Weekend Ramblings

So far, the most anticipated correction of all time has been not surprisingly, pretty lame. Despite all the major worries of Spain, slowing economic data, high gas prices, ect, it was only good for a 4% drop from the YTD high and the market has recovered about 2/3 of that drop. During this decline I noticed a run for the exits via AAII, NAAIM, and mutual fund flow data. Also, bonds rallied sharply as the 10 year is now back to sub 2%. Remember when I said that the 2 best timing indicators of late has been bond yields and mutual fund flows? During the past 3 years you would only see a meaningful correction in the market (ones greater than 5%) when bond yields had been rising significantly for several weeks and mutual fund flows were at least somewhat positive during that time as well. Conversely, important bottoms have been made when the opposite was true. Prior to this "correction", both bond yields and fund flows (by some accounts) were in positive trends for a few weeks but it was a rather minor reversal of the trends that had been in place with bonds and fund flows since last summer. So, because the reversal was so minor,  I'm not surprised to see the market only fall as modestly as it has.

My best guess is that we will see May turn out to be a positive month and then we'll stall again in June as the market further consolidates this big move since November.  I'm not a major fan of seasonality but one thing I've noticed in the past several years is that June has been a perennially shitty month in both bull and bear markets while December has been a perennially good one. Based on what I see in the historical charts with my naked eye, every June since 2000 has been negative!

This "correction" has already worked off a lot of the overbought condition in the market from a trader sentiment standpoint. I say "trader sentiment" because such things like AAII sentiment surveys are only relevant to the ST/IT.   The true, underlying LT structural sentiment has been one of ingrained pessimism since late 2008. Go ask your neighbor or uncle what he thinks about the economy or the stock market. Go to globefund.com and see the list of the most popular fund quotes. Go to your local book store and see the titles that dominate the business/finance section. You will get the same message - doom and gloom. But knowing that the dumb money herd is still bearish is not going to help you time the IT moves in the market. The herd was still negative prior the flash crash and last summer's meltdown for example. Just keep in the back of your mind that no matter how bad or scary things may seem in the market, the dumb money herd was never anything close to feeling positive about the economy and so somehow, someway the market will be able to recover from whatever funk it may find itself in and eventually make new highs shorty after. This certainty requires a leap of faith and I'll be the first to admit that it can be difficult to do so when the shit hits the fan like it did last summer.

Switching gears now to talk about  the energy markets. There's some interesting developments happening specifically in nat gas. It's amazing what can happen in a span of a few years. In 2008, the nat gas price hit $14/mcf and just last week it broke below $2 hitting $1.87 before popping a bit back to $2.20. At the most recent low, the nat gas price traded 40% below it's 200DMA. This 40% deviation from the 200 DMA is important because this is the type of extreme you tend to see near the end of a major panic or mania. With the equity markets, it happened at the November 2008 bottom and then again at the March 2009 final bear market bottom. The first time nat gas hit the 40% threshold was in Janurary at about the $2.25 level and now it happened again at the $1.87 level.  If the price breaks above $2.50, I think there's a good chance that the final bottom has been made. Conditions are certainly in place for a long term bottom to be in. First there's sentiment. Take a look at the following chart.

Sentiment towards nat gas is the complete opposite of where it was at the major top in 2008. It's pretty much as depressed as it can be. Not only that, but bullish sentiment has been below 25% since the start of the year. While that certainty has been justified given the price action, such chronic, low sentiment is what you see in the final blow-off phase of a bear market just like the chronic bullish sentiment you tend to see in the blow off phase of a bull market.

Next there's rig counts for nat gas. The current number of rigs in the US drilling for gas has dropped to 613 - a 10 year low. That's about a 35% drop from October levels. This 600ish level of rigs is also consistent with what you see at major bottoms in the nat gas price if you look at history.

