see the flows into fixed income ETPs continue (see chart below). In fact, if they continue to follow their current trajectory, FI ETPs could actually sextuple their assets over the next 10 years – from $300 billion to $2 trillion. As my colleague and fellow blogger Matt Tucker has said many times, investors are starting to realize that fixed income ETPs are simply a better way to invest in bonds.
Fixed Income Cumulative Net New Asset Trends
Never one to keep a good story to myself, I’ll be sharing interesting ETP flow data and related insights on a regular basis here on the iShares blog. And I’d love to hear from all of you – what questions do you have that our data might be able to answer?
Source: BlackRock Investment Institute
Tags: Assets, Blackrock, Cfa, Corporates, Diversified Sources, Dodd, Etps, Fixed Income Investment, Global Head, Global Markets, Investment Trends, Ishares, Nbsp, New Money, Relative Safety, Russ, Second Half, Sentiment, Treasuries, Trillion
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U.S. Equity Strategy: A Mid Year Update
Thursday, July 5th, 2012
prepared by Ryan Lewenza, CFA, CMT, Senior Vice President, U.S. Equity Research,
TD Waterhouse, Portfolio Advice and Investment Research
Mid-Year Update
- In the “risk-off” environment seen for much of Q2, small caps and technology were hit the hardest, with the Russell 2000 Index and the Nasdaq Composite Index down 3.83% and 5.06%, respectively. The defensive telecommunications, utilities, and consumer staples sectors outperformed, gaining, 12.63%, 5.46%, and 2.11%, respectively. The cyclical sectors underperformed with financials down 7.27%, energy off 6.53%, and information technology declining 6.96%. While Q2 was a more difficult trading environment than Q1, it is important to note that the S&P 500 Index (S&P 500) is still up 8.31% year to date.
- Europe continues to be the most significant risk to the global markets, with news from the region largely driving the volatile day-to-day price action. Greece, with its potential to default (again) on its debt and possible exit from the eurozone, remains front and centre. However, the focus is quickly turning to Spain, whose economy at US$1.4 trillion is nearly 5 times larger than that of Greece.
- The key question is whether the eurozone debt crisis will escalate further, and push the global economy into a recession. Unfortunately the problems are largely political, making it difficult to predict one way or the other. All of this uncertainty bears a defensive posture at this time.
- Looking at simple P/E ratios, equity valuations look quite reasonable, and even cheap in certain areas of the market. However, with the prospect of slowing earnings and increasing global risks, we believe stocks will be hard pressed to see any significant P/E expansion, and therefore maintain our S&P 500 year-end price target range of 1,290-1,340, which assumes a year-end P/E target range of 13- 13.5x.
- Stepping back from the day-to-day market gyrations, we believe the S&P 500 will continue to trade range-bound between 1,200 and 1,400 through the summer, as the markets weigh the negatives of the European debt issues and slowing growth, with the positives of still healthy corporate earnings, reasonable valuations and supportive monetary policies.
- With the heightened risks we recently
- upgraded consumer staples to overweight from market weight.
- We continue to recommend an overweight in health care.
- Our sole cyclical overweight position is the information technology sector.
- The energy, utilities, telecommunications and industrials sectors remain at market weight.
- Finally, we maintain our underweight recommendation for the financials and consumer discretionary sector.
The complete report is available for reading or download in the slidedeck or at the link below:
Tags: Consumer Staples, Debt Crisis, Defensive Posture, Economy Into A Recession, Equity Research, Equity Strategy, Eurozone, Global Economy, Global Markets, Global Risks, Investment Research, Market Gyrations, Nasdaq Composite Index, Portfolio Advice, Price Target, Russell 2000 Index, Senior Vice President, Small Caps, Target Range, Td Waterhouse
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Unmasking the Asian Giant
Monday, July 2nd, 2012
Unmasking the Asian Giant
By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors
Chinese operas have been keeping audiences enthralled for hundreds of years with mythical characters, enchanting stories and elaborate masks that add drama and mystery. While this fantastical treatment is appreciated in the theatre, it isn’t in global markets. Investors don’t like mystery—think of how uncertainty has spooked markets in recent years.
