Is this June 2010 or 2011? The reason I ask is because I'm noticing talk of double dip again in the financial media. Watching "Market call" on BNN one emailer asked the guest "does the market pullback suggest the beginning of a double dip?" And it's not just this emailer who's concerned, it's everywhere. For Christ sake people, the market has dipped about 6% after making a 100% gain in less than 3 years! It wasn't too long ago when people were moaning and groaning about how the market had "gone too far to fast" and now that we get a decent pullback everyone's worried about a double dip. Sure, the data is suggesting a slowdown but let's remember a couple things. A lot of those economic guages like the ISM hit 20-30 year highs earlier in the year and so there's really only one way to go and that's down....but that doesn't doesn't mean it will swing to full blown contraction. It could simply suggest going from 6th gear to 5th or 4th for a while. And how much of this soft patch is due to Japan?
Then there's all this chatter about Greece and the potential for a "Lehman event" which to me tells me it's something not to worry about. Nobody wants another Lehman event and despite all the bickering in the EU , they will eventually do what it takes to avoid a Lehman because memories and fears of 2008 are still fresh. Merkel specifically talked about avoiding a Lehman event.
Do you notice how quickly fear and misery returns to the market? The financial media it seems, is doing whatever it takes to keep you out of the market. They certainty did their part in scaring the shit out of people during the crash trotting out the permabears like Schiff day in and day out with their end of the world forecasts. And did the media help you get bullish during this bull market? Not a chance....they did the opposite. I don't think there's some sort of bear conspiracy in the media...they are just trying to feed off what what people are feeling and since most people are still dour they prefer to talk about all the negatives out there. In the past several months I read so many times in the National post about how Canadians are supposedly dangerously deep in debt and how housing prices are out of control.
Look, I'm just like you. Despite all I've said I too am worried about the things that are happening out there deep down. How can't you after witnessing the financial system suffer a massive heart attack 3 years ago. But that's my emotions talking. My analysis of conditions along with history suggests that this bull market ain't done. This corrective phase we are going through is going to do whatever it takes to shake out weak holders while making longer term bulls sweat bullets. Just like last year, I'm already seeing technical types get shaken out of longs because of such and such trend line or moving average being violated. Last summer I talked about how I read about some technical type guy saying that if the market dropped below some level (I think it was 1050) the bull market from March 2009 would be officially over which did end up happening.. And remember the "death cross" that happen right at the exact bottom of the correction in July last year? Expect to see these sort of things happen again to yet again cause the market to make fools out of the most amount of men as possible. How long could this consolidation phase that I've been calling for all year last? Quite some time...perhaps as long as October or November! Look back to 2004 to see an example as to what we could see play out.
As far as ST action goes. The bulls need a catalyst to get some traction here. Although the VIX has gotten some religion admittedly it's still low here at 22 which suggests there's still decent risk of final downside puke to 1250 or so. Aside from the VIX everything else is in position for some sort of a bottom here. I still haven't put my cash reserve back to work yet but I'm close to doing so and I'm making a list of potential buys. Very fortunately for me, my core longs have held up quite well overall during this correction. I realize however, that this could change very quickly and so I'm getting mentally prepared for this. Don't get too fixated on the ST. If you see some long opportunities and your holding period is longer than 30 minutes go for it with at least a partial position.
Monday, June 20, 2011
Friday, June 17, 2011
Sentiment in position for an IT bottom...but more patience likely needed for LT investors
Last time I discussed how indicators were suggesting pessimism was rapidly heading in the right direction needed to establish a bottom but some of them weren't quite at the levels seen at IT lows of the past. Well, that's changed now. The 10 DMA of the put/call ratio is at 1.14 and NAAIM is at 26% pretty much matching what we saw in late May last year after the flash crash.. The VIX is also starting to get some traction and made a mini-spike. So, it's likely were are going to see at least a relief rally very soon. There's still the chance of one more downside spike to say 1250ish but I don't think it would get worse than that.
So does this mean that it's onwards and upwards again if we do put in a bottom around here? Probably not. The situation right now is similar to late May of last year whereby the market made a bottom, rallied nicely but eventually saw that bottom retested and violated (although not by much) later on before the ultimate bottom was put in. This is also similar to what happened during the consolidation of 2004. The market had made 3 bottom attempts before the correction was over for good (check out the chart I posted in Janurary).
