Thursday, June 28, 2012

Investors Desperately Seeking Income, Utilities Continuing to Act Well

Utilities are acting once more like the new mo-mo stocks.  Look what just set a post-financial crisis high today, closing on its high and thus moving up as the market rallied into the close:;range=20040621,20120628;compare=;indicator=sma%2850,150,200%29+volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

It's a small northwestern utility with a P/E that's "cheap"- under 17 LOL.  But the payout is 4.4% and people want that good stuff.  Meanwhile P/E's on techs are shrinking and P/E's on a growing number of energy companies are less than 10X TTM.

One factor that actually makes sense in this rush for seemingly secure dividends w/o regard for growth is the tax treatment of foreign earnings.  The foreign earnings of all multi-nationals is not able to be paid out to shareholders as dividends until they come back to the U.S. and get taxed.  Thus a dollar of domestic earnings are worth somewhat more than a dollar of foreign earnings.  That issue notwithstanding, the fact is that utility earnings are not necessarily predictable.  Therefore their dividends are not necessarily secure either.  I have a massively overweight position in utilities in my IRAs.  Avista is one of them.  VVC, Vectren is another.  The charts are in break-out positions and unlike the new premature faves, the homebuilders, they actually have investment merits in the here and now.  The homebuilders will have their day in the sun, but I think they are ahead of themselves.  As was the case with gold and silver in 2009-11, sound domestic electric and natural gas utilities look as though they have more room to run on the upside as investors are increasingly reaching for income.  Con Ed is at $62.  I think $75 is realistic as the months roll by.  Unfortunately Cramer feels the same way, but I've been saying so for awhile.  He does, after all, get some mo-mo stuff right now and then...

Wednesday, June 27, 2012

Silver Approaches a Major Price Breakdown

A quick note about the spreading weakness in the four major traded precious metals (PMs), with the focus on silver (the "people's choice" PM).  Silver is testing a triple bottom formation that begins with the January 2011 bottom (after which it almost doubled in short order).  You can see this on a futures chart or simply with SLV.  This strikes me as a sort of opposite formation to the triple top that gold was testing in late summer/fall of 2009, about which I blogged positively in several posts at that time; and, more important, personally bought the impending breakout big-time.  At that time in 2009, the received wisdom was that resistance at triple tops rarely held; usually there was follow-through on the upside.  I suspect that a similar phenomenon will hold for silver on the downside now.

Palladium (and platinum) has a weak chart that is consistent with the silver chart.  I like to focus on it as it has the least public participation in ETFs that hold it; thus it "should" be the PM most related to industrial demand.  In any case, what I find bearish is that it is testing levels that are triple the price levels that marked the 2008/9 bottom in this commodity.  I think there has been lots of speculation in the commodities that is in the process of being negated, as investor preference continues to shift to muni bonds at, say, 50X "earnings" (i.e., a 2% interest rate) or utility stocks at, say, 16X earnings and a 4% dividend payout.
Investors and traders also may want to be aware that ETFs serve as a vehicle for the commercial interests to get the public to pay storage costs for excess inventory of these metals.  It is not an unfair deal, and the costs are fully disclosed, but if rising commodities prices were close to a sure thing, would the commerical interests be eager to form ETFs to allow the public in on this near-sure thing?

Monday, June 25, 2012

Tipping Point? Corporate Profits Seen Heading Down

Recession in the U.S. or not, only time and NBER will tell.  Corporate profits get reported much more timelier than NBER's data, and here is Bloomberg with the latest trends:

Europe’s debt crisis is putting pressure on corporate earnings globally with companies fromProcter & Gamble Co. (PG) to Danone (BN) cutting forecasts and signaling profits will fall at more companies this year.

Analysts predict members of the Standard & Poor’s 500 Index in the U.S. will report a 1.1 percent average drop in second-quarter earnings, after estimating a gain as recently as last month, according to data compiled by Bloomberg. That would be the first decline in 11 quarters after a 6.2 percent average increase in the first quarter.

This is how bear markets typically begin.  Profits head south after quarter after quarter of growth and resiliency.  Commodities have just entered a bear market.  They tend to lead.  Increasingly, last year's turbulence is looking like 2007 to this year's 2008.  I hope that is not so, but as a self-styled perma-realist only interested in doing right by the funds I manage, I believe in the old physician's credo of Primum non nocere:  first, do no harm.