We all know that warm weather and oversupply from shale drilling were the culprits of the recent crash in the nat gas price, but the oversupply problem is being addressed via production shut-ins announced by the majors and the rapid decline in the rig count which is now at historical lows. Weather conditions, although important, will have short to intermediate term impacts on the price. It's the structural demad issues you need to focus on and we are seeing new sources of demand emerge. We are seeing increases in the use of nat gas from utility companies switching from coal, conversion to deisel and demand from natural gas powered vehicles. These sources of demand have not yet been significant enough to overcome the oversupply imbalance, however, it seems as if it's just a matter of time before they will if nat gas prices stay at these levels while new supply is being curtailed. Then there's the big kahuna - LNG. This has the potential to be a massive force on the demand side, one that was never there before.

I've been noticing a lot of buzz lately about the LNG sector ever since Cheneire Energy in the US has received approval to build a LNG terminal. There's also a LNG buzz up here in Canada as well. It's pretty clear to see why there's so much excitement.  Here in North America the price of nat gas is hovering at $2/mcf whereas in Europe and Asia the price of nat gas ranges from $11-$17/mcf ! So, it's quite lucrative for North American producers to convert the nat gas to LNG and export overseas. The move towards LNG exporting is starting and when this achieves critical mass...look out above!  Here's the issue though....it takes time (at least 2 years) and a ton of  money before any proposed LNG terminal can be built and so LNG demand won't be a significant factor in the nat gas price just yet but when it does, it has the potential to make for a massive impact.  In the meantime, it's best to focus on the supply and demand factors that are relevant right now.

The bottom line here is that it's time to take a serious look at the nat gas sector. It's tough to tell exactly when all of the bullish forces that I mentioned will start making an impact on the price but it seems to me that it's just a matter of when, not if, a major nat gas bull market will begin. It will be interesting to see the market's reaction to the Q1 earnings reports of the pure players like ECA and UPL which are going to fully reflect the collapse in the nat gas price. There's lots of smaller players in Canada as well which have been hammered. What I want to see is more base building behavior in these stocks and the market showing a willingness to ignore any poor earnings reports thus reflecting the possibility that the bad news has already been priced in and better times lie ahead. A lot of contrarian investors have been hurt badly trying to catch the bottom of this sector and I don't wish to be one of them, but given what I see out there, it's time to be on high alert of a major bottom in the sector. Big money is made riding big trends and it seems to me that with nat gas we could be near the beginning of such a trend....and it may have already started.

This post is going to be philosophical. A couple weeks ago I attended a funeral of a girl who passed away due to cancer. She was only 35, one year older than me. It made me really realize something important about fear and worry....there's really nothing to worry/fear compared to the prospect of facing your own death.

One time when I was a kid, I crank called someone leaving really nasty messages on their answering machine. One day when I called again, someone answered the phone and said "if you're that kid who's been calling here you're in big trouble!". I hung up immediately and I must have turned white as a ghost. For the next couple days every time our phone would ring I was shitting bricks thinking it was the police. When I look back I realize how trivial my fears were. The very worst that could have happened was that the police would have contacted my parents and gave me a warning not to do it again. I would have been grounded and probably given a few shots. No big deal but it certainty felt like a big deal at the time. I can remember precisely how I felt that day...how the fear gripped me the way it did. In hindsight, feeling that way was quite unwarranted even if the worst thing would have happened. I think for the most part, when we look back we realize that we got worried and all worked up a lot more than we should have about things that we feared....at the least I can speak for myself

Imagine, God forbid, you're diagnosed with terminal cancer like Antonella was in her mid 30's and told you had less than a year to live. You want to talk about fear? You want to talk about something to worry about? Now that's something to worry about. Everything else is pretty much trivial compared to that. Now, imagine a few months later you're told that by some miracle your cancer had completely vanished. How do you think you would approach life then? What would make you afraid? Nothing. We we should all approach life as if this happened to us. Although we're not doomed to die in a few months we're still doomed to die so what's there really to worry about compared to that? What's more serious than that? Whatever you're afraid or worried about is trivial. Go for it. So what if you fail? So what. You're still alive to see another day and at least when you grow older you won't be in agony wondering what could have been.