So, more patience is likely for LT investors but now is the time to do some picking if you indeed have the patience.
So does this mean that it's onwards and upwards again if we do put in a bottom around here? Probably not. The situation right now is similar to late May of last year whereby the market made a bottom, rallied nicely but eventually saw that bottom retested and violated (although not by much) later on before the ultimate bottom was put in. This is also similar to what happened during the consolidation of 2004. The market had made 3 bottom attempts before the correction was over for good (check out the chart I posted in Janurary).
So, more patience is likely for LT investors but now is the time to do some picking if you indeed have the patience.
Friday, June 10, 2011
Pessimism rapidly building
Ok, so my hunch that a ST move back up didn't pan out and we got a downside resolution instead which I said if happened would be quite limited and put us in a better position for a more sustainable advance. We all know what triggered this latest slide - softer than expected economic data. I won't get too much into that with this post. What I'm going to talk about is feelings....nothing more than feelings....ok that was lame. Well, despite the market being down 5 weeks in a row (and working on 6) since making a 3 year high, the SPX got as much as being about 6.5% off from this peak. When you consider how far the market has risen since September prior to making this peak, never mind since March 2009, such a decline is quite modest and normal in a still ongoing uptrend. But you wouldn't know that by reading the financial media and by what traders and investors are feeling. The gloom is palpable.
Let's say you woke up from a 4 year coma and the first thing you did was pull up a 2 year chart of the market. You would probably not think very much of this latest dip. Not knowing any of the news or not being influenced by any of the legions of permabears that now make up a large part of the herd, you would probably think that the market has been looking pretty damn good and this latest dip doesn't look serious at all. But of course, that's not what the tone is out there. It feels like hopeless despair similar to what you feel in bear markets.
Since the summer of 2009 I've been hypothesizing that this has got to be the most hatest bull market of all time and that the herd never came close to truly embracing it which was a solid indication that the bull market was in fact legitimate and would carry on. Oh sure, there were moments when ST trader types and the little guy showed bullishness but that was quickly extinguished and reversed to pessimism as soon as the market showed any modest weakness....just like now. Any bullishness we see from these guys is due to the "don't fight the tape" line of thinking. Deep down most of these jokers are still bears at heart and are quick to run for the hills when we get a dip. That's why when the tide goes out, you get to see who's truly bullish who is just swimming naked (a variation of what Buffet likes to say). The trading community is full of nudists let me tell you.
Let's take a look at some sentiment measures. AAII sentiment released Thursday shows 2:1 bears vs bulls a reading that is consistent with ST and IT bottoms. We saw the same reading just prior to the massive move that began last September. But we also saw such readings at temporary bottoms in May and June of last year which from a longer term perspective were still good buying opportunities but you had to grit it out for a few months as the market ended up chopping around eventually making modest lower lows before hitting a final bottom.
A new sentiment measure I follow is called The National Association of Active Investment Managers (NAAIM). I like this because it not widely followed and it measures what people are doing with money which counts more in comparison to indicators that measure what people are just "feeling" about the market. NAAIM measures the exposure active manages have they have in the market. It's currently at 43% which is near the levels seen at ST bottoms of the past. A reading in the 20's would be more ideal to mark a longer term bottom though, but it's certainly near the the low end of the range.
Next the 10 DMA moving average of the put/call ratio. It sits at 1.03 which is high enough to warrant a ST bottom. We did see this get as high at 1.16 during last summers correction though.
Then there's the VIX. This is probably the only indicator that strongly supports the bears. It has remained rather muted which has many puzzled including me. I won't try to rationalize this one like some people are trying to. In my view it's not bullish that it remains this low and signals that there could still be one last little downside puke to mark the bottom of this slide (like say a sharp move to 1250 from here) or that if we did get a good rebound now, sometime later on in the summer we will go back to the lows of this move.
So in summary, we could be at or close to a bottom but it's likely not going to be "the" bottom that ends this consolidation phase I've been expecting. Having said that though, this looks very much like a correction and not the start of something more ominous and I don't expect to see the market go down more than 5% from here.
