The Daily Trading Report

World Financial Markets in 8 Charts $SPY $DIA $DBC $JNK $SLV $HYG $TLT $TBT $UDN $FXA

Brad — Tue, 07 Sep 2010 11:29:11 +0000

Some four days ago it appeared as if the most anticipated collapse in equity markets was about to materialize but as it always happens with moves that the majority anticipates it never happened. I know by now followers are probably sick of hearing a broken record saying that it appears as if equity markets are in the midst of hammering out a bottom from which a sustainable rally is likely to develop. I say sustainable because sentiment literally remains so toxic that no one is anticipating or positioned for a material move to the upside. It seems every where I look there is yet another retail product developed to feed the hunger of the masses wanting to hedge downside exposure, perhaps the little aftershock we had in May (flash crash and all) brings back too many gut wrenching memories of what happened from Sept 2008 – mid March 2009.

But this “rally” (that is strength we have seen over the last three days) is based on fundamentals, there are still too many structural deficiencies to support more upside in equities! Well that is the battle cry of the majority who remain firmly in the bearish camp……of course time will tell. Just remember John Templeton’s words, bull markets are born in pessimism, grow in scepticism, mature on optimism and die on euphoria. If you are waiting for all the “structural deficiencies” to go away then it will be too late.

On a more fundamental note it does appear that the crowd is becoming overly bearish. As of late there have been at least six occasions where economic releases have come in better than expected. The ones that come to mind (in no particular order) are:

Chinese PMI
ISM Manufacturing
US GDP
Consumer Confidence
UK Factory Production
US Private Payrolls

Granted there have been some figures coming in less than expected such as the ISM Services Index on Friday. But all in all there is not enough evidence to suggest that the much anticipated “double-dip” is materializing.

Of course much depends on the US equity market’s ability to break to a multi-week high. That will only occur once (if) the Value Line closes above the 2450 level. As you can see from the chart below it still remains locked in a trading range that is now some 15 weeks old.

What makes us reasonably confident that we will see a break above 2450 on the Value Line? Well one factor is the strength of equity markets outside the US. Note where ADRs are trading. In the midst of the talk of double-dip and deflation they have been quietly moving higher. ADRs are certainly a lot closer to a multi-week high than a multi-week low. Note the performance of emerging market small caps (EWX) they are already trading at a multi-week high. This is not the sort of action you would expect to see if the market was genuinely bearish or if liquidity conditions were drying up.

We continue to find the banter about deflation and a double-dip bizarre. How can there be deflation when the commodities are trading at multi-month highs?

How can there be deflation when silver (amongst others) has broken out? Something is going on and it appears to be a whole lot more inflationary than deflationary!

I guess it is encouraging that the crowd still is positioned for a deflationary environment. Note the linear action occurring in investment grade bonds. This indicates weak hands have entered the bond market. This uptrend is not healthy and is at risk of falling spectacularly. OK I would not be too confident in saying that if commodity prices were trending down, but of course they are not!

Now if the US economy was about to fall into the abyss why do we have junk grade corporate bonds (which are highly geared to economic growth or at very worst tame growth) near a multi-week high? The action of junk grade bonds is being mirrored by the action of highly risky emerging market small caps.

And it appears that the Dollar index is about to “roll-over” again.

Yes I have to confess there is one market that I am concerned about and that is the market for the carry trade. Until the AUDJPY breaks above resistance at 79 I will remain somewhat edgy.

So there are perhaps two big levels that you should be watching. On the Value Line 2450 (or 670 on the Russell) and on the AUDJPY 79. If the market can trade above these two levels then I can confidently say that we have confirmation of the bull market that started way back in late 2008. Given the action of junk grade corporate bonds, emerging market small caps, and generous liquidity conditions I am confident that breakouts to the upside will happen over the coming days.

Pay Close Attention to the Lesser Known Commodities $DBC $GSG $GCC $RJI $UCI $DJP

Brad — Fri, 03 Sep 2010 09:48:24 +0000

It continues to intrigue me how the crowd remains convinced that the US economy and perhaps by default the world economy is entering a condition of deflation and is falling “back” into a recession (aka “double-dip”) or that there is going to be a prolonged period of economic contraction. Of course there are more than a few freaks out there who believe that the US is about to enter a depression.

