Tuesday, December 10, 2013

The bigGER picture

by Marketanthropology

To round things out a bit, we decided to take a Felix Baumgartner peak at the long-term equity market cycle. Secular lows were determined and normalized by performance (SPX) and the momentum lows as expressed by the cycles respective RSI and stochastic oscillators. Because this was such a long-term study, we utilized a quarterly scale for this big-ger picture view. 
Based on these criteria, the secular lows were determined as: Q2 1932, Q3 1974 and Q1 2009.

From a performance perspective, both of the long-term cycles (32'-73' and 74'-07') delivered similar returns (~ 2600% & ~2300%) - granted the former was approximately eight years longer. From a qualitative perspective, one could argue the 32'-73' secular bull actually delivered much smoother and superior returns, compared to the latter cycle that included the collateral damages of the Tech-Bubble bursting.

Click to enlarge images

Should the current market follow in the performance cadence of the 1980 breakout, the market is likely close to making an interim high - before retesting the previous resistance levels from earlier in the year.

To reconcile this perspective with long-term support which currently sits ~ 1600, a consolidating range for 2014 above the Meridian would present participants with a frustrating environment for both bulls and bears alike. Food for thought. 

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Nelson Mandela

by Vitaliy Katsenelson

Nelson Mandela’s passing last week made me want to share some thoughts about him. I visited South Africa twice over the last five years. I fell in love with that country, especially with Cape Town, which looks very similar to Santa Barbara – ocean, vineyards, and mountains (here are pictures from this trip). I wrote about it after my first visit in 2009. One of the highlights of the trip was a tremendous appreciation for Nelson Mandela as a person and as a leader. Here is an excerpt from that article on South Africa and Nelson Mandela:

Until the early 1990s, South Africa was governed under apartheid. Instituted in 1948, apartheid was a version of modern-day slavery. Though individual black people were not per se owned by white folks, white people as a class dominated non-whites. People’s treatment and their rights were based solely on race. They were divided into four categories. Whites, about less than 10% of the country, had all the rights and ran and owned the country. Blacks and colored, over 80% of the population, involuntarily segregated to live in ghettos, also called townships, had no right to vote, were kept for the most part uneducated or were provided only vocational education, and were treated as subhumans. Blacks were not free to roam around the country; they needed a special travel document that allowed them to travel between ghettos and their places of work. Colored (mainly Indians) accounted for the remaining 10% of the population.

Even more disturbing was that people’s rights varied based on skin color – the more white blood you had in you the more rights you had. Black people had no rights at all, while coloreds and Indians had slightly more rights. The definition of “colored” in South Africa is someone of mixed race, between white and black. There was even a special commission in South Africa that determined a person’s official color (race). Every year, thousands of people would change their color in their official documents through that commission. None went from black to white or white to black: most of the changes were (“upgrades”) from black to colored or colored to white.

In the early 1990s the country was ready to explode; modern-day slaves were fed up with apartheid. They started demonstrations which spilled into violent confrontations with the government. They demanded equal rights and the release of their leader, Nelson Mandela, who had been in prison since the 1960s. The government resisted at first and blood was spilled, but out of fear of a nationwide uprising Nelson Mandela was released. Negotiations between him and F. W. de Klerk, South Africa’s newly elected president, began as a result. Apartheid was dismantled, equal rights for all races were established, and black people voted for the first time in the 1994 elections. Nelson Mandela was elected president.

Then amazing transformations began in South Africa.

Nelson Mandela’s actions after he became president are fascinating to me. This is a person wrongly imprisoned for 27 years by white people, who now had effective control of the country, as his party controlled over 65% of the votes. He did not seek revenge. He did the unthinkable – he united the country. It would have been easy for him to go after his oppressors and try to socialize wealth. After all, a small minority of the population controlled all the wealth of the country. What is easier than taking wealth from the rich oppressors who had gotten rich on the backs of slaves, and distributing this wealth to the poor? Though it would have been the easier decision, it would have been the worst decision for the country and for all races. This type of thinking sent Zimbabwe (South Africa’s northern neighbor) back to the proverbial Stone Age. White people would have fled the country, and the new owners of businesses and land would not have known what to do with it, lacking the skills and experience to manage it.