Let's say you woke up from a 4 year coma and the first thing you did was pull up a 2 year chart of the market. You would probably not think very much of this latest dip. Not knowing any of the news or not being influenced by any of the legions of permabears that now make up a large part of the herd, you would probably think that the market has been looking pretty damn good and this latest dip doesn't look serious at all. But of course, that's not what the tone is out there. It feels like hopeless despair similar to what you feel in bear markets.
Since the summer of 2009 I've been hypothesizing that this has got to be the most hatest bull market of all time and that the herd never came close to truly embracing it which was a solid indication that the bull market was in fact legitimate and would carry on. Oh sure, there were moments when ST trader types and the little guy showed bullishness but that was quickly extinguished and reversed to pessimism as soon as the market showed any modest weakness....just like now. Any bullishness we see from these guys is due to the "don't fight the tape" line of thinking. Deep down most of these jokers are still bears at heart and are quick to run for the hills when we get a dip. That's why when the tide goes out, you get to see who's truly bullish who is just swimming naked (a variation of what Buffet likes to say). The trading community is full of nudists let me tell you.
Let's take a look at some sentiment measures. AAII sentiment released Thursday shows 2:1 bears vs bulls a reading that is consistent with ST and IT bottoms. We saw the same reading just prior to the massive move that began last September. But we also saw such readings at temporary bottoms in May and June of last year which from a longer term perspective were still good buying opportunities but you had to grit it out for a few months as the market ended up chopping around eventually making modest lower lows before hitting a final bottom.
A new sentiment measure I follow is called The National Association of Active Investment Managers (NAAIM). I like this because it not widely followed and it measures what people are doing with money which counts more in comparison to indicators that measure what people are just "feeling" about the market. NAAIM measures the exposure active manages have they have in the market. It's currently at 43% which is near the levels seen at ST bottoms of the past. A reading in the 20's would be more ideal to mark a longer term bottom though, but it's certainly near the the low end of the range.
Next the 10 DMA moving average of the put/call ratio. It sits at 1.03 which is high enough to warrant a ST bottom. We did see this get as high at 1.16 during last summers correction though.
Then there's the VIX. This is probably the only indicator that strongly supports the bears. It has remained rather muted which has many puzzled including me. I won't try to rationalize this one like some people are trying to. In my view it's not bullish that it remains this low and signals that there could still be one last little downside puke to mark the bottom of this slide (like say a sharp move to 1250 from here) or that if we did get a good rebound now, sometime later on in the summer we will go back to the lows of this move.
So in summary, we could be at or close to a bottom but it's likely not going to be "the" bottom that ends this consolidation phase I've been expecting. Having said that though, this looks very much like a correction and not the start of something more ominous and I don't expect to see the market go down more than 5% from here.
Tuesday, May 31, 2011
Back in the saddle
It took about 10 days but things eventually normalized here in the nodice household. Korea was a unique experience no doubt and I'm impressed with the country overall. I visited 3 cities including Seoul. Here are some notable things about South Korea from my perspective:
- just about as "developed" as North America with Seoul being the most. For example, lots of people appeared to be using smart phones and you can get HD TV and other tech luxuries.
- streets everywhere I went were well maintained (I never saw 1 pothole) and sidewalks/public areas very clean
- lots of small businesses as opposed to "super stores" like Walmart and Costco.
- very few homeless people and beggars relative to Toronto
- public transportation very cheap - about $0.90 Canadian for a bus/subway ride. (It's $3 in Toronto)
- subway in Seoul is probably the best in the world....you are even able to use your phone!
- taxis about 50-65% cheaper vs Toronto
- gas is expensive - about $1.85/ltr but you have the option of using LPG (liquefied petroleum gas) which goes for about $0.90/ltr as there are several LPG fueling stations available
- coffee very expensive vs Toronto - about double the price
- clothing somewhat expensive vs Toronto
- generally speaking, anything imported is expensive due to heavy taxes/tariffs slapped on them notably autos which is why probably 90% of the cars on the road are from local manufactures (Kia, Hyundai)
- food is cheap expect for certain imported items which can be very expensive (such as watermelons)
- tipping for any service not required nor expected
- Koreans are peaceful people. I got the impression that the crime rate is very low there
- Koreans are noticeably slimmer than North Americans. I saw very few obese people
- Koreans are respectful towards foreigners. I have never once felt anyone had a "get the hell out of my country" feeling toward me. In fact, I often experienced the opposite. Being one of the very few white guys around gave me somewhat of a celebrity status! My wife was both a little jealous and amused!