Thursday, June 21, 2012

Updates on Recent Posts, and a Mid-Year Resolution

Two days ago, I put out two posts here.  One needs little further comment beyond reiterating the title, which was "Metals Comments:  Silver and Others Breaking Down Again".  No change there.  Just to add that I think that oil works lower yet.  Do I hear $60/bbl (WTI).

The other was about Deere (DE), AAPL, and GARP investing.  Anyway, I went ahead that day and put in a 5% portfolio allocation to DE and more to HP (Helmerich and Payne), and more to AAPL.  When DE and HP had strong upside days yesterday in association with the VIX dropping to 17, I got nervous about this ultra-rapid drop in the VIX from 27 to 17 even as the macroeconomic data was getting worse and Spain was now clearly insolvent.  So I took a one-day, 3% profit in DE and dumped HP for a profit.  I love the company but hate commodities right now, as per the above-mentioned post.  Anyway, I also markedly decreased my longs in AAPL and took profits in about half of my bond-like stock plays, the utilities, beginning this morning and continuing through the downturn today.  Europe continues to remind me of the U.S. in 2008.  There is both a solvency and liquidity crisis there.  The global macroeconomic spillover is somewhat negative for the U.S., though decreased European demand for resources will help us with imported oil prices.  Probably more important is the liquidity issue.  Who knows, but I continue to fear a recurrence of 2011 or worse.

In the meantime, daily consumer spending per has collapsed to $68.  This is below the level at the same date last year and a full 27% below the level seen on-- are you ready-- October 27, 2008, a month after Lehman/AIG.  And, it is not adjusted for inflation. 

The times are out of joint. The plain vanilla Vanguard long-term muni bond fund VWLUX has had a total return the past year of about 14%.  The leveraged Nuveen muni bond fund NIO has had a total return of about 18%.  The zero coupon long Treasury has returned well over 50%.  Meanwhile, the SPY has returned about 4% with much greater volatility.  More relevant, I think, to economic conditions here in the U.S. is the Russell 2000.  Its ETF, the IWM, has had a negative twelve month total return of 4%.  All this interest rate decline is what in my view has been sustaining by stocks and the economy.  But said rate decline is played out, one would think. 

I have had a very good twelve months and a very good 2012.  It's feeling like a good time to do what I hate at a time of ZIRP and positive CPI, but I'm going to try to stick to my mid-year resolution and sit on this lead with a lot of cash in my trading accounts (self-directed IRAs).  Everything except AAPL that does not look overvalued acts badly, and things like T-bonds and AMZN that act well look overvalued.  Strange days... 

Tuesday, June 19, 2012

Metals Comments: Silver and Others Breaking Down Again

The silver chart now looks terrible.  PALL and PPLT look to be failing at their descending 50 day sma's.  I had mentioned in a recent blog that on Saturday, Harvey Organ interpreted the COT report for silver as bearish-- that it was ready for a "hit". 

I am not seeing any justification for another QE out of the FOMC tomorrow.  Extension of ZIRP into mid-2015 (say), and continuation of Op Twist, very possible if not probably.  Will the lack of new inflationary tinder that a true QE 3 would represent, if that is what eventuates, spark a risk-off move, perhaps with a big move down in silver?

Note that I pay special attention to PALL, as it is the commonly-traded precious metal that is hardly influenced by investor trends.  It is thus the most economically-sensitive of the "Big Four" precious metals.

A major new metals bull market is coming, I expect- but FWIW, I think it remains delayed longer.

Deere Apple: GARP's Time Is (Approximately) Here and Now

Just wanted to put in a quick stock comment.  Since I think that "safe" govvies are "played", I have gone to stocks with fortress balance sheets and unique large niches in core areas of the global economy.  Thus I bought back into Deere (DE), which I have traded at higher prices this year, perhaps making a buck or two but jumping out as I sensed the downtrend in the shares.  DE is heading for its 175th birthday.  It has seen a lot worse than the mess going on in Europe!  The P/E is about 9X projected 201s earnings, and its CEO was on CNBC a day or two ago reaffirming guidance and saying that construction is doing well in the US of A.  Value Line's "fair value" or "value line" for DE puts fair value at about $110, not the $75 it's now at.

