Buzz on The Street: Markets End a Pain-Filled Week
Some of this week's most insightful and timely vibes.
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Monday, February 1, 2010
Last month's drop... It's not just about numbers.
At month-end, the S&P 500 had dropped 3.7% from December 31's close. It seems to be widely disseminated that this is the worst since February's 11% drop.
January's loss dwarfed October's 1.8% drop, which I suppose means it "giant-ed" all the other months. In fact, despite the interim recovery to new highs, January's close also ended under September's highs. Barely, but you get the point.
No net improvement after four months is rare. Resuming the rally would be rarer still, when each of those months probed higher highs. That's distribution, waiting only for a trigger.
Speaking of which, January's drop is the rally's first to close back under a prior month's low. And thanks to December's narrow range, January's drop is the rally's first to reverse back under two prior highs. Failing certain levels along the way down gives a downleg momentum.
It's often dawn-est before the dark. This current downleg's targets are only slightly lower, and sellers might let a bounce come in to refuel ahead of Friday's Employment report. But if a near-term bottom isn't found by Tuesday's open, then sellers are just getting started.
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One factor that I must chalk up to the bullish side of the ledger is the seemingly endless bearish articles being published on why 4Q GDP numbers were either "phony," or otherwise misleading. This shows that skepticism about the ongoing economic recovery is deep and widespread.
Most of these articles read like ex-post rationalizations. They tend to cite the same litanies that were cited in 2008 and 2009 (while GDP was contracting), to supposedly prove that a recovery was impossible. Never mind that they were proven wrong. Now the same litanies are being cited to "prove" that the current recovery (that presumably should have never happened) is merely a statistical mirage and that it will not be sustainable.
The recovery is here and gaining momentum and we need to come to grips with that fact, folks. In this context of building economic momentum, bearishness can only be justified if one can come up with new reasons. If the old reasons were not enough to prevent an economic rebound, they will almost certainly not be enough to stop an economy with momentum behind it.
One of the often cited rationalizations cited in recent analyses of the 4Q GDP report regards inventory building. Somehow, according to bears, this does not "count." It's funny because when inventory liquidations were responsible for a great deal of the GDP contractions registered from 2007 through 2009, I do not recall bears suggesting that this factor should not be taken into account. In fact, this factor was cited at the time by many bears as evidence of a bleak future. It presumably showed that that the business people in the trenches – the folks most likely to be able to anticipate aggregate demand – were bearish about the future. Why is it that now, inventory restocking is not seen as a bullish sign that entrepreneurs are anticipating a reactivation of aggregate demand?
The inventory cycle is an integral part of the business cycle. It is a force to be reckoned with, not explained away.
Investors need to monitor their biases. In particular they need to be particularly wary of ex-post rationalizations masquerading as investment theses.
Tuesday, February 2, 2010
What's propping up your house?
At the risk of overkill, as follow up to Kevin's excellent review of the SIGTARP report, I would offer that while his "How to Manipulate The Mortgage Market If You Are A Government" chart also got my attention, it was this chart that took my breath away:
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For most Americans their home is their single largest investment. And if you take the SIGTARP report at its word, this is everything that is supporting current home prices.
I can't help but wonder how Joe Six Pack would feel if he knew this.
Wednesday, February 3, 2010
Crude oil, gold, steel and stocks have all taken it on the chin so far this year, to greater or lesser degrees, but not all commodities have suffered the same fate. The one standout has been a commodity that most of us rarely think about, and that is lumber.
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As you can see in the chart above, raw lumber is up more than 25% this year even though the home construction business -- its main use -- has been scrambling along at record lows. This is a rather stunning development, and according to some analysts is a solid example of production dropping too much even for weak demand, sending prices much higher.
In other words, because there has been so little demand for lumber to build houses, timber companies have cut back on their harvesting and cutting. So now that home production is picking up a little, as suggested in some earnings and economic reports this week, marginal new demand is pushing up the price of this surprisingly scarce commodity.
This is actually very good news, according to veteran technical analyst Tom McClellan, who has studied the lumber-housing relationship in great detail. He recently published a report that showed if you push a chart of the price of lumber futures one year forward, its lows tend to coincide with relative lows in the construction of new single-family homes. In essence, lows in home construction follow lows in lumber prices by 12 months.
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More on this later...
Overlooking another Shining January Indicator?
So I was sharing reams of research with a couple of friends this morning, and I was intrigued by a few detailing the many reasons Gold should move lower. Then I took my head out of the granular fundamental sand and happened to notice something else – that despite all the bearish reasons and opinions and into the teeth of a powerful rally in the US Dollar that continued in January and supposed to doom Gold – one simpler fact was staring me in the face when I looked up. Gold has not gone down in 2010. Hmmm…
Many of these reports have much fancier technicians drawing them than I do, I usually just borrow my pal Macke's purple crayon. This is the DJ-UBS commodity index below, many of the components I like even more than Gold, because they are consumed so they are not just demand stories, but supplies can become very tight (or disappear) as well.
Here is that index over the past year.
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Too much too fast?
Maybe so, but this context will help. Using just a slightly wider lens it reminds us that we may have been simply putting in a nice and well-tested base after a 60% decline.
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Only time will tell. In the meantime I prefer to look under the hood. I provided this cross-section below last year and thought it would be helpful to update the new weightings, even if you don't trade commodities it may be of interest or related to equities you consume. Remember the number of long-only commodity funds that roll each month, are a powerful force in the markets. Like rolling your coverages against Manning, you can try to disguise them but you know they will be completed. Not factored in here, and sadly without option contracts are the 160 million Hass avocados we are estimating will be eaten this Super Sunday.
The most recent DJ UBS Commodity Index weightings:
By way of comparison to this time last year, Crude and Copper got the biggest increase in votes while Corn, Soybeans and Wheat had the biggest reductions. My interest in finding the most un-crowded set ups, no different than with equities in the S&P index, has me interested in watching the un-favored Grains to see when they put in their own bases.
Sometimes finding something not going down with endless reasons why it should be is a good place to start.
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