Wednesday, November 11, 2015
FOLLOWING COPPER SURROGATE
High prices lead to over supply. Low prices to cost-cutting, layoffs and mine or shop closings.
That's what business cycles and the market are supposed to do--that is, if you don't have government interference.You can spell government interference in many ways from China's building cities with zero inhabitants to global QE madness.
Copper is called the educated metal, jokingly referred to by many as having a Ph'd in economics. That just might be one of it inherent weaknesses.The world today is awash in Ph'ds and the same can be said for copper.
A bell weather for copper is Freeport McMoran, one of the globe's big miners of the metal. With China's recent revelation about its future growth prospects, Freeport's stock price, a New Orleans-based firm, turned further south.
The rout in copper is on. The important industrial metal just hit a six year low. China has been the globe's largest copper glutton, gobbling up an estimated 40% of world supply. But now it's dorsiflexing it hands and pushing itself away from the table. For many this has come as a surprise, proving once again the hard-learned lesson some call the law of impermanence. Or in popular Wall Street jargon, trees don't grow to the sky.
Down for five straight sessions, copper is off 22% for the year. Here's a chart from MarketWatch via Factset.
And here is chart for FCX. We're not recommending anything here, just pointing out some things. Last August hedge fund manager Carl Icahn revealed he owned a big share of the company and in September the CEO reportedly purchased a million shares around $9.74 a pop.The stock closed yesterday at $9.83 and this morning is trading around $9.25.
Again, we're not suggesting anything here, just ruminating on a concept we keep rolling over in our mind, capitulation.The FCX chart speaks for itself and the economy. So you might want to follow FCX not the bouncing ball.
YOU OWN SKIN
There is an old complaint about the news business that big stories later found to be flawed or plain incorrect make the front page, but retractions wind up buried on the obit or church page.
A similar thing happens with government numbers, especially those economists and central bankers harp on and on about and use to make decisions that affect innocent people. At the moment these folks along with the MSM financial press are fixated on the job number, a figure that supposedly came in a thundering 0.1% better, improving from 5.1% to 5.0%.
If change is the only constant in life, say hello to revision of government economic data.That booming October job number nearly everyone seems to be falling over most likely faces revision. Maybe even more than one. Was the October number just an outlier, an aberrant figure like many we've seen and come to question with government data in the past?
But it's a safe bet traction-wise the revised number or numbers will cut little bait. This is one of the main reasons such data--particularly that which the Fed follows or invents--and the economy in general are lagging indicators while the stock market is a leading one.
There's another reason, too. Most market players have their own skin in the game. When was the last time you could say that about politicians or government bureaucrats?
AROUND THE WEB
As we cruise around the Internet we come across reads we think are worth sharing. Every year there is discussion about a Santa Clause rally. The piece below pearled recently on dailyspeculations.com .
Stock Trader's Almanac is the longtime publication originated by Yale Hirsch now headed by his son and is alway worth a look and fun to peruse. We don't have connections to either, just enjoy good content where and when we find it.
Stock Trader's Almanac is the longtime publication originated by Yale Hirsch now headed by his son and is alway worth a look and fun to peruse. We don't have connections to either, just enjoy good content where and when we find it.
Has anyone studied Art Cashin's claim that:
"When October is up over 7 percent, the result of the next two months — the so-called Santa Claus rally — is cut in half," UBS's director of NYSE floor operations told CNBC's
His research comes from Stovall from S&P, if I hear him right. Cashin says that instead of approx 3% benefit long drift you only should look for half of that because of the >7% rise in Oct.
anonymous writes:
I have not studied his claim, but if he does not somehow factor in the relative strength of the market in months just prior to October, I'm not sure the observation is worth much. Presumably, the very week August and September of 2015 created a reset of sorts and the odds of a Santa Claus rally occurring this year are probably no worse than usual. Just my opinion of course.
Jeffrey Hirsch writes:
While I love Art Cashin, he and everyone else mistakenly calls the yearend rally the Santa Claus Rally. As defined by Yale Hirsch my illustrious father and mentor the Santa Claus Rally is the short 7-trading-day period cover the last 5 trading days of the year and the first 2 of the New Year. Most importantly as the songwriter in Yale has made clear: "If Santa Claus should fail to call, Bears may come to Broad and Wall." Here is the page from the 2016 Almanac and a slide image I use a presentations.
From Page 114: "Santa Claus tends to come to Wall Street nearly every year, bringing a short, sweet, respectable rally within the last five days of the year and the first two in January. This has been good for an average 1.4% gain since 1969 (1.4% since 1950). Santa's failure to show tends to precede bear markets, or times stocks could be purchased later in the year at much lower prices. We discovered this phenomenon in 1972."
The history of the Santa Claus rally:
Tuesday, November 10, 2015
CENTRAL BANK FANATICISM: HELLO MR. CARNEY
In our last Weekend Notes we wrote about the upcoming Paris meeting on what has become almost a fascist obsession about the dangers of global warming more deceptively known as climate change.
Recently, the Canadian transplant and current head honcho at the stodgy old Bank of England, Mark Carney, jumped into the fray with a fiery, scaremongering speech worthy of a Pentecostal preacher on a sultry summer Sunday morning in the deep South. The problem with people like Mr. Carney is he appears to be playing the useful idiot role for climate change hardliners with his acceptance nonpareil of conventional wisdom.