Steve Jobs' Stanford Address in 2005 motivated me some and Antonella's unfortunate death motivated me even more. They made me realize that I've been taking my life for granted.  I'm not living up to my full potential. I need to be bolder and not afraid to fail. I need to work harder, I need to spend my time more wisely. I need to live life with much more urgency because my time on this planet is extremely short.

Stop being afraid, stop waisting time, stop complaining and do what you need to do to live up to your full potential and start doing it now...as in right NOW. I'd bet everything that, like I, you're not doing nearly enough.

Remembering that I'll be dead soon is the most important tool I've ever encountered to help me make the big choices in life. Because almost everything — all external expectations, all pride, all fear of embarrassment or failure - these things just fall away in the face of death, leaving only what is truly important. Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You are already naked. There is no reason not to follow your heart.  


-Steve Jobs 2005

Weekend Ramblings

Seems I'm in the writing mood these days. Friday's non-farm payroll number came in well below expectations at 120K causing SPX futures to tank 12 points. Cramer's calling this a "horrendous number". Talk about a manic depressive. Take a look at this chart for a moment

So, how really "horrendous" is jobs number when you look at this chart? What I see is a positive trend in jobs being added for well over a year now and this so called "miss" is simply a little blip which appears nothing out of the ordinary given how volatile these numbers can be be month to month. Here in Canada we had a jobs number that came in miles above expectations after showing sluggishness for a few months.  Getting euphoric or depressed over each data point is foolish. You need to focus on the bigger trend.

The US experienced a housing led recession in 1990 and a significantly bigger one in 2008 and so I think it's a good idea to compare the job numbers in the recoveries that followed each of them. A common complaint among bears in 2009 and 2010 was that this was a "jobless recovery". The exact same thing happened in the early 90's as well and the exact same "jobless recovery" complaint was made. It wasn't until 1993, about 2.5 years after the recession of 1990 had ended, that job gains were showing a clear positive trend but the gains were moderate. Then finally, in 94-95 jobs gains accelerated to around the 300K/month rate...that's quite a long time after the recession of 1990 had ended for job gains to have "normalized".

Now, like then, we are seeing the same thing unfold so far. It look a couple years to see jobs come back after the recession officially ended in 2009 but the gains so far have been moderate. If it took about 4 years for job gains to normalize after the 1990 housing led recession, it will probably take just as long or longer for that to happen this time given that the housing bust was more severe, but the key point here is that it can and probably will happen given the trend that's been in place. It's also important as I said before, to focus on the trend and not freak out like Cramer about month to month noise.

Here's an interesting Time article I found last year which I shared...I think I'll share it once more

The outward sign of the change is an economy that stubbornly refuses to recover from the recession. In a normal rebound, Americans would be witnessing a flurry of hiring, new investment and lending, and buoyant growth. But the U.S. economy remains almost comatose a full year and a half after the recession officially ended. Unemployment is still high; real wages are declining. At a TIME economic forum last week, forecasters predicted that U.S. growth would amount to only 1.8% this year and 2.6% for next, about half the speed of a normal recovery. The current slump already ranks as the longest period of sustained weakness since the Great Depression.

That was the last time the economy staggered under as many "structural" burdens, as opposed to the familiar "cyclical" problems that create temporary recessions once or twice a decade. The structural faults represent once-in-a-lifetime dislocations that will take years to work out.

A lot of this stuff sounds familiar to you I'm sure. Oh by the way, I forgot to mention that the article was written in September....of 1992.

As far as the potential for the correction to have legs goes with this "bad" jobs number, it certainly serves as a good excuse. As I said in earlier posts, I'm not going to get overly fixated with corrections unless I believe they are going to be severe like the ones we saw in the summers of 2010 and 2011 which I don't given what I see. We've made a huge run and the market wasn't going to maintain that sort of pace forever otherwise we'd be on track for about a 50% gain on the year which is near impossible. I'm already seeing plenty of calls for 5-10% drops by even those who are bulls like Biggs. I suspect it will be less and perhaps we will see a period of consolidation for the next few weeks/months.