- Korean kids all learn English as a second language (but most are far from fluent) and spend several additional hours studying via private schools, tutoring or study groups. I remember walking the streets at 11 pm seeing high school kids going home from class. My wife says that this is the result of the poor public schooling system which apparently is a big weakness of Korea.
The late John Templeton was keen on Korea as an area for investment and I can see why. Overall, I got the impression that Korea is a thriving nation with hard working people. By no means am I an expert on Korea...this is just the impression I got.
Switching gears now towards the market. Nothing has changed in my outlook. I continue to believe we are in a consolidation phase here with risks of an upside surprise as opposed to a down one which so many appear to be bracing for. Based upon what I hear on BNN and read in the paper I get the distinct impression that investors are bracing themselves for a major dip in the market. I've said this before, such a thing will be hard to come by when everyone has there guard up even if it's warranted. I mentioned in my previous post to look for a situation where AAII sentiment hits 2:1 bears vs bulls. We just about got that last week but the market isn't quite in a full oversold condition. So, in such cases the likely outcome is a rally but probably not a powefull multi-month one that takes us to significant new highs. If downside continues it would likely be quite limited and would then put the market in a better position to have a powerful and sustainable run like last fall.
Again, I'm not going to try and play the ST wiggles that I think could transpire...that's not my game. I'm going to keep doing what I've been doing which is to maintain core longs with a cash buffer waiting to take advantage of a truly sold out market or unique opportunity. I'm positioned in way that allows me to be comfortable with either outcome in the ST that I described above.
My wife and I at the top of a mountain we had climbed in Jeong Ju, Korea
Thursday, May 19, 2011
Quick update
I'm still trying to recover from jet lag. My daughter is the biggest preventer of this and it doesn't help that she's struggling the most and is sick. As far as the market goes, I'll say this....nothing has changed much since I've left and returned. The market is more or less where it was 6 weeks ago. I still sense that there's a large cohort of market participants who look at the market with contempt and are quick to run for cash and hunker down or make bearish bets anytime the market shows a hint of weakness including some noted bulls like Cramer. So long as we keep seeing this type of behavior it will be difficult for a significant correction to take place and more importantly, it suggests the bull market is alive and well.
The main worry out there that I sense right now is the potential for a hard landing in China. So far there hasn't been any material evidence of this concern coming to fruition nor have high energy prices had a material negative impact on Q1 earnings but both of these things could change by next earnings season and that's when we could see a material correction take place. In the meantime the market will probably continue to frustrate bears and possibly make a run back to the highs. That's my best guess for now.
The bottom line is that for any kind of notable correction (drop of 5%+ from the high) for whatever reason to take place it requires complacency from ST trader types and hedgers. They need to drop their guard and embrace the uptrend and that simply has not been happening. You can see it in the daily put/call ratio readings which for weeks have indicated that these folks have had their guard up. On Tuesday the put/call ratio closed at 1.15 which is consistent with ST bottoms.
I suspect that sometime this year we will get a situation like in September of last year where the market is well oversold on an IT basis and we see something like a 2:1 ratio of bears vs bulls in the AAII sentiment survey. It doesn't require a flash crash for this happen. A sideways market or a series of mild declines can do the job similar to what happened from March-September of 2004. Don't be surprised if the market goes sideways or makes additional marginal new highs before we get to this type of situation.
My strategy continues to be the same as it has been coming into this year....maintain core longs with a sizable cash position until we see a situation as described above. If I spot a really good individual story stock or a trading opportunity of some sort I would be willing to commit cash to it regardless of the general market.
The main worry out there that I sense right now is the potential for a hard landing in China. So far there hasn't been any material evidence of this concern coming to fruition nor have high energy prices had a material negative impact on Q1 earnings but both of these things could change by next earnings season and that's when we could see a material correction take place. In the meantime the market will probably continue to frustrate bears and possibly make a run back to the highs. That's my best guess for now.