Right after my trip I read Nelson Mandela’s unabridged autobiography, Long Walk to Freedom (there is an abridged version, too, if you like). Nelson Mandela belongs to a whole different category of world leaders. Pick a leader you respect – Churchill, JFK, Reagan. He is a mile above them. What he did in South Africa required incredible self-sacrifice, much higher than ever asked from any other leader. He had an enormous capacity to forgive and put the interests of the country and all its people (especially the ones that had been oppressed for so long) ahead of his own; and that is truly amazing.

Here are few excerpts from his book that I highlighted on my Kindle when I read it:

“I learned that courage was not the absence of fear, but the triumph over it. I felt fear myself more times than I can remember, but I hid it behind a mask of boldness. The brave man is not he who does not feel afraid, but he who conquers that fear.”

“I learned that to humiliate another person is to make him suffer an unnecessarily cruel fate. Even as a boy, I defeated my opponents without dishonoring them.”

“In every meeting with an adversary, one must make sure one has conveyed precisely the impression one intends to.”

“Some in the ANC [African National Congress] were disappointed that we did not cross the two-thirds threshold, but I was not one of them. In fact I was relieved; had we won two-thirds of the vote and been able to write a constitution unfettered by input from others, people would argue that we had created an ANC constitution, not a South African constitution. I wanted a true government of national unity.”

This last quote highlights the spirit of Nelson Mandela and makes you feel a little bit sad about the atavistic behavior of our current crop of politicians in the US. Today, in the US, if a party gained control of both houses, its members would be dancing in the aisles – after all, they would have a blank check to do anything they wanted, and the opinions of the minority would not matter one fig).

Also, Nelson Mandela did not let power corrupt him: he stepped down after one term as president. That’s something very few our career politicians have ever done. (I don’t remember a single example of it.) A leader like Mandela is a black swan –very rare and unexpected. I keep thinking what if Russia had been blessed by its own Nelson Mandelas rather than by Stalin in the 1920s and Putin in the 2000s, life there would have been so different. The world needs more Nelson Mandelas.

P.S. After I wrote the original article about my South African trip, I received a lot of angry emails, mainly from South African whites. They shared their stories about how the crime rate has skyrocketed since the end of apartheid and how affirmative action is hurting the country. I can sympathize with their point of view, especially the horror stories of escalating crime. And I have only this comment: – if not for Nelson Mandela it could have been a lot worse. The transition from slavery to democracy is painful – especially for the protected minority that has benefited for decades or centuries from that slavery. Uneducated people have few skills to offer (and remember that under apartheid blacks were prevented from getting education), and hunger and poverty usually leads to the flourishing of crime.

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A Longer Perspective In……. Copper

by Greg Harmon

This morning begins a year end series taking a longer perspective in many market indexes, macro related commodities, currency and bonds. Over the next three weeks these reviews are intended to help create a high level road map for the the next twelve months and beyond. We begin with Copper.

Copper ($JJC, $HG_F) is the metal that the analysts say has a PhD in economics. This is because its strength or weakness is supposed to foretell the future direction of the economy. But it only takes a quick look at the monthly chart of the Copper with the S&P 500 in the background to see that for a full 35 years from 1970 until 2005 Copper was in a tight range while the S&P 500 went like gangbusters from 1995 on. The only period where Copper seems to have any correlation to the equity market is from 2004 through to 2011. It has not been correlated since then. PhD? I do not think so.

copper vs spx

So stripped of its PhD, we can look at it purely for its price activity. Doing so reveals that the range for 35 years was a tight $1 range between 50 cents and $1.50. The run up for the most part brought the price to a new higher range. The Financial crisis did rip it back lower as all assets became correlated and after a brief overshoot to the upside, it seems to be setting into the new range between $3.00 and $3.80 on this large time scale. Back to boring.

copper m

The wide 80 cent range means that there may be the opportunity for range trading. And when you zoom in on the weekly chart the the last 2 years are setting up for a potential move. The descending triangle shown is approaching the apex as it tightens toward the bottom support. The target on a break below the support at $3.00 would be back to the top of that previous 35 year box at $1.50. If this were to happen then there would likely be talk of deflationary pressures and you should also look at Gold and US Treasuries. But technicality as it moves well beyond the 2/3 point of the triangle it is thought to lose some potential power to move. It could even morph into a tighter consolidation channel. It is just beyond that point right now. A break to the upside over the descending resistance would still find a lot of previous price history to work through until it could get above $4.00. So the longer perspective on the monthly chart does not seem in jeopardy unless it were to move below $3.00.