I am not going to get caught up in yet another argument of deflation or double-dip, rather I would like to highlight what things we would look for that would indicate “deflation” or a “double-dip”.

Many economists refer to the action of the US treasury market for clues as to what is likely to happen with respect to deflation/inflation and economic growth. However, given the blatant Fed involvement in the bond market and also the fact that moms and pops have been loading up on treasuries (amongst other fixed income instruments) I don’t think that the action of the bond market can be trusted. Yes I have to hold back on the use of the “manipulation” word.

I think that the market or asset class that is least subject to “artificial” price movements is the commodity market. In essence a sure fire way of telling that something is happening on the inflation/growth front is if there is a general rise in the prices of commodities.

Most commentators refer to the CRB Index as being a proxy for the commodity market in the same way that many still refer to the Dow Industrial as a proxy for the equity market. However, the CRB is rather misleading. It has a 40% weighting to energy commodities (gas and crude), so any analysis on the behavior of the CRB is going to be misleading especially if crude is lagging or outperforming the price behavior of other commodities.

CRB Futures Index

Also the CRB excludes a number of vitally important commodities. A more definitive index is the “old” CRB Index (now referred to as the Continuous Commodity Index) and the CRB Spot Indices (see crbtrader.com). In any event, I have talked about these indices before. What I want to do today is highlight the recent price performance of a few commodities which are not included in the commodity indices but nonetheless are vitally important for our everyday lives;

polyethylene
ethanol
newsprint
cheese

Indeed this may seem a rather bizarre combination of commodities. I haven’t chosen them for any particular reason, rather merely to highlight that the more one digs into the price behavior of commodities, the more one gets the feeling that something very bullish is developing on the commodity front and by default, one should be positioning portfolios for inflation rather than deflation.
.
Bloomberg Injection Grade Polyethylene Index

Bloomberg Ethanol Average Rack Price Index

FOEX PIX Paper US Newsprint Index

Cheddar Cheese Index

If my “naive” eyeball analysis serves me correct, then it looks as if all four commodities are moving higher. Does this indicate inflation or economic growth? I don’t know, but I am reasonably confident that it does not suggest deflation or economic contraction as pundits and the press of popular opinion would have us believe, and it is definitely not supportive of low yields on long dated fixed income securities.

I think you could do a lot worse than to have a reasonable portion of your assets invested in commodities of various shapes, sizes, and descriptions.

The Bears Are Fully Extended $DIA $SPY $TLT

Brad — Fri, 03 Sep 2010 09:46:15 +0000

Evidence suggesting that “investors” are throwing in the towel with respect to equities and accepting their “lot in life” in treasuries continues to mount. I came across the following two articles yesterday:

Face it Nobody is Bullish Anymore

A Thomson Reuters analysis of the 30 largest fundamental hedge funds has found that these major players slashed their risk exposure to the stock market in the second quarter, by opting for defensive stocks such as dividend-payers or utilities, or by shifting away from cyclical industries such as materials and energy.

Only 17% of Hedgefund Managers are Bullish on the S&P 500

Only 17 per cent of hedge fund managers are bullish on the S&P 500, according to the TrimTabs/BarclayHedge Survey of Hedge Fund Managers for August. About 47 per cent of the 104 hedge fund managers surveyed in the past week are bearish on stocks, up markedly from 33 per cent in July.

As to US debt, only 17 per cent of managers are bearish on ten-year US Treasury notes. Bullish sentiment vaulted to 36 per cent from 14 per cent in the past two months.

So my point? Well, where is the marginal seller of equities and marginal buyer of treasuries going to come from? If everyone (well, at least the vast majority) is bearish on equities they are by default heavily positioned for the downside. Markets always follow the path of least resistance, perhaps the “black-swan” here will be a dramatic move to the upside, precisely the very thing that no one is expecting.

New Zealand Stocks a Bargain and Play on Agricultural Commodities $ENZL

Brad — Fri, 03 Sep 2010 09:43:22 +0000

We are always searching the globe for markets that are completely out of favour with the investment “community” and also off the radar with the average fund manager. Furthermore, we try to find out-of-favour markets where the underlying fundamentals, or at least the drivers of those fundamentals, are favourable.