The bottom line is that for any kind of notable correction (drop of 5%+ from the high) for whatever reason to take place it requires complacency from ST trader types and hedgers. They need to drop their guard and embrace the uptrend and that simply has not been happening. You can see it in the daily put/call ratio readings which for weeks have indicated that these folks have had their guard up. On Tuesday the put/call ratio closed at 1.15 which is consistent with ST bottoms.
I suspect that sometime this year we will get a situation like in September of last year where the market is well oversold on an IT basis and we see something like a 2:1 ratio of bears vs bulls in the AAII sentiment survey. It doesn't require a flash crash for this happen. A sideways market or a series of mild declines can do the job similar to what happened from March-September of 2004. Don't be surprised if the market goes sideways or makes additional marginal new highs before we get to this type of situation.
My strategy continues to be the same as it has been coming into this year....maintain core longs with a sizable cash position until we see a situation as described above. If I spot a really good individual story stock or a trading opportunity of some sort I would be willing to commit cash to it regardless of the general market.
Monday, May 9, 2011
A few words
It's been about a month since my last post. I'm still here in Korea but I'll be leaving Sunday. A few notable things have happened. We saw S&P downgrade US debt which not suprising to me only caused a 1 day knee jerk selloff which eventually got fully recovered and then some. These are the same clowns who had AAA ratings on all those toxic MBS a few years back and were as slow as molasas to change their tune and only did so when it was painfully obvious and even my grandmother knew what a toxic MBS is. And now they downgrade US debt at a time when the economic recovery is gaining momentum with tax revenues recovering and spending is being scrutinized....are these guys in some sort of time zone that is 1-2 years behind the rest of the world? If they ever wanted to downgrade the debt with any shred of credibility it should have been done many, many months ago and now they should be looking to upgrade it not downgrade it now that things are getting better. These rating agencies are as useless as tits on a bull.
It never ceases to amaze me how there are so many so called "professionals" out there who are, quite frankly, morons. But the cold hard truth is you need ignorant, simple, unimaginative and emotional people to exploit in this game otherwise making money in this game would be a lot more difficult. Call me an arrogant prick if you want but you know I'm right. Can you imagine a world where everyone was either Warren Buffet or John Templeton? How could you ever make money? So folks, the next time you are frustrated that a position you have isn't at the price where it deserves to be, look on the bright side and be thankful that few can see the bargain you see which has allow you the opportunity to make a big score....that's assuming of course that you'll be proven right in time and have the patience and conviction to capitalize.
On to the next news item...the dip in commodities triggered largely in part due to higher margin requirement for traders of silver futures. The question on everyone's mind is whether the "bubble" in silver has popped and whether commodities in general have peaked. Well, I gotta say that this selloff in commodities look more like a correction rather than a major cycle peak. Regarding silver specifically, the rise it had prior to this sell off did indeed resemble a bubble with it's parabolic assent. Just prior to the sell off I was contemplating buying Janurary puts on SLV for a trade. I figured whether it's just a bull market correction or a bubble popping crash leading to a new bear market, the odds of a sharp drop in silver are high. But being on vacation and in addition to wanting to see more topping action, I didn't pull the trigger so I'm kicking myself a little but not much. The question remains, is silver in a bubble and did it just burst? Check out these points from an article I read which discussed conditions in the silver market just before this latest drop.
Wow, these are some eye popping stats aren't they? There is very strong evidence to support that a major silver collapse is immanent. But you know what? Despite all these points, I saw just as many traders on the message boards bearish on silver as I did bullish just prior to the collapse which suggests we are seeing a correction and not the end of the silver bull/bubble. Now perhaps these bearish traders were just playing for pullback which would negate any bullish contrarian implications of these bearish traders. Price action however, does suggest the drop in silver so far looks more like a correction than a bull market peak. The hallmark of any corrections in a bull trend is a short but sharp drop in the price after just making a fresh high without any topping behavior prior to it. I have found that this type of drop is the difference between a correction in a bull trend vs. the first down leg of a new bear trends which starts with a crash. When you see a crash typically, you will see some sort of topping behavior that lasts at least a couple of weeks. If I'm wrong about this and silver is the midst of a crash and new bear trend, we should see the price drop at least 40% from the peak within the next 3 weeks...that would be consistent with the price action of other bubbles bursting. So far we've seen about a 30%.