Correction or errection?

So, are we finally going to get the correction that everyone including my grandmother has been holding their breath turning blue for, or are the bears going to get the football yanked away yet again a la Charlie Brown? The obsession about when this market is going to correct reminds me very much of the summer of 2009. Eventually we did get a significant correction of about 8% but that was only after the market had gone up 40% from the March 2009 bottom,  far exceeding the levels when the calls for a correction first started. I'd say it's been since around mid January whereby many people were expecting a correction and here we are comfortably higher from that point. If you look back the past few years to see when major corrections occurred you saw a 2 things happen just prior to them:

1) gov't bond yields had risen significantly for several weeks
2) retail investors had been getting back in the market again (but by no means were they ever exuberant given all the money they pulled out in 2008)

Anything less and we only would see minor dips.

So far we have seen govt bond yields rise for a few weeks but yields have just started to turn up from very low levels. The 10 year is still sub 2.5% which is still quite stimulative for the economy and is non-competitive with equities.

Retail has either not come back or only is just gingerly coming back.  ICI reports that equity fund inflows in the US have been negative YTD. Lipper US funds flows however shows that there has been a modest inflow into equity funds so far YTD. I'm not sure who's more accurate but according to either source, retail had shown far more exuberance early last year and in early 2010 when the market was building a top prior to the major summer corrections that occurred.

So, based upon what I see, if we do get a correction it should be fairly contained at this point. The fact that I too am correction watching like everyone else supports this notion. And don't forget there's tons of bear bag holders who haven't capitulated which further suggests downside should be limited. I still have 50% in cash that I have not deployed. This allows me to be a strong holder of my positions should a correction occur, even if there's one bigger than I expect. The positions I hold are all microcaps which give me quite a bit of leverage. I'll be willing to add more exposure if I get the sense that the dust has settled. If this is just yet another small dip and the markets resume upward to new highs next week that's fine by me too. However if that happens we're going to get closer to the point where a bigger correction actually occurs and then I'd be more inclined to actually hedge my positions rather than keep a cash reserve.

Despite everything I've been saying lately, anytime the market has just I little dip I can't help but feel scared and start sweating a bit and that to me is a long term bullish sign. Although you must have a certain degree of conviction when taking a position in the market, if you're not sweating a bit, it's not a good sign. The moment you think a trade is a "no brainer" watch out!

The main purpose of the stock market is....

If you aren't a believer of the motto of my blog by now then you'll never be. Who would have believed 3 years ago that the SPX would rally over 110% from it's low in March 2009 and not too far away from making an ALL TIME HIGH? I'll telll you who....absolutely nobody, not even the most bullish person you could find on the planet. So far this year Mr. Market has made even the bulls look foolish since they too have been calling for correction since Janurary.

I was going to discuss in detail about how utterly asinine it is for people to have either missed out or lost money during a 3 year, 110%+ bull market and how the Schiffs, the Prechters, the Hussmans and the rest of the popular gurus du jour have zero credibility for being the broken clock permabears that they are but why bother? Why should I give a shit about what other people are doing anyways? Let them burn. I should be focusing more on what I'm doing and the opportunities that are out there to make money. It's just that sometimes I feel the need to vent when I see pundits who have been nothing short of atrocious, refuse to acknowledge how wrong they have been. Instead, as the market makes new highs they just keep digging in their heels, wringing their fist saying "just you wait and see!". You know what? They are wrong no matter what the market does at this point. Anyone who misses or even worse, loses money during a multi-year bull market of 110% has ZERO credibility and if you're still following and worshiping the same people who have lead you astray it means you're delusional just they are and you probably lost money too. Snap out of it!  I'm not saying you should never be bearish again....just find another way....find a way to be bearish when being bearish is the correct thing to be. I think a lot of people out there need pearmabear detox.