We are concerned about inflation and rising commodity prices, we are diametrically opposed to the in-vogue “deflation” and double-dip” school of thought/camp (call it what you will), and we have made no secret of that in previous posts to seekingalpha. With this central view in mind we have been trying to find a market which offers a very cheap entry into a leveraged play on commodity markets. Whilst many emerging markets look very attractive they have attracted the attention of the investment community and accordingly valuations have been bid up to reasonable levels (i.e. they are hardly bargains anymore especially when you compare them to developed market equities).

There is one market that is:

almost entirely exposed to the commodity market especially agricultural and “soft” commodities
is a developed market in the true sense of the word (no need to take any political risk whatsoever),
has equity valuations that would bring tears of joy to any deep value fund manager
has not been easy for the average punter to get exposure to
has Asia on its back doorstep….and in the other direction Antarctica!
and at a guess the majority of the population of the world wouldn’t even know where it was on the globe.

Ok the last point is perhaps an exaggeration but when I mention New Zealand you will probably get what I mean. I am not going to go into the dynamics of the New Zealand economy too much except to say that it is geared almost entirely to agricultural, horticultural, and soft commodities. The average dividend yield of stocks listed on the NZSE is 6 with a price to book value of less than 1x and P/E of approximately 8x. You can go and do your own homework…….I will just say one more thing. At current levels you are able to buy stocks at the same level they were trading at in December 2008!

NZSE Index

OK big deal so what about December 2008 levels! Well here is the kicker……look at what has happened to a trade weighted basket of commodities which NZ exports since December 2008. The index below is based on 18 different commodities that make up over 60% of New Zealand’s total merchandise exports. The index covers: the major forestry products (logs, pulp, paper); dairy products (e.g. whole & skim milk powder, butter, cheese, and casein); other livestock products (e.g. wool, lamb, & beef, leather and skins); assorted commodities such as aluminium, fruit, fish, and crude petroleum products. The commodity weights are determined according to the importance of each commodity in New Zealand’s trade. Dairy (35%), Forestry (20%), Livestock (30%), Fishery (8%), Aluminium (7%).

The Commonwealth Bank of NZ Commodity Price Index

Until recently it has been very difficult for the average punter to get access to the New Zealand market, unless you had a brokerage account in NZ that of course. However, now there is a way. There is a new ETF (ENZL) which tracks the MSCI New Zealand Index. If commodities take off (in which evidence suggest they are) you could do worse than be invested in the New Zealand economy.

Take Careful Note of European Economic Expansion $FEU $EFA

Brad — Wed, 25 Aug 2010 09:48:27 +0000

Doom and gloom pervades in world equity markets. But there is more than just hope, there are a number of bullish economic stats coming out of markets in different regions, well all except Japan that is but that is a story for another day.

Contrary to popular believe it appears that “austerity” measures have not held back economic growth/expansion in Europe and in particular Germany. Yesterday we had Eurozone New Orders coming in ahead of expectations. The chart below doesn’t seem to support the “double-dip” or “deflation” schools of thought, well not in Europe at least.

Today German Business Confidence came in ahead of expectations and as with the chart above it does not show any sign of a “slow-down”.

Granted Europe is not the US neither is Germany, but we should not forget that Germany is one of the industrial powerhouses of the world economy and one of the biggest exporters. Perhaps the US economy is not in such a bad shape after all…….if it was sinking into a recession again (call it what you will) then it stands to reason that this “sinking-feeling” should also be showing up in Germany, and the greater Eurozone. There is enough evidence to suggest that this is not the case

Bull Markets Creep Up on You When You Least Expect Them $SPY $DIA $QQQQ

Brad — Tue, 24 Aug 2010 12:13:57 +0000

Looking at the behaviour of stock market indices over the last week or so I get the feeling that here we go again for the third time in as many months! The press of popular opinion would have us believe that the abyss is about to open up! I cannot help but notice that Nassim Taleb is featuring again in the WSJ: Nassim’s Pessimism Lures CIC. Yes the contrarian signs seem to be piling up by the hour now. In any event if the market was about to “crash” albeit move significantly to the downside what should we have already seen by now? I am going to work through different markets and different indicators of “risk” to arrive at a conclusion as to whether or not the weakness we have experienced is the beginning of something grandeur or whether it is merely another bear trap. If the market was genuinely in trouble we should see multi-week highs/lows in different risk indicators….