Also, I scaled further back into AAPL, having largely gotten out around $620+ after the DOJ lawsuit broke and trading had gotten just too crazy in the stock.  Meanwhile, Microsoft came out with some event this evening that announced something more than vaporware but less than an actual product-- and was thus in stark contrast to Apple's recent WWDC where actual products ready to be shipped were announced.

Here is a pretty funny take on the event:

I also received an impressive e-mail from a techie who may be switching from PC's to the new Empire after being blown away by seeing the Retina display on Apple's new MacBook Pro 15 inch portable computer that was unveiled at the WWDC.  He is looking at much higher AAPL prices, soon.  Unlike yours truly, he actually knows the hardware-software industry as a veteran insider.  I'll publish his comments in full if he allows me to.

With interest rates so low, patient money that does not have to mark to market and thus can ride out what might be a very stormy time in the weeks and months ahead will, I think, outperform most bonds with a truly select group of dominant equities that generate strong free cash flow.

Thus I have added select GARP companies to bond-like utility stocks as I have moved away from the highly-appreciated bonds that now have more risk than reward as I see it.

Monday, June 18, 2012

Newton's Fruit Falling Upward Once Again

CRUS, Cirrus Logic, which makes audio chips which trades essentially as an AAPL derivative, has broken out today strongly following a positive report from the Semiconductor Industry Ass'n that business has turned.  I take this as a sign that AAPL is "probably" headed to new highs as well.  I had gotten lucky and sold most of AAPL around $620+ after A) Cramer called it the stock of the century (I exaggerate only slightly) and then the DOJ e-books lawsuit was filed. 

I have been scaling back into the fruit big-time.  First intermediate-term target:  $690-700 by year-end.  Rationale: After FY Q3 earnings are released in about 5 weeks, TTM 12 month earnings could be $45.  15-16X those earnings gets one to about that range.  I would also note that Value Line's "value line" places AAPL's "fair value" around $900 as of today.

Am selling my last 14-year Treasury Strip at a 9% return, good in that this one was not bought till late in the rally.  My rule of thumb with trading zeroes is that I sell if I net 3 year's worth of interest payments on the trade.  Especially so when it's a zero that pays you nothing to own it.

Sunday, June 17, 2012

Gold May Be Looking Tired

The latest gold rally is already showing signs of having brought in too many bulls too soon in the (unending) European crisis.  I was lunching Friday with a hedge fund manager who noted that a very recent survey continued to show that the favored investment of Americans, per the poll, was gold.  I had pointed to what I believe was an earlier version of the same poll in the summer of 2011 as part of the reason why I had begun selling my gold when it hit $1900/ounce, and sold more as the price dropped off.  Too much belief.  Where were these when I was buying gold in the $300s (unfortunately I did not buy "enough"!) in 2002 as part of what I thought was an obvious weak-dollar set of policies by both the Bush administration and the Fed?

Now we see a negative CPI print and rising claims for unemployment.  Plus the obvious diminution of buying power in a spreading number of regions in Europe.  Sorry gold traders, against this deflationary backdrop, rumors of the obvious-- that central banks will "print" as needed-- the following survey from makes me negative on gold short-term:

Gold traders are bullish for a fourth consecutive week after hedge funds added to bets that prices will rally, exchange-traded products backed by the metal expanded and Europe’s debt crisis roiled markets.

Twenty-four analysts surveyed by Bloomberg said they expect gold to gain next week and six were bearish. A further three were neutral.

In addition, Harvey Organ's latest summary of the COT in silver looks overtly bearish to him, and his reading of the COT in gold is mildly bearish.  I have found his analysis to be pretty good-- he "called" the latest gold rally well, for example.

At this stage in the game, my POV is to take bad news as bad news.  Gold almost always directionally trades with silver and platinum, and both of them have even worse charts on the 50-200 day sma basis than does gold.

Meanwhile, Bloomberg also reports that Israel's stock market is up 2% today, supposedly on hopes that the European authorities will stimulate something or other. 

We know "they" will do their job-- that's what "they" do.  But sorry-- they are not rampant inflationists.  If they were, the STOXX 50 etc. would not be in a pronounced downtrend. Copper wouldn't be under $3.50/lb.  Whole countries would not be going bankrupt due to difficulty rolling over old debt and selling modest amounts of new debt, because "they" would be "printing" the new money needed to keep the game going.  What's going on is more subtle than that.  It's the biflation I wrote about a lot last year.  I actually think that the inflation is returning to U.S. housing prices, which are historically cheap relative to gold IMHO.  And while you can't eat houses, you can either live in them or rent them out for, one hopes, a positive cash flow.