copper w

Then turning our attention to the daily chart to look for a catalyst for a move it gets a little more interesting. The recent Bat harmonic took its time to play out and turn back lower after a couple of reversal candles but finally retraced 61.8% of the pattern in November. Rather than looking like it might give a catalyst for a break below $3..00 it looks to be getting stronger. This also reinforces the monthly chart view that looks like a boring consolidation in a higher and tightening range. As a result the foreseeable future looks to be set up to move sideways between 3.00 and 3.80 or so.

copper d

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Soybeans pull corn higher, while wheat moves on winter weather

By Allendale Inc

Corn: Nearly all the influence seen in corn Monday was due to other markets. Trading volume was low, allowing for a bullish bean day to offer some support to this market, which is not expecting much out of Tuesday's report. To review trade expectations once again, analysts are looking for the corn carryout to drop from 1.887 billion bushels in November down to 1.871. By itself, this small drop in carryout would be considered negligible, which means that future support for the corn will have to continue coming from the bean market if this estimate is accurate. Most will expect to see some sales on the morning’s 8 a.m. announcement as it is common for exports to be made the night before a report. It might actually be considered disappointing if sales are not seen ahead of the report.

In the end, corn finished right on its highs from a combination of following beans and also possibly following a seasonal pattern that suggests corn should move higher from Monday to January. Funds were estimated to only be short 110,000 contracts Monday morning, which suggests they had covered more short positions last week than trade expected. If corn is going to follow that seasonal trade, it will likely have to come from fund short covering more than pure fundamentals right now….Ryan Ettner

Soybeans: The bean market punched to new highs for the move Monday as bears short covered their positions before the USDA report. Decent export inspections and the confirmation of bean purchases by China added to the day’s positive tone.

The weekly export inspections report showed that 60,430 (1,000 bushels) of beans were shipped out last week. We have now shipped out 703,365 (1,000 bushels) of beans year to date. The USDA confirmed that China had bought 290,000 tonnes of old crop beans and 60,000 tonnes of new crop beans.

Tuesday the USDA will release its updated WASDE report. With the phenomenal export pace and crush we have been seeing, the trade is anticipating some demand revision. The trade is looking for bean ending stocks to come in at 153 million bushels with the trade range being 170 to 118 million bushels, In November the USDA projected the bean ending stocks to be 170 million bushels. World ending stocks are forecast to jump to 71.4 mmt up from last month’s 70.23 mmt estimated.

Weather in South American continues to get a bearish spin with most in trade looking for the Brazil crop to be between 90 and 92 mmt and for the Argentina crop to come in between 55 to 57 mmt. With the weather looking so good in S.A. we are hesitant to chase the market over the $13.00 level and think eventually beans will work back down to the $12.50 level.  With the run up we have seen into Tuesday's report, the market is set up for a buy the rumor sell the fact reaction if the report is not quite “bullish” enough…Jim McCormick

Wheat:  Wheat finished the day mixed today heading into the USDA WASDE report. Reports of winter kill due to cold temps and a lack of snow cover have caused some concern over the crop conditions. Some meteorologists are suggesting that as much as 5% to 15% of the wheat crop could have been damaged.

Snow of some amount covers most major growing areas after this weekend’s system we see snow in the Dakota’s, Nebraska, most of Kansas and Oklahoma and parts of northern Texas.

The WASDE report is expected to see large wheat stocks even after some production issues this past year in South America. Today’s settlement was the lowest we saw for the March contract and this could reestablish the downward pressure with a bearish report tomorrow and additional technical selling…Cordon Sroka

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Why What’s Happening in the Bond Market Now Is So Important to Stock Investors

By George Leong

Taper or no taper? When? How much? These are the worries that are currently driving tensions in the stock market on a daily basis. As I wrote in a previous article, no one seems to care that corporate revenue growth is muted and consumers aren’t spending.

Last week, we saw jobs market data that helps support the Federal Reserve’s reasons to begin tapering its bond buying program.

The non-farm payrolls reported the generation of 203,000 new jobs—better than the consensus estimate of 180,000 for the month of November. This represented the second straight month that more than 200,000 jobs were created, and while the jobs market has a long way to go, this is positive news. Jobs numbers were revised upwards in September and October.

Now it may be true that the quality of jobs created could be improved upon, as much of the increase in the jobs market continues to be driven by the service sector and other lower-skilled jobs. However, the results do suggest some action may be taken by the Federal Reserve.