The playbook for a bubble bursting aftermath is a 40-60% initial decline followed by some sort of a counter trend bear market rally of 35-50%. So, if you miss out on the crash of a bubble, wait for that counter trend rally which could take several months to play out.
From a fundamental perspective, the requirement of higher margin requirement for silver futures which albeit a negative, doesn't strike me as a bull market killer for silver because it doesn't change the underlying psychological drivers for silver. Silver has been driven upwards by the notion of it being an anti US dollar play coupled with the notion that it's in short supply...but the former factor is more important, in my opinion. Higher margin requirements don't change either of these beliefs.
The bottom line regarding silver is this....let it play out. Market action should tell us whether the party is over or just taking an intermission. As frothy and parabolic as silver has been, I have to honestly say that I believe this is just a correction....we'll just see what happens.
On to the next news item...the dip in commodities triggered largely in part due to higher margin requirement for traders of silver futures. The question on everyone's mind is whether the "bubble" in silver has popped and whether commodities in general have peaked. Well, I gotta say that this selloff in commodities look more like a correction rather than a major cycle peak. Regarding silver specifically, the rise it had prior to this sell off did indeed resemble a bubble with it's parabolic assent. Just prior to the sell off I was contemplating buying Janurary puts on SLV for a trade. I figured whether it's just a bull market correction or a bubble popping crash leading to a new bear market, the odds of a sharp drop in silver are high. But being on vacation and in addition to wanting to see more topping action, I didn't pull the trigger so I'm kicking myself a little but not much. The question remains, is silver in a bubble and did it just burst? Check out these points from an article I read which discussed conditions in the silver market just before this latest drop.
3. Take the Sprott fund, which is in such hot demand that buyers this week were paying $1.22 for every dollar's worth of silver in the portfolio.
4. Silver is trading 82.17% above its 252 MA. This is the 99.5% percentile going back to 1920. The other times were near the 1974 and 1980 tops.
5. Silver is up 412% in the last 625 trading days. This is the 99.75% percentile going back to 1920. All 59 times it has gone that high in that time, silver has dropped at least 85.61%.
6. Silver is trading 15.17% above its 21 MA. This is in the 99.22% percentile going back to 1920. The average drawdown from when it reaches that high is down 64.68%.
7. The 252 MA of gold/silver ratio is 70.21% above the current reading which is in the 99.88% perceile going back to 1920. The indicator’s all time readings occurred in 1933/1934 when FDR changed the price of gold overnight. Since January 1934, the highest this indicator got to was Jan 10, 1980 which was 11 calendar days before the silver peak. The 1980 reading was broken on Wednesday April 20, 2011.
8. Primary silver mine cash costs remained relatively flat year-on-year, falling by less than 1 percent to $5.27/oz. from a revised $5.29/oz. in 2009.
9. Silver performance vs. stocks over a 10 year period is in the 99.7% percentile. The only year it was higher was 1979. Silver peaked on Jan 31, 1980.
Wow, these are some eye popping stats aren't they? There is very strong evidence to support that a major silver collapse is immanent. But you know what? Despite all these points, I saw just as many traders on the message boards bearish on silver as I did bullish just prior to the collapse which suggests we are seeing a correction and not the end of the silver bull/bubble. Now perhaps these bearish traders were just playing for pullback which would negate any bullish contrarian implications of these bearish traders. Price action however, does suggest the drop in silver so far looks more like a correction than a bull market peak. The hallmark of any corrections in a bull trend is a short but sharp drop in the price after just making a fresh high without any topping behavior prior to it. I have found that this type of drop is the difference between a correction in a bull trend vs. the first down leg of a new bear trends which starts with a crash. When you see a crash typically, you will see some sort of topping behavior that lasts at least a couple of weeks. If I'm wrong about this and silver is the midst of a crash and new bear trend, we should see the price drop at least 40% from the peak within the next 3 weeks...that would be consistent with the price action of other bubbles bursting. So far we've seen about a 30%.