Our job as investors and traders is to recognize the planted stories in the media.  Thus, it was revealed that part of the latest peak in Treasury prices was spurred (finally) by buying by the public.  (I don't know what duration bonds and in what vehicles these were purchased, so I don't know how much staying power these investors have if yields back up more for a while as I expect.)  So congrats-- the public is finally buying Treasurys near the end of an over-30 year bull market. Meanwhile I was pounding the table last spring and early summer for Treasuries in several posts on The Daily Capitalist, beginning when 30-year T-bonds were yielding over 4%.  That was just one year ago or so.

During the latest peak in Treasury prices, electric utilities that have 'A' or better financial ratings and have at least a modest amount of inflation protection were left temporarily ignored by the media and the public, and their yield spread versus Treasuries went to historically wide levels.  So it appeared obvious to take profits in Treasuries and arbitrage, as it were, into the utes.  I'm not perceiving any excess in the utes yet given they trade as if their yields were bond-like, and in fact when I talk to financial people, they doubt the move.  They all express worries about the scheduled expiration of the Bush tax cuts.  That strikes me as an uber-strange response.  Aren't Treasury interest payments taxable, also?  (Plus I own the utes in IRAs and own tax-free vehicles in taxable accounts.)

I mention the above as a long digression in a gold-oriented post because I continue to believe that the aging investor base in the Western world and Japan has a built-in, difficult-to-shake bias for income with perceived safety.  That 'safety' will, methinks, inevitably turn out to be illusory, but the Japanese example shows that seemingly illogical phenomena often have good reasons to have occurred and to persist.  When they buy GLD, the only thing that is certain is the ongoing trust expenses, plus commissions of course. 

Per Bloomberg, gold traders are heavily bullish in contravention of the intermediate-term charts and at a time when everybody and his sibling knows that the world is going to pieces.  Brilliant!  They ignore that the same sorts of growthy trends that were occurring in 2009, 2010 or most of 2011 are not the dominant trend now.  The dominant trend on a macro global basis is the ill winds swirling around and blowing out of Europe.  What is going on in Europe continues to remind me of what was going on in the U.S. in 2008- cascading serious financial problems in core parts of the economy-- large financial companies in the U.S., systemically important banks and increasingly major governments in Europe.  At least in the U.S., there was one national government and one powerful Fed to do what they did.  Europe lacks that advantage. 

Gold and silver, as assets that actually cost money to store and that are not valid to pay debts, became items that were liquidated post-Lehman, and their prices plunged to yearly lows post-crash.  There simply was no rush to buy into an orderly short-term gold uptrend pre-Lehman such as has been occurring the last few weeks in gold.

Thus for people who already have core exposure to these metals, I'm not thinking that this is an opportune time to add to the holdings.  (If one owns none of them, that's a different story.)

I'm also not thinking that all the attention being paid to yet another "critically important" Greek event is worth all the digital ink that's been spilled on it.  I'm waiting for further events in Spain, and critically Italy, to see how these historic and sad dramas will play out in asset prices.

The numerous economic and other strengths of the United States continue to become more obvious to more and more people, and IMHO support the "America First" sort of investment strategy that I propounded last fall.  When it comes to gold, I'm just speculating that we may well see a period of disenchantment with it in some poll later this year or next year out of America, and that it or silver may then be properly set up for yet another major bull move.

Wednesday, June 13, 2012

The 'New Normal'- Yet More Economic Deterioration Out of Europe

The real financial news today had nothing to do with Mr. Dimon at the Senate.  It was again out of Europe.  German mfg took a big drop per MarkIt, and Spain is nearly insolvent per Egan-Jones.  So we had yet another sharp stock reversal to the downside and yet another lower high about the 150 day sma.

It continues to look as though Europe is going through the U.S. experience of 2008.  Now it's nation-states, before it was the core financial structure of the sole superpower with immense global reach.  Not sure which is harder to deal with!  In any case, the other structural difference from the standpoint of this American observer is that what happened in 2008 occurred at the home of the most important central bank in the world.  This European thing is different.  The Fed in theory can loan them all they need.  In this scenario in which Italy is up next and falls despite the various reassuring words out of Europe today on this topic, Treasury rates could drop to unimaginably low levels.  As in Japan, the general stock averages would get hit hard.  However, if no catastrophic "Lehman moment" occurs this time, there might be a lot of differentiation between stocks, as was the case in the major 2001-2 U.S. bear market.