First the equity market itself and in particular market internals. Few people take any notice of the NYSE Advance Decline Line these days and those who do usually look at the wrong index. The index that you should take note of is the NYSE AD Line of stocks not securities. A change in primary direction is depicted by a multi-week low/high in the A/D line. From the chart below you can see that it has yet to reach a multi-week low….Actually it has a long way to go. Accordingly it suggests a primary bull trend in equities remains in place.

NYSE Advance Decline Line of Stocks

And what about the canary in the coal mine of the world stock market? Emerging market small caps are a “leveraged” play on world growth. Usually genuine problems with the S&P 500, FTSE etc are picked up well in advance in the behaviour of emerging market small caps. Well almost at a multi-week high and not looking bearish in the slightest.

MSCI Emerging Markets Small Cap in Local Currency

speaking of growth if we were going into a period of economic contraction then shouldn’t we see commodity prices collapsing? As far as the CRB Spot All Commodities index is concerned that is far from the case, yet another case of a multi-week high, which is being confirmed by the behaviour of the CCI Futures index. And when were rising commodity prices indicative of “deflation”? It is interesting how the emerging market small cap index and spot commodities look very similar in appearance.

CRB Spot All Commodities Index

If the world economy was contracting then shouldn’t activity on the high seas be slowing down? But Baltic Freight Rates have been rocketing up? Well someone is aggressively bidding up shipping capacity! So much for China slowing down…..

Baltic Dry Index

Now one could make a real bearish case for equities if credit/liquidity conditions were “drying up”. Yes we could look at various spreads such as the TED, Emerging market Bonds over US Treasuries, Investment Grade CDS vs. Junk Grade, swaps etc…..or we can look at an index that includes them all. Judging by what the press of popular opinion would have one believe the Bloomberg Financial Conditions Index should be at, or very near to, multi-week lows. Yet the BFCI is a long way off the lows it was trading at in May/June. Liquidity/credit conditions have been improving not breaking down…….Believe it or not!

Bloomberg Financial Conditions Index

But what about the behaviour of US treasuries and corporate bonds? Moms and Pops are piling into fixed income securities. When did retail investors become the “smart” money?

I have only included a 12 month graph of each index so that one can easily gain an understanding of the current behaviour. I urge you to look at each index, or proxy thereof, from the 1st Jan 2008. You might be surprised to see how much of a surprise the big crash of 2008 wasn’t!

Arthur Cecil Pigou once said……”Prosperity ends in a crisis. The error of optimism dies in the crisis, but in dying it gives birth to an error of pessimism. This new error is born, not an infant, but a giant.” Bull markets sneak up you when you least expect it….am I right in saying that the next bull market in equities began in March 2009 and that any weakness we seen in the major market indices should be seen as a buying opportunity? Or are the charts above just an optical illusion? Only time will tell.

Beware of Being Led Down the Garden Path by the Press of Popular Opinion $DIA $SPY $TBT $AGG $TLT $LQD $JNK $BND

Brad — Mon, 23 Aug 2010 08:35:36 +0000

An investment theme making its way to the front page of a mainstream newspaper is a contrarian’s delight. I could not help but notice the following headline on the front page of the New York Times:

In striking shift small investors flee stock market

There is no striking shift at all, the only striking thing is that this investment theme has become so pronounced that it qualifies as front page material for the NYT! Do we need any more evidence to suggest that moms and pops or weak hands have finally thrown in the towel on the equity market front? Probably not, but just for good measure look at the headlines popping up on the fixed income front:

Bond funds attracting cash like stocks during dot-com boom

Desire for income drives high yield bond ETFs popularity

Mutual Fund Cash Balloons

The immortal words of Humphrey B Neill “when everyone thinks alike the opposite is most likely to happen” ring in my ears. But wait there is more………..least we forget two notable US treasury bears announcing a “return of capital” last week. Then there was the remarkable results from a survey conducted by moneyshow.com:

Its doom and gloom all over again

where 58% of respondents said that the recession would end sometime after 2011 (that is at least 18 months from now), only 7% of respondents thought that the S&P 500 would close 2010 higher by 10% from current levels, and a mere 8% of respondents believe that a bull market began in early 2009.