Global investors are rarely privy to every detail about the economy; that’s why it’s necessary to rely on multiple data and research to make decisions and be cautious of extreme views that unnecessarily arouse suspicion, skepticism, and criticism. These opinions may grab headlines, but rarely do they help investors’ portfolios.
A recent article in The New York Times raised doubts about the quality in China’s macroeconomic reporting. The Times pointed to evidence from “prominent corporate executives in China and Western economists” who say that “local and provincial officials are falsifying economic statistics to disguise the true depth of the troubles.” The author alarmed many of our readers, so we immediately contacted numerous analysts—many of whom have front row seats to Chinese economic data—to get their reaction.
Some analysts preempted our request by independently sending out a rebuttal, including CLSA’s China Macro Strategist Andy Rothman, in his Sinology report titled, “Lies, Damned Lies…” Since 2006, global investors have come to rely on this company’s coverage of China because of its ability to “independently monitor mainland economic activity.” See Andy’s insightful views on China from a recent webcast.
Don Straszheim from ISI also emailed his view on the veracity of Chinese data. (We note that Don was correct on a recent call on China. When he visited our office at the beginning of June, he correctly predicted the interest rate cut, which China made two days after his visit.)
We’re all influenced by emotions, of course, and when used to our advantage, can help guide how we invest. However, we need to be aware of how outside biases can influence our judgment. In Thinking, Fast and Slow, Daniel Kahneman writes about a mechanism through which biases flow called an “availability cascade,” a term coined by Cass Sunstein and Timur Kuran. Kahneman says the availability cascade is a “self-sustaining chain of events, which may start from media reports of a relatively minor event and lead up to public panic and large-scale government action.” The vicious cycle goes like this: As people begin to worry, they seek more information and are attracted to similar news reports, which encourages additional coverage. The “availability entrepreneurs” are the ones who deliberately want to keep the negative news flowing.
This may not have been the intention of the Times—and other China bears—but its business is selling newspapers.
Kahneman focuses his discussion on how policies should take into consideration a combination of “experts’ knowledge with the public’s emotions and intuitions.” This thinking also relates to investment decisions, which is why our SWOT model is designed to help us review a variety of sources, along with emotion and intuition, and categorize the results in terms of strengths, weaknesses, opportunities and threats.
We encourage our readers to take this approach: Read the Times article and analyze it alongside what analysts are saying:
It’s not breaking news that China’s data is less-than-perfect. Analysts have been saying this for years. CEBM says simply that the Times article is “a true but not new story,” while ISI believes “the shortcomings of China data is a topic every China macro journalist writes on every year or so – with small variations and supporting anecdotes.”
Part of the reason the topic of China’s “disguise” keeps coming up stems from the fact that the country has not had a very long history of “professional independence from the political machinery in Beijing,” says ISI. Unlike developed countries, ISI believes China’s data system continues to be opaque and primitive. The countries’ inadequacies are relatively common among emerging markets, as numerous analysts have pointed out.
This fact does not release China from its responsibility to make sure that investors have accurate information. Rather, because the country has become an economic powerhouse, it is under greater scrutiny, which means it needs to improve its checks and balances. CLSA says the central government has been aware of how local officials inflate their data and “has been taking steps to mitigate the problem.” For example, more than 700,000 companies now report their data directly to the National Bureau of Statistics, rather than the local governments. NBS data is typically used to forecast consumption of key commodities, says CLSA.
The Times discussed how electricity production and consumption is “a telltale sign of a wide variety of economic activity” and is a “gold standard” for finding out how the economy is doing. A few months ago, U.S. Global’s analyst, Xian Liang talked about how important electricity consumption was as a measure of activity—some commercial banks that lend to small companies would physically check the meters themselves.
As shown in the chart below, over the last few years, China has reported electricity consumption that was much more volatile than real GDP data. Noting the extreme at the end of 2008, it’s likely that GDP fell more than was reported, and at the end of 2009, GDP likely rose more than publicly reported, says ISI.