In this scenario, volatility will go wild between deteriorating fundamentals and the certainty of intervention-- but when, oh when will they print, and how much and in what form?  Summer 2011 set certain modern-day records for 1% up- or down-days.  Could a rerun of some such volatility spikes be in the offing?

I am also paying no special attention to the Greek election.  Whichever party wins will be happy to have the spoils of power and will do whatever they will do.  It's impossible for an American to invest based on such unknowns and the high chance that even if Syriza wins, Tsipras will pull an Enda Kenny, who became P.M. of Ireland only to follow the bail-out course set by the previous guys.

Momentous, perilous times.

Sometimes cash is kingly. 

Monday, June 11, 2012

More Evidence of Spreading Economic Weakness in the U.S.

ChangeWave Research is out via e-mail today with their latest survey of business conditions.  It is consistent with a new cyclical downturn or at best yet another "growth recession".  They have a pretty good history for accuracy from my 4-5 year history with them.  Their data are consistent with the pro-secure income thesis I have been propounding in one way or another since last May.  Here is the summary:

Summary of Key Findings

Slowdown in Growth for U.S. Economy

2nd Quarter Sales
Just 20% of respondents say their 2nd Quarter sales will come in Above Plan – 4-pts lower than the previous quarter
30% say their 2Q sales will come in Below Plan – also 4-pts worse than previously

Reduced Visibility for 3rd Quarter Sales Pipeline
Only 21% project their sales for the coming 3rd Quarter will come in Above Plan – 7-pts less than previously
20% say they'll come in Below Plan – 5-pts worse than previously

3Q Cap Spending Also Registers Downturn
Only 10% see an increase in their 3Q cap spending – 3-pts worse than previously
16% project a decrease in their 3Q capital budgets – 4-pts worse than last quarter

U.S. Job Market
19% see more new hires in their company this quarter – up 1-pt since previously
14% see less new hires – but that's 1-pt worse

Other Economic Indicators

Slowing Economy Helps Bring Down Inflation
Just 15% say prices are rising for their company's products – down 5-pts from previous quarter
16% say prices are falling – up 2-pts

Slight Improvement in Availability of Credit for U.S. Businesses
7% say it's easier for their company to borrow money than it was 90 days ago – unchanged from previously
And while 12% say it's harder – that's 1-pt better

Turnaround Monday- Didn't Wait for Tuesday

As was strongly suggested on yesterday's post, today the European and U.S. stock markets staged what looks to be a major intra-day reversal, both in Europe and here.  Spanish and Italian govvies were clobbered.  The SPY closed below its 150 day sma once again, and has a 10 week pattern now of lower highs since the April 2 high.  Lower lows coming soon to a stock market near you would be highly unsurprising.

I am long a variety of utilities because of my favorite reason to buy/own stocks:  income in a world starved for seemingly secure income; and technicals.  These include ED, AVA, SWX, WGL, XLU.  Note these have replaced my zero-coupon Treasuries, on which I took profits the week before last, and now I am increasingly ramping into the utilities as a preferred income and price appreciation play.  Today's drop in interest rates is perfect for this thesis.  My expectation is that utilities will suffer profit-taking on days like today but then go up a nice amount when we have days as we did last week when stocks rebound and rates go up.  I'm banking on some resumption of the historical relationship between the 10 year T-note and utility yields.  Some utes could go up 50%++ if that occurred near today's record-low T-yields.  (Not counting on that!)

I also own a few of the small community S&Ls/bank stocks I have mentioned for quite some time on The Daily Capitalist.  I prefer not to name them b/c they are so illiquid.  Finally, I own a very modest amount of stocks with varying charts that are "normal" operating companies, are ultra-high quality, have the leading position in essential growth industries, and have TTM P/Es of 7-14.  In general, they all are GARP stocks that are well off their highs but with record earnings, and all pay dividends and have substantial tangible book value.

I am also long a significant amount of some of the leveraged closed end tax-exempt bond funds, the largest holdings being NIO and NVG.

I see investors turning away from the SPY until it yields double the 10-year Treasury.  This process takes time.  That's how it ended up in Japan, with a 1% 10-year JGB and a 2% Nikkei yield.  In the US in the 1940s, the market had periods where the highest-quality stocks yielded 7-9% with T-bond yields marginally higher than today's.