I have said it before and I will say it again – this has been and continues to be the most hated stock market rally in modern history……yes the S&P 500 is still up some 60% from its March 2009 lows.

John Templeton’s words keep ringing loud in my ears – bull markets are born in pessimism, growth on scepticism, mature on optimism and die on euphoria. Am I right in concluding that a condition of pessimism prevails in equity markets and euphoria in fixed income markets?

Bull markets have a habit of sneaking up on you when you least expect them. Does the chart below look bearish to you? Well it doesn’t to me, it is the MSCI Emerging Market Small Cap Index and it has a fantastic record of leading major market indices like the Dow and S&P.

The behaviour of emerging market small caps doesn’t make headlines, it doesn’t sell newspapers or attract readership but drama queen indicators like the Hindenburg Omen do! Watch out for the press of popular opinion cleverly disguising themselves as economic bogie men!

Commodity Markets Suggest That US Treasuries Are So Not Safe Haven $TLT $TBT $IEF $GCC $DBC $BND $AGG $RJI

Brad — Tue, 17 Aug 2010 10:42:42 +0000

The two buzz words doing the “circuit” right now are “double-dip” and “recession”. Yes one cannot deny that the action of the US bond market is suggesting on no uncertain terms that economic growth and inflation will be a figment of one’s imagination very soon…….but can we trust the action of the bond market? Put it another way, is the behaviour of moms and pops throwing in the towel with respect to the equity market and piling headlong into treasuries and investment grade corporate debt rational? Is it rational that many companies can now issue debt for less yield than their respective dividend yields? I don’t think so! It certainly appears that the average punter in the street has absolutely no (as in zero) concern of a rise in interest rates a few years from now…….and by default no fear of a rise in inflation.

OK what would we look for, in real time, as evidence supporting economic expansion and or inflation? In short rising raw input prices – commodities. Enter the CRB Spot All Commodities Index. This is a measure of price behaviour of 22 economically sensitive basic commodities whose markets are the first to be influenced by changes in economic activity. Accordingly, it serves as one early indication of impending changes in business activity. What distinguishes the CRB Spot index from the CRB Futures index is that it is based on spot prices.

A spot price is a price at which a commodity is selling for immediate delivery. Some of the prices used are nominal prices in that they are not actual transaction prices. Often they are exchange prices – a price for a completely standard commodity which eliminates the effect of minor quality changes on actual transaction prices? . Trade publications may use this type of price for commodities such as cocoa beans, coffee, and wool tops. The price for print cloth is an average of the spot price and price for the most distant forward contract because it was determined that a large part of the sales of print cloth are made on a contract basis.

The 22 members are: burlap, copper scrap, cotton, hides, lead scrap, print cloth, rosin, rubber, steel scrap, tallow, tin, wool tops, zinc, butter, cocoa beans, corn, cottonseed oil, hogs, lard, steers, sugar, and wheat.

Notice the distinctive lack of energy related commodities! In any even this is a very serious list. Suffice to say this, if the CRB Spot Commodity index is rising then it is a sure sign that something “determined” is happening on the economic expansion/inflationary front. I would rather trust the price behaviour of things that the retail investor has never “herd” of before……..rather than the price of the US 30yr treasury or an ETF of investment grade debt! Bet you don’t know what Burlap is!

Is the index rising? Well beauty is in the eye of the beholder. That looks like a multi-month high to me!

Based on this chart it would appear that US treasuries and fixed income products in general are high risk “assets”!

Still not convinced? Well how about the price of coal, steel, ethanol, pulp, iron ore, shipping rates (Baltic, Contex, Harpex), and least of all the Shanghai Composite!

As funny as it may seem just as everyone starts queuing up to interview “Rosie” and he gains “rock-star status” commodity prices start taking off.

Market Behaviour Not Befitting That of a Bear Market $VTI $EWX $UDN $CEW $JNK $DBC $DBB $TBT

Brad — Mon, 09 Aug 2010 10:44:37 +0000

I think it was John Templeton who once said “bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria”. Given that:

every blogger out there seems to be talking about “double-dip”, “the new-normal”, or “recession”,
that the most widely followed articles on blogg sites (no names in particular) are essentially about “Why the S&P 500 is About to Fall Into the Abyss”,
articles abound as to why moms and pops are throwing in the towel with respect to the equity market,
the crowding into the “safety” of US treasuries
and perhaps what can only be described as hatred towards the FED.