However, the logic of the Times article to think that local officials are “overstating” data seems misguided. According to Bank of America-Merrill Lynch, China’s local officials have little incentive to over-report the use of energy because “Beijing imposes increasingly restrictive regulations on energy use per unit of GDP on local governments.” Also, since 2011, many local officials have been trying to encourage the government to ease tightening measures, so it is not in their interest to over-report power data to mask a slowdown.
What’s needed before investing in any emerging market is an ability to decipher the mountain of data and use informed judgment. Because “all data in China are not created equal,” ISI bases its opinion on data, giving more credibility to data that is independent and discounts data that is confusing or biased. Data including purchasing managers’ index, export and import volumes, auto and vehicle sales and production, transportation and People’s Bank of China are generally high-quality and credible, says ISI.
There’s no denying the importance of China. Take a look at McKinsey’s map showing the rapid shift in the world’s economic center of gravity. Beginning in AD 1, for nearly 2,000 years, the economic center of gravity was in Asia because population growth and migration were slow. Industrialization and urbanization in Europe and the U.S. quickly shifted the economic power west for the next century. Now, “China is urbanizing on 100 times the scale of Britain in the 18th century and at more than ten times the speed,” says McKinsey.
In fact, in the past three years, a combination of lower growth in the developed countries, combined with the fast urbanization of the emerging world, the economic power has reverted back toward the east at the “fastest rate of change” in history.
Here’s another way to visualize China’s reversion to the mean, which we showed a few days ago:
All the World’s Not a Stage
China is far from perfect: While actors can perfect their lines and use masks to captivate an audience, smart investors know better to use a wealth of information across numerous sources to guide investment decisions. Weigh the evidence and judge for yourself. As my friend, Investment Strategist Keith Fitz-Gerald recently said in an interview, “A powerful China is coming, and we have two choices. Either we’re at the table, or we’re on the menu.” To him this means, “Good news from China is good news for the U.S.; bad news from the Chinese economy is bad news here.”
Tags: Chief Investment Officer, chinese data, Chinese Operas, Clsa, Corporate Executives, Economic Data, Economic Statistics, Extreme Views, Frank Holmes, Front Row Seats, Global Markets, Insightful Views, Mythical Characters, New York Times, Provincial Officials, Rothman, True Depth, U S Global Investors, Veracity, Western Economists
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Viewing Global Markets – What Happened in 2012?
Monday, June 4th, 2012
by Andrew Horowitz, The Disciplined Investor
Looking at the table below, it seems that the year has been one big waste of effort for most equity markets. Closing in on the lows in the EuroZone and just above the weekly lows in the U.S. markets.
But, Asia has been remarkably strong. In fact, China (up until very recently) has not wanted to budge from its high perch. Even with much of the bad news that is being thrown at it, Chinese stocks have been relatively resilient.
If you were thinking that they were just too cheap after the shellacking they took last year – consider the the continuing downtrend for Spanish and Indian shares.
Information on the table below looks at year-to-date trends for 2012 through June 1st.
The continuing prompts, promises and pledges from the Chinese government on additional stimulus measure has clearly been well engrained (brainwashing anyone?) into the investor’s psyche. So, either the economy is going to get better without stimulus, or additional provisions will need to come in a rapid manner as markets have a short memory.
Which is it?
Copyright © The Disciplined Investor
Tags: Bad News, Brainwashing, Chinese Government, Chinese Stocks, Eurozone, Global Markets, Horowitz, India, Indian Shares, Investor, Lows, Nbsp, Pledges, Promises, Provisions, Psyche, Rapid Manner, Shellacking, Short Memory, Stimulus, Waste Of Effort
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Bernie Horn and John Dorfman: Finding Value Globally and in the U.S.
Tuesday, May 15th, 2012
Two value investors with exceptional long-term track records discuss the unusual opportunities they are finding in the global markets. Bernard Horn, finalist for Morningstar’s International Stock Fund Manager of the Year award, explains the international strategy he is following in his Polaris Global Value Fund and Thunderstorm Capital’s John Dorfman tackles bargains available in the U.S.