Once people really start worrying about stocks, a 2% SPY yield is trivial.  They can go out for lunch and come back to find the SPY down that much, just like that.  Thus we saw the psychology to get high dividends- and note back in the '40s, stocks often traded close to tangible book value, which as the decade drew to an end got to be understated due to inflation.  I expect the lust for high dividend income is likely to return.  For now, utilities with seemingly secure dividends are the best way I see to make investment lemonade out of today's ZIRP-era lemons.

I also took very small trading profits on GTU, having bought it late last week at a zero premium to NAV, selling it today with bullion a little below where it was when I purchased GTU but the premium to NAV had rised to 3+%.  Every little bit helps.  GTU does not fit the income theme!  With oil turning to the downside today, I don't want more than a core gold holding, the trend being your friend and all that.

Not Trusting the Spanish Bailout Rally

I am so skeptical of this rally tonight, I even question the validity of the alleged big increase in Chinese exports that was announced this weekend.  Who on earth is increasing their imports?  U.S. imports were down in the last report, and certainly China's largest customer, Europe, has not been ramping up its purchases.  Congrats and good luck to the nimble traders who went into the weekend well-positioned.

This strikes me as Europe's version of America circa four years ago.  So I'm into a USA all the way investment posture. 

Friday, June 8, 2012

Con Ed Lights Up Wall Street

What sort of rally is it that is led by Con Ed (ED) and its electric peers, and natural gas suppliers such as Southwest Gas (SWX) and WGL Holdings (WGL)? 

A strange one.  One that is playing catch-up with the massive decline in yields in Treasuries, munis and other debt instruments over the past months and even years.

If you suspect, as I do, that while said yields will bounce around including in an upward direction, but will stay "low" in general for some time, then you may also suspect as I do that while the ED's of the world look extended, they will trend higher in price simply as bond alternatives.

In other words, utilities of the local, regulated monopoly kind (as opposed to ones that emphasize competitive power situations or wind etc.) may be morphing into this year's mo-mo stocks. 

Very strange.

The Internet, after all, runs on electricity.  Batteries that power mobile devices are charged with electricity.  Who needs gasoline when you have the Internet at home or a short walk or bike ride away at a coffee shop?

There are other good things happening in the US of A investment-wise.  These fit with the theme I announced last summer or early fall after I tired of Europe and also saw TPTB in the US go for growth at the expense of fiscal prudence.  (Not that I necessarily "approve", but my view was not sought.)

MCD sales were weak in China but strong in the US, they revealed today; that's backward from what we were told to expect.  WMT is surging, and it's still largely a US company.  Small local bank stocks are strong, though they don't trade much.  And of course utilities are all US or almost all domestic.

Expect much angst over the upcoming "fiscal cliff".  If interest rates are low and the economy remains challenged, I would note there is an election coming.  If anyone would like to buy utility stocks and is afraid to because of the scheduled rise in tax rates on dividends for high earners, or would like to buy into munis but are afraid of the talk of taxing some portion of that income, I would simply point out that the markets don't appear to share your concerns.  IMHO they are usually right.  Not always, just usually.

I don't have a strong predictive sense here, but I'm just guessing that either the Federal deficit starts shrinking on its own due to an unexpected pick-up in tax receipts or else the economy stays subdued below official expectations; and that in either case, the response will be to defer the fiscal cliff for one year for either a re-elected lame duck President Obama or a President Romney with a "mandate" to take some "courageous" action.

The single main worry sign I see domestically is that ECRI's Weekly Leading Index has been moving down fairly sharply the past few weeks, and has a close correlation with stocks.  Perhaps it's bottoming, or is irrelevant; we shall see.  Here's a link to a 1, 3 or 5 year view of this indicator.  When at that screen click on the + WLIW button.  I suggest looking at the 3-year view.  This shows a series of post-GFC lower highs.  Will this year see a lower low?  If so, some stocks will probably take a hit as recession worries go mainstream.  If this is the bottom of this indicator, it could be a hot summer on the Street.

Current-ly, I'm all charged up for Fast Eddie to shoot out all the lights on the way to ? $70 and beyond.

Wednesday, June 6, 2012

If Today's Stock Surge Means Economic Strength, Why Did Electric Utilities Defy Weakness in Treasuries and Instead Break out to a Nearly 4-Year High?