The playbook for a bubble bursting aftermath is a 40-60% initial decline followed by some sort of a counter trend bear market rally of 35-50%. So, if you miss out on the crash of a bubble, wait for that counter trend rally which could take several months to play out.
From a fundamental perspective, the requirement of higher margin requirement for silver futures which albeit a negative, doesn't strike me as a bull market killer for silver because it doesn't change the underlying psychological drivers for silver. Silver has been driven upwards by the notion of it being an anti US dollar play coupled with the notion that it's in short supply...but the former factor is more important, in my opinion. Higher margin requirements don't change either of these beliefs.
The bottom line regarding silver is this....let it play out. Market action should tell us whether the party is over or just taking an intermission. As frothy and parabolic as silver has been, I have to honestly say that I believe this is just a correction....we'll just see what happens.
Sunday, April 10, 2011
anyoung haseyo!
it means hello. It took me a week but I've finally fully adjusted to the 13 hr time difference here in Korea. I haven't been following the market newsflow all that much since I've been here aside from browsing the headlines on bloomberg.com. I've only been paying strict attention to the news regarding my positions and of course, the one day where I would be most vulnerable to missing out on the market (the day I arrived), there was huge news regarding one of them, tec.to. They announced a merger with esn.to. The stock had run up big time in the prior week obviously due to this news leaking and then sold off sharply after the news was annonounced. I'm not sure if I would have taken action had I'd been there to trade the stock after the news. I probably would have lightened up. At this point though I'm Ok with just leaving the position as is after the pullback. The fundamentals for the energy services sector with a North American oil focus are rock solid so long as oil is at at least above $70. There is boom going on for unconvential oil drilling i.e horizontal drilling and fracing and although nobody can give a definitive number, in my opinion, so long as oil is above $70, it's been quite profitable for such unconventional drilling to take place. I'm assuming this to be true because in 2010 the oil service companies I've been tracking had an explosion in earnings vs 2009 with solid 3rd and 4th quarters and this was achieved with the price of oil ranging from $70-85 for most of 2010. With oil now solidly above $100 these service companies are in a sweet spot because even if there's a serious correction in the oil price they will still be in great shape to make lots of money. Of course, there's other factors to consider but the price of oil is by far number 1. Other positions I have in this sector are isc.v and wzl.to.
I can sense that the concern on everyone's mind right now is the price of oil being as high as it. The market's strength is confounding everyone it seems. The conventional thinking is that there's no way it can sustain these levels and sooner or later we're gonna have a serious correction/bear market and mabey even a double dip. Well, you know what think about conventional thinking. There's no doubt that the sharply higher price of oil is a drag to the overall economy but is it a killer? I don't think so. Food and energy prices have been rising but as a whole it makes up less than 20% of average disposable income in the the US and it's probably about the same for other developed nations. Yes,I know this percentage is a lot more for Emerging market countries but the bottom line is that overall, rising energy prices is not the economy killer it once was. Over the last several decades the food and energy expendatures as a % of income has been on a stready decline and is much lower now than it was say 30 years ago.
Let's also look back to the 2003-2007 expansion. In the economic cycle prior to it, oil hit a high of about $38 before tanking to $20 as the recession took hold. As the recovery took hold, by late 2004 oil handily exceeded the previous cycle high reaching $55 which was also an all time high at the time. Just like now, people thought this was surely going to kill the economy but it didn't.
I've been saying the following on these pages over and over. What kills an economic expansion is tight monetary policy accompanied by public optimism which also tends to coincide with investor greed. The bears will point out that energy price spikes have caused recessions, namely in 1980 and 1990 but those 2 periods also happened to coincide with tight monetary conditions - the true killer. Every recession post WW2 has been preceded by tight monetary conditions i.e and inverted yield curve. Yes, folks, it's been that painfully simple to predict recessions and thus bear markets yet it's amazing how few of the pundits seem to realize this.