Tags: Bargains, Bernie Horn, Global Markets, Global Value, International Stock, International Strategy, John Dorfman, Morningstar, Polaris, Stock Fund, Thunderstorm, Value Investors
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Late Bull Stampede Turns Bears Into April Fools (Coté)
Monday, May 7th, 2012
by Douglas Coté, Chief Investment Strategist, ING Investment Management
The bears grew hopeful early in the month, as global markets were spooked by goings-on in the euro zone: Spain briefly brought back fears of bailout Armageddon, the Dutch government collapsed, and PMI numbers for the region came in weaker than expected. April Fools! The bull market remains intact and offers compelling value for those looking to build wealth.
At its April trough, the S&P 500 was down 3.5% for the month. However, the bull awoke mid-April, prodded by relentless corporate strength that continues to confound Wall Street. Blockbuster corporate profits were led by financials, followed by industrials and put over the top by technology. With a meager 0.89% consensus expectation for first quarter earnings growth, Wall Street got it wrong; in fact, considering that first quarter earnings growth, at press time, stands at an explosive 8.8%, “got it wrong” is a serious understatement. The S&P 500 surged into the end of the month, making up nearly all its lost ground.
This performance is no joke for those who are missing out on an extraordinary bull market that has just entered its fourth year. It is not too late for savers to turn into investors, but this market’s persistent and determined march forward will not wait for the hesitant. Investors must resist the all-ornothing approach to risk; a moderate risk posture has been handsomely rewarded over the past three years despite pockets of extreme volatility.
The questions for investors to ask are how and when to invest. We get into the “how” below. The answer to “when” is more straightforward — immediately! Don’t delay, because every day is a good day to invest during a bull market.
ING Global Perspectives Monthly Commentary May 2012
Tags: April Fools, Armageddon, Bailout, Blockbuster, Chief Investment Strategist, Corporate Profits, Corporate Strength, Dutch Government, Earnings Growth, Euro Zone, Extreme Volatility, Fourth Year, Global Markets, Global Perspectives, Industrials, Ing Investment Management, Moderate Risk, Press Time, Quarter Earnings, Stampede
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Investor Sentiment Remains Elevated
Monday, March 26th, 2012
Central bankers have done their part flooding the world with liquidity, and investors have caught on as well by taking asset prices higher. Central bankers have their backs, but there is no reason to think that some new virtuous cycle has been created. By lifting global markets, central bankers have averted a recession and cushioned any future fall in asset prices. So what if the SP500 drops 10%? That would take the SP500 down to its 200 day moving average. What a buying opportunity that would be for the always bullish crowd. So while it may not be a virtuous cycle, we can say, “mission accomplished”. I don’t think the “all clear” is ever warranted and just when investors get comfortable with one thing, the market has a way of changing its tune. Predicting when this will happen is difficult, but it is more likely to happen in the current market environment when bullish extremes in investor sentiment persist. If you are a buyer now, you may not make any money, but that is the risk you take when buying high with the expectation to sell higher. So while central bankers can claim mission accomplished, for the average investor it is going to boil down to market timing.
The “Dumb Money” indicator (see figure 1) looks for extremes in the data from 4 different groups of investors who historically have been wrong on the market: 1) Investors Intelligence; 2) MarketVane; 3) American Association of Individual Investors; and 4) the put call ratio. This indicator shows extreme bullishness. As stated last week: “If we look at the “dumb money” indicator in figure 1, we know that as long as the indicator stays above the upper band (see green arrow on chart), prices should continue to go higher – albeit in a grinding fashion at this stage of the rally. This is the syndrome I call “it takes bulls to make a bull market”. If the indicator closes below the upper band, then the best time to sell is usually one week after this occurrence. In this instance, the market is rolling over and those late to the party are buying that dip. The data shows that this is the optimal time to sell. But these are optimal scenarios, and I should caution that optimal and stock market are rarely spoken of in the same sentence. The market is just too unpredictable. Who saw the May, 2010 “flash crash” or the 20% drop over 3 weeks in 2011 coming? If you hang around too long, you could be one of those casualties. Alas, there are no right answers or guarantees. These are just signposts that help us better understand the price action. ”
Figure 1. “Dumb Money”/ weekly
Figure 2 is a weekly chart of the SP500 with the InsiderScore “entire market” value in the lower panel. From the InsiderScore weekly report: “Insider selling levels continued at elevated levels, however, volume began to diminish as some companies began closing trading windows ahead of the quiet period straddling the end of one quarter and the beginning of another.”