It would appear based on Templeton’s words at least that the stock market has the all the hallmarks of being more or less at the start of a multi-year bull market rather than in the middle of a bear market!

Yes as bizarre as it may seem, it may well turn out that the crash of 2008 ended a multi-year bear market for the US stock market! Ok I am not for one minute saying that the crash of 2008 was the end of the bear market, we will only know that with the passage of time, rather it is just something to give some serious consideration. I know there are a power of “reasons” as to why the stock market is heading down “to test its March 2009 lows”, or why we are going into a “new normal” period of low growth, but ask yourself are these your own reasoning or based on what the press of popular opinion have led you to believe?

It was interesting watching how markets behaved on Friday to the less than expected Jobs figures. After a respectable sell-off the market rallied hard late in the last few hours of the day and the major market indices closed only marginally lower. A weak start and a strong finish is typically what you find in bull markets.

Emerging market small caps almost at a multi-month high? This isn’t what you would typically associate with a bear market! Well if you are not convinced take a look at one of the broad European indices like the Bloomberg Euro 500, they are now only a few percent away from their April highs but no one bothers to mention that. If one did not know any better the popular press would have us believe that European equity markets are near multi-week lows.

When I hear stories of moms and pops, who are typically long term buy and hold investors, throwing in the towel with equity holdings and that consumer sentiment is still more or less as bad as it ever has been since 1967 (since records began or at least since Bloomberg started keeping them), the contrarian spirit in me suggests that long dated US treasuries are the last place to be. Yes, yields do look rather bearish but if this is a result of what moms and pops have been doing I am happy to take the other side or be a “provider of liquidity” to panic buyers.

I have said it many times before………the behaviour of the junk grade bond market is not befitting of behaviour associated with a bear market.

Commodity prices, that is the price of the average commodity, has risen dramatically over the last two months and so too has the popularity of deflationists, yet there is hardly any commentary about the action of the broad commodity market. Rising commodity prices indicate inflation or economic growth or some combination of the two……..in no way is it deflationary in nature!

Base metals have broken out and are moving higher, and so too has the Shanghai composite. But barely is this spoken about, it seems that commentators are hell-bent on the employment situation in the US. How employment ever got to be a leading indicator is a new one on me!

Still very few are paying any attention to the linear fall in the USD and I can find no bulls of the Euro or GBP. It seems that there is total disbelief in the strength of the GBP and Euro (weakness of the USD). This can only mean one thing, we have got a lot more weakness in the USD to come.

It seems that the safest place to be is in fact the riskiest place, that is emerging market currencies. Again not exactly the sort of behaviour associated with bear markets.

Take very careful note of what the market is telling you, look far and wide…..Mr Market reveals his true intentions if you look hard enough!

We Now Have Broad Based Confirmation of a Rally in Commodities $TLT $TBT $GCC $GSG $DJP $GSG $CEW

Brad — Wed, 04 Aug 2010 10:35:22 +0000

Commodities, US treasury spreads, and emerging market currencies are now trading at multi-month highs, yet still all the “experts” seem to be convinced that the US economy (and most of the world with it) is heading into a deflationary condition. Well strike me off my horse……how can multi-month highs in the aforementioned markets be deflationary!

The Continuous Commodity Index (the “Old CRB”)

Performance of the 10yr Treasury relative to the 30yr Treasury (price)

Proprietary Index of 10 Emerging Market Currencies relative to the USD

It is interesting to note that commodities and emerging market currencies have essentially gone nowhere since about October 2009 (some 10 months). The longer a market moves in a sideways direction the greater the intensity of the breakout……even my sheep shearing next door neighbour can tell you these markets are now breaking to the upside!

With the US treasury market loaded to the gunnels with weak hands (Moms and Pops) the crack in the bond market is going to be rather amusing! What is going to be that proverbial last straw that breaks the camel’s back? Well it could be nothing more than a butterfly flapping its wings over the Atlantic!