The unemployment rate fell to a five-year low of seven percent, much better than the consensus 7.2% and October’s 7.3%. The rate appears positive on the surface.

The Federal Reserve had said it wants to see the unemployment rate fall to around 6.5% before it considers raising interest rates, but with a seven percent rate, you have to wonder if the Federal Reserve is thinking hard about when to rein in its monthly bond buying and reduce the stock market’s dependency on cheap money.

Yet I don’t think the Federal Reserve will begin tapering until the New Year. No matter if it’s under Ben Bernanke or Janet Yellen, the Federal Reserve likely wants to see more jobs growth before deciding on any actions toward tapering. Should the unemployment rate hold or fall below seven percent in December and January, I would think the Federal Reserve would take that as a signal to begin tapering.

The consensus feeling is that the Federal Reserve will hold off on any tapering until some time in the New Year, maybe some time in March or June. The central bank wants to make sure the economic renewal is on solid ground prior to tapering.

The strong third-quarter gross domestic product (GDP) growth of 3.6% reported last week will help to support tapering if it continues at this pace. The reading was well above the estimate of three percent.

Overall, the stock market will likely continue to focus on when the Federal Reserve will begin tapering for the next months, and this will make for some nervous trading.

The yield on the 10-year Treasury bond has edged higher to 2.84%, which could trigger some minor selling in stocks. Investors should be mindful of this.

The chart of the 10-year U.S. Treasury below recently showed the decline in the S&P 500 when yields rose, as indicated in the chart below (the first two blue ovals starting from the left). We are now seeing bond yields rise, but stocks appear to be holding on (as shown by the third blue oval on the far right of the chart).

10-Year US Treasure Yield

Chart courtesy of www.StockCharts.com

If bond yields continue to rise as we move into 2014, we will likely see the stock market decline. You should be aware of this correlation and monitor the direction of the jobs market and bond yields; this will help you decide when to begin to take some money off the table.

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Why a Serious Stock Market Correction is Overdue

By Mitchell Clark,

There is going to be considerable pressure on interest rates and the Federal Reserve very soon, and it’s very likely that we’re going to get some choppy trading action in stocks. The reason for this is, of course, positive economic news, which is increasing the likelihood of a decrease in monetary stimulus. As contradictory as it may seem, good economic news is actually bad news for stocks; that’s just the way the counterintuitive system of the stock market works—buy on rumor, sell on news. But what’s transpired recently goes more like buy on expectations, sell on hints of growth.

While economic recovery is inconsistent, regional, and industry-specific, there is considerable evidence from many corporations that business conditions are improving.

Conns, Inc. (CONN) is a Texas-based company selling appliances, electronics, furniture, and mattresses. The company’s share price has been soaring on genuine operational growth. On the day of its recent earnings report, the company’s shares jumped 15% to $67.00 a share. The stock was trading around $11.00 a share at the beginning of 2012.

According to the company, its fiscal third quarter of 2013 produced record financial results: quarterly revenues accelerated a whopping 51% to $311 million; its retail gross margin jumped 460 basis points to 40.1%; diluted earnings per share grew to $0.66, way up from earnings of $0.35 per diluted share last year; and company management said November retail sales jumped 49% comparatively, while same-store sales grew 32%.

The company said that its biggest comparative gain in sales was in appliances, with growth improving 96%, followed by home offices with sales growth of 77%, consumer electronics at 45% sales growth, and home appliances with 37% sales growth.

The company’s latest quarter beat the Street on earnings and revenues, and management raised its fiscal 2014 and 2015 guidance to well above previous consensus.

Clearly, there are some regional factors at play with the economic growth at Conns. The company’s comparative numbers are impressive and representative of what I consider to be pent-up demand from consumers who have kept a tight fist on their wallets since 2009. (See “Four Companies with Earnings Growth That Shines.”)

And the same can also be said for corporations, which have been unwilling to spend their cash hoards on new plant, equipment, and employees.

With any positive economic news, there is going to be further pressure on share prices and the Federal Reserve’s ability to maintain artificially low interest rates. This is going to make for some serious stock market volatility.

But realistically, there is no trend yet. Massive monetary stimulus and artificially low interest rates haven’t given rise to a new business cycle; rather, they’ve resulted in a reflation of the value of equity securities.

My view remains the same. Blue chips are a hold going into 2014, and I would not be chasing any positions. A serious stock market correction is overdue, and when it finally hits, it will likely be an excellent buying opportunity.

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