Figure 2. InsiderScore “Entire Market” value/ weekly
Figure 3 is a weekly chart of the SP500. The indicator in the lower panel measures all the assets in the Rydex bullish oriented equity funds divided by the sum of assets in the bullish oriented equity funds plus the assets in the bearish oriented equity funds. When the indicator is green, the value is low and there is fear in the market; this is where market bottoms are forged. When the indicator is red, there is complacency in the market. There are too many bulls and this is when market advances stall. Currently, the value of the indicator is 68.16%. This is the second week in a row that the indicator has turned down week over week. Values less than 50% are associated with market bottoms. Values greater than 58% are associated with market tops. It should be noted that the market topped out in 2011 with this indicator between 70% and 71%.
Figure 3. Rydex Total Bull v. Total Bear/ weekly
Copyright © The Technical Take
Tags: American Association Of Individual Investors, Asset Prices, Best Time, Current Market, Dumb Money, Extremes, Figure 1, Global Markets, Green Arrow, Investor Sentiment, liquidity, Market 1, Market Environment, Market Timing, Marketvane, Moving Average, Put Call Ratio, Recession, S&P500, Virtuous Cycle
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Historical Trends Favoring Commodities, Stocks
Sunday, March 4th, 2012
Historical Trends Favoring Commodities, Stocks
By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors
In January, we felt winds had shifted among global markets, anticipating that easing actions taken by many central banks around the world might provide welcome relief to investors. Two months later, we are seeing the positive results from their actions.
For the third month in a row, a leading indicator for global manufacturing activity, the JP Morgan Global Manufacturing Purchasing Managers’ Index (PMI), remained above its three-month moving average as of February 29.
Going back to the 1998 inception of JP Morgan’s index through the end of 2011, there have been only 20 occurrences of “cross-above.” When this happened, there was a strong probability that copper, oil, and materials and energy stocks would head higher the following three months. Take a look at the historical data which charts the probability of a positive return, as well as the three-month median return after the “cross-above” happened:
So far in 2012, the historical pattern has been holding up. Over January and February, copper increased 13 percent; the S&P 500 Energy Index added 7 percent and the S&P 500 Materials Index went up 10 percent. WTI crude oil, while rising a significant 8 percent in the last two months, has not quite hit its historical median return. Read further to see why we believe oil should continue to increase.
As the global easing cycle continues, the trend of higher prices for these commodities and energy and materials should continue. “Global central banks are in full-on expansion mode,” says BCA. Early last year, many countries around the world were much more concerned about stemming inflation. This time around, ISI Group says that 99 stimulative policy initiatives have been announced from countries around the world since late August. Most recently, central banks from China, Hungary, Ireland, Japan and Sweden, announced initiatives such as boosting lending, easing bank rules, plans to create jobs and cutting reserve rates. This monetary easing should provide a boost to equities, especially commodity-related stocks and natural resources funds, such as the Global Resources Fund (PSPFX).
This is only one trend advisors can use with clients to counteract the hangover of apathy many investors are feeling. I recently talked about other positive trends that we are seeing, such as the fact that nearly 70 percent of the S&P 500 companies are paying dividends at an annualized rate greater than the yield on a 5-year Treasury. Considering that the latest CPI number for the U.S. is 2.9 percent year-over-year and the 5-Year Treasury is less than one percent, fixed-income investors are most likely earning a negative real interest rate on their money. Dividend payers appear to be attractive in today’s low-yield environment.
Tags: Central Banks, Chief Investment Officer, Countries Around The World, Energy Index, energy stocks, Expansion Mode, Frank Holmes, Global Markets, Isi Group, Jp Morgan, Last Two Months, Leading Indicator, Moving Average, Occurrences, Pmi, Policy Initiatives, Purchasing Managers Index, U S Global Investors, Welcome Relief, Wti Crude Oil
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