On a day when Treasuries sold off sharply due in large part to simple profit-taking, it felt wrong to see the XLU (Utilities ETF) move up with the SPY tick-for-tick and close at a 45 month high.  My take is that investors are simply moving into the lagging safety-income vehicles and away from the (allegedly) super-safe govvies such as bunds, gilts, and Treasuries.  As I have been saying for some time, Con Ed ED is as good as it gets for me right now.  Strange though it seems, at its current almost 4% current yield, a 15% price move higher is entirely reasonable if we assume that the 30-year T-bond yield moves back to 3%.

Meanwhile, the S&P 500 150 day sma has just begun to point downward, with the index marginally below that line.

Also consistent with a topping process is Uncle Warren coming out to say there's not going to be any stinking recession.  And in the unlikely event there will be one soon, it's the fault of some other people (i.e., the Europeans).  Meanwhile, a pitiful few percent of U.S. GDP comes from exports to Europe, very little of that will be lost should Europe's economy get worse, and there's an offset as diminished economic activity in Europe means lower prices for imported oil and other imported goods into the U.S.

An awful lot of people such as Doug Kass are locked into the no-2012 recession camp.  (Recall that he put the risk of such an event at zero a few months ago.)  I dunno, but it is more than 4 1/2 years since the last recession began in the U.S. and 3 years since it ended.  All precious metals, copper and (sort of) oil are in bear markets.  Interest rates plumbed multi-decade lows-- which cannot possibly happen in the absence of agressive QE unless there simply is not much demand for credit.

Regular readers know that starting in early May last year, I have been emphasizing safety, and switched to a U.S.-centric investing posture.  (See Changing on a Paradigm from May 9.)  At that point or soon after, I was long gold and Treasurys; no more stocks or oil/silver:  pure safety.  Then I got more liberal as it became clear that the U.S. really was the "best house" in a challenged global neighborhood.  (See Gold on Hold; The New Play May Be in Munis from Sept. 25 -a Sunday.  Weirdly, gold closed the next Monday almost exactly where it closed today.  Talk about truly having been "on hold"!)  Since then, the leveraged muni fund NIO has paid out about 4.5%+ in tax-exempt dividends and has appreciated about 5% in price- and to me the key is, considering NIO and its peers vs. stocks, that this followed after a substantial uptrend in NIO and a severe correction in stocks. 

This I continue to see matters as laid out in my April 15 post, More Signs Of a Stock Market Topping Process Emerge.  The interesting and hopeful phenomenon that strength in electric utilities may just presage a non-catastrophe, merely an "ordinary" down-cycle should indeed the top be in already and a lower low await.    

Monday, June 4, 2012

Bloomberg Now Reassures Us There Will Be No Recession in the U.S. This Year

The usual counter-trend rally stuff is crossing the wires.  It's "probably" a smart trend to play for a little while, though I don't fully trust it (but may play it with small change that can just sit for years if need be).  From (BBG), this headline is redolent of so many fake-out excuses from prior established ongoing downtrends that suck the sheeple in:  Asia Stocks Climb Amid Global Policy Stimulus Speculation, which begins:

Asian stocks rose amid speculation global policy makers will take steps to stimulate economic growth and after a four-day drop left the regional gauge at the cheapest level this year.

And then after reminding you that others are buying the dip, there's this, a bit down the page:   Growth Slowdown Seen in U.S. as Recession Dodged,which features this "persuasive" lede:

The U.S. economy looks set to deliver a repeat performance in 2012: for the third straight year, it may suffer a swoon yet not slip into a recession.
“I don’t think the slowdown will be any more consequential than the past two years,” said John Ryding, a former Federal Reserve researcher who is chief economist at RDQ Economics LLC in New York. “There are positives out there in the economy. We’ll avoid a recession.” 

The not so hidden persuaders at BBG that favor the theme that all is well and shall always be well will likely modify Ryding's happy foreknowledge of the future if need be by reminding us, should economic data turns more definitively south than it already has that A) the bad news has already been discounted by the markets, so BTD; and B) the Fed will do whatever it takes to save the day, so BTD.

You can see that the recession case has advanced, given that BBG has seen the need to refute the possible occurrence of one. 