In absence of tight monetary conditions what will an energy spike do? It will likely be a drag on the economy but not a killer. Seeing gas prices rise 30% in just a few months will have psychological effects no doubt but at the end of the day, if you still have your job and more and more people formerly out of work are getting jobs, paying an extra $20 at the gas pump is probably not going to be all that serious. Think about the reverse. If you were out of work and people were losing jobs steady how much of a help would saving $20 at the pump be? Not much. And by the way, do you notice how nobody talks about the rapidly falling prices in electronics and other goods over the years? Also, clothing, appliances and autos have either been flat or declining modestly year over for the past several years. Of course you don't hear nobody talk about this things because everyone is a miserable fuck and likes to focus only on the negatives. And not only have prices been declining for these above mentioned goods, the quality is constantly improving giving you even more bang for your buck.
Ok, let's get down to the bottom line here which is this. There will be some sort of a "shock" factor with the price of gas soaring like it has been but it's not nearly large enough to derail the economy. Is it enough to adjust expectations for earnings lower? Yes, but the impact will likely be modest and eventually people will adjust to these rising energy costs by being more efficient and learn to accept them as the norm. Here in Canada there was this fear years ago that the Canadian dollar trading at par with the US would destroy our exports and thus sink our economy. That has hasn't happened.We learned to adjust and deal with it.
I can sense that the concern on everyone's mind right now is the price of oil being as high as it. The market's strength is confounding everyone it seems. The conventional thinking is that there's no way it can sustain these levels and sooner or later we're gonna have a serious correction/bear market and mabey even a double dip. Well, you know what think about conventional thinking. There's no doubt that the sharply higher price of oil is a drag to the overall economy but is it a killer? I don't think so. Food and energy prices have been rising but as a whole it makes up less than 20% of average disposable income in the the US and it's probably about the same for other developed nations. Yes,I know this percentage is a lot more for Emerging market countries but the bottom line is that overall, rising energy prices is not the economy killer it once was. Over the last several decades the food and energy expendatures as a % of income has been on a stready decline and is much lower now than it was say 30 years ago.
Let's also look back to the 2003-2007 expansion. In the economic cycle prior to it, oil hit a high of about $38 before tanking to $20 as the recession took hold. As the recovery took hold, by late 2004 oil handily exceeded the previous cycle high reaching $55 which was also an all time high at the time. Just like now, people thought this was surely going to kill the economy but it didn't.
I've been saying the following on these pages over and over. What kills an economic expansion is tight monetary policy accompanied by public optimism which also tends to coincide with investor greed. The bears will point out that energy price spikes have caused recessions, namely in 1980 and 1990 but those 2 periods also happened to coincide with tight monetary conditions - the true killer. Every recession post WW2 has been preceded by tight monetary conditions i.e and inverted yield curve. Yes, folks, it's been that painfully simple to predict recessions and thus bear markets yet it's amazing how few of the pundits seem to realize this.
In absence of tight monetary conditions what will an energy spike do? It will likely be a drag on the economy but not a killer. Seeing gas prices rise 30% in just a few months will have psychological effects no doubt but at the end of the day, if you still have your job and more and more people formerly out of work are getting jobs, paying an extra $20 at the gas pump is probably not going to be all that serious. Think about the reverse. If you were out of work and people were losing jobs steady how much of a help would saving $20 at the pump be? Not much. And by the way, do you notice how nobody talks about the rapidly falling prices in electronics and other goods over the years? Also, clothing, appliances and autos have either been flat or declining modestly year over for the past several years. Of course you don't hear nobody talk about this things because everyone is a miserable fuck and likes to focus only on the negatives. And not only have prices been declining for these above mentioned goods, the quality is constantly improving giving you even more bang for your buck.
Ok, let's get down to the bottom line here which is this. There will be some sort of a "shock" factor with the price of gas soaring like it has been but it's not nearly large enough to derail the economy. Is it enough to adjust expectations for earnings lower? Yes, but the impact will likely be modest and eventually people will adjust to these rising energy costs by being more efficient and learn to accept them as the norm. Here in Canada there was this fear years ago that the Canadian dollar trading at par with the US would destroy our exports and thus sink our economy. That has hasn't happened.We learned to adjust and deal with it.
I continue to believe that we are in a consolidation phase in this bull market and dips/corrections should be modest because conditions for a serious decline i.e. bear market are absent. At this point you need to be selective with your positions and if you've think you've discovered a real winner don't pay much attention to the general market and have the courage to stick with it. If you have positions that have been dragging ass not living up to your expectations then you should consider dumping them or lightening up.
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