What I don't trust about the apparent reflex rally in the commodities is that it's unaccompanied by any significant selling in the T-bond futures, which are ripe for profit-taking.  (If rates stay where they are in the AM, I'm planning on taking profits on the last of my T-bonds, and am also sorely tempted to buy TBT for the first time ever.)  At this point my short-term guess is commodities up for a while, T-bonds up in yield, but continued negative economic data points that raise serious questions about Dr. Ryding's certitude that "We'll avoid a recession".

The "Perils of Pauline" markets continue on, mostly benefiting the brokers. 

Friday, June 1, 2012

We are finally seeing the VIX and VXO break decisively above 25.  Finally.  Boy, has this been an exhausting wait.  FB buyers and the like are capitulating.  Finally.

We only had 12 weeks in a row of the NAZ being up this year-- a record, it was said, a longer streak than even in 1999.  Reality can bite, n'est ce pas?

Note I'm not a short-seller.  I simply have owned Treasuries (and high grade munis) as a natural hedge against the stocks-down/interest rates-down trend we've seen the last few years.  Plus I own AAPL, and some OTC income stocks.  I've simply been blogging "forever" that stocks have fundamentally been overpriced based on historical norms, and relative to the risks.  I presume there are very good reasons why the Fed has been doing what it has been doing and why investors are finally focusing on return of principal.

The DoctoRx rule of thumb is that high-quality stocks can be bought when the above fear indices are above 25, though the timing may be terrible for a while.  Typicall, these moves above 25 carry to or above 30.  I would look for a BTD scenario around there. 

Support for the NAZ is around 2200.

The dividend-paying top-tier NAZ tech stocks are my long-term faves for growth and income.  I would look to scale into them on weakness in the bubble tech stocks (plus I own a fair amount of AAPL as a "permanent" holding).

More to say in a later post, perhaps Sunday night.  A busy weekend looms on more than one front.

Gold Up but Oil Down: A Mixed Message

Oil and gold are doing what they did in later periods of 2008 as well as last year.  Oil is breaking down while gold is moving up.  The gold:oil ratio is either about 20:1 (WTI) or about 17:1 (Brent).  Either way, gold is not historically cheap to oil.  There is clearly more room for oil prices to drop, both fundamentally and based on my reading of net short positioning  of the commercials in the crude oil futures market.  Thus as in 2008, a deeper low in the gold market is very possible (no guarantee), as people start really fearing deflation (perhaps).  More fundamentally, in recessions, people must pay their bills with currency, not gold, plus jewelry purchases decrease.  Finally, let's remember that the gold is now about 4X as expensive relative to U.S. residential real estate as it was when the ratio was at its minimum about seven years ago.  You can't eat either gold or a home, but you can live in the latter (or rent it out for a profit, or so you hope).  Value buyers are looking to homes this cycle for inflation protection, not only gold.  I think the financial markets will reflect this relatively high price of gold compared not only to houses but to metals such as platinum.

Thus I am looking at the action in the precious metals today as technical, under cover of the "they will print" POV.  But no U.S. recession is baked in the cake, and the current money flows into the Treasury market out of Europe and out of the global stock markets are probably sufficient to take the place of a new QE.

All recessions are deflationary (or disinflationary).  As regular readers know, I give ECRI's views more weight than the Street does.  Their WLI was down again today, and the multi-year trend is uninspiring.

If their U.S. recession call is correct while Europe works through its various problems, I think we can look forward to demand for commodities sharply diminishing.  For example, there is said to be a 2-year supply of platinum in ETFs, for which the public is paying storage costs.  LOL!  Platinum can go into deficit, plus what do you think happens to the demand for platinum jewelry in a global recession?  Platinum "could" fall a lot further from here.  Just look at the 2008 lows if you are skeptical.  Maybe it can't go so low, but sub-$1200 is quite possible.  I just don't see gold as a good value at its current price in that global recession scenario.  Message:  sometimes markets should be watched and not traded.

As I've been saying since January 2009, the U.S financial structure. has been developing as Japan did during its ZIRP period.  The zero bound has been a gravitational force, as it were, pulling the longer maturities toward it, with inflationary spurts during the expansion phase of the economic cycle. 

I still consider stocks as a whole to be overpriced.  OTOH, buy-and-hold investors are finally getting the chance to purchase a growing number of equities that are likely to outperform Treasuries on a multi-year basis, ignoring the fluctuations in between.  Hint:  think secure and growing income stream, a la BDX; or high and safe income stream even if it fails to grow ("we" think safe), as in ED.