When Mr. Carney addresses his board of fellow governors perhaps few pay much attention. That would be somewhat understandable, the economic cellar is full of some pretty dry stuff. Such is not the case, however, when it comes to the current rage of global warming fanaticism. Some people take their homework seriously. Here's brief example with the site for those who choose to take the time. prienga.com/blog/2015/10/9/fact-checking-mark-carneys-climate-claims
In his speech London’s insurance community, Mark Carney, Governor of the Bank of England, asserted a series claims about climate change. Some of these are widely accepted. The climate does change. The world has warmed. Atmospheric CO2 has increased, half of the increment due to human activities.
Beyond this, there is no consensus, and indeed, the available data in many cases directly refutes the Governor’s more extreme assertions. There is no consensus that humans are the primary drivers of climate change. As we can see, sea levels, for example, were rising well before the 1950s date Carney gives as the start of modern anthropogenic warming.
Importantly, the increase in losses since the 1980s is more likely to reflect expanded insurance coverage, increasing payouts as a percent of losses incurred, and an increased number of assets with higher values placed in harm’s way. Losses increases have not occurred due to increases in hurricane, tornado, flooding, drought or fire frequency or strength, at least not in the United States, which represents the lion’s share of insurance claims. In many cases, either frequency or intensity of weather-related events has actually declined. Sea level rise has not accelerated, not as measured by either satellites or tide gauges. Sea level has been rising for well over 100 years, and continues on that pace.
Like so many other economists, Governor Carney seems to operate under the assumption that current CO2 levels are just on the edge of some catastrophic acceleration. For some reason, 320 ppm of atmospheric CO2 is safe, but 540 ppm is not, because there is some precipice—an inflection point or boundary—between here and there. The limit is not 1,000 ppm, or 5,000 ppm, or 42,448 ppm, but right here, right now. A little more CO2, a trace more of a harmless trace gas, and we are doomed.
The climate is complex and the future uncertain. It is possible the worst fears may prove correct. Nevertheless, such an assertion is not supported by the historical data, not for US droughts, floods, tornados, hurricanes or fires. But it does show up. In politics. If sea levels were 20 cm higher in New York and this contributed to the damage from Superstorm Sandy, well, any middling analyst could have predicted the rise back in 1940, just as we can predict today that sea levels will be one foot higher a century hence. The failure was not of CO2 emissions, but squarely a failure of governance. And that goes doubly so for the fate of New Orleans. If Governor Carney wanted to make a constructive proposal, he should have called for Lloyds to create macro audits of risk zones and censure or refuse to insure jurisdictions where governance is not up to par. If insurers had refused to insure New Orleans unless the levees were sound, they could have saved themselves $30 bn in payouts and probably twice that in losses.
As an analyst, I find Mr. Carney’s speech is truly dismaying. For the Governor of the Bank to claim that climate change is leading to rapidly rising insurance claims is, at best, a critical failure of analysis. As discussed above, insurance claims are a function of a number of factors, including the type and country of the weather event, as well as the extent of insurance coverage and payout ratios. A hurricane in the US may see one hundred times the payouts of a major flood in India. Payouts will rise as a function of nominal GDP, as both inflation and the value and concentration of assets will play a crucial role in overall losses. The specific path of a storm can also be decisive for global averages. It goes without saying that a storm which strikes in Philadelphia, marches up the New Jersey coast, slams into the Manhattan and turns towards New Haven is going to cost a bundle. That same storm hitting, say, rural Mississippi would cause a fraction of the monetary damages. And this matters, because Superstorm Sandy caused more insured damages than all the leading weather events in Europe, Japan, and China combined. Single events can move long-term global averages.
If the Bank missed this, it is not because the necessary data is hard to find. Information on weather-related events is readily and publicly accessible on the internet. Almost every graph I use above relating to hurricanes, tornadoes, floods and droughts comes from the US government itself. Apparently, the Bank of England could not be bothered to consult the underlying climate data before making hyperbolic claims. Thus, at best, the Bank was careless with data analysis.
A worse interpretation of events suggests that Mr. Carney was willing to blindly accept the conventional wisdom, the ‘consensus of scientists’ regarding global warming, without any will or curiosity to dig deeper and form a personal view. One can only hope that monetary policy in the UK is not informed by such superficiality or passivity.
The very worst interpretation is that Mr. Carney is in fact aware of the source data, but chose to make hysterical claims to promote a personal political agenda. I cannot imagine a more ill-considered idea. For those of us who consider central bank independence sacred, the appearance of a national bank taking sides in a highly charged political debate—and doing so with scant regard for the underlying data—will establish the Bank of England as partisan and the political opponent of conservative politicians. Given that Janet Yellen, the Chairman of the US Federal Reserve Bank, hails from Berkeley, a hot bed of climate activism, should the Republican Party consider the Fed also its opponent? If so, I can assure you, the Republicans will find some support to ‘audit’ the institution.
At the end of the day, political neutrality is a pre-condition for central bank independence. If a political party deems the central bank to be an opponent, then it will take measures to gain political control over the bank, with the result that monetary policy itself may become politicized. If the Bank nevertheless feels compelled to champion a particular side in a political debate, its analysis must be water-tight and its communication, impartial. That Governor Carny violated both dictums is simply stunning and a huge blow to the prestige of the Bank of England. It was a very bad call indeed.
CAPITULATION
They say look for signs of capitulation.
They also say there are no signs of inflation as far as one can see. Most commodity sectors are weaker than a new born kitten. Concerns about anemic demand appear to grow daily. Higher interest rates supposedly bode well for some sectors like banks and building materials and metals and mining.
The other side of that coin is companies that lend credit to keep their businesses afloat like the auto industry and certain retailers. A stronger dollar goes along with higher interest rates and so does a bigger trade deficit. Prices of U.S. imports for October reportedly fell 0.5%, the fourth straight dip while prices of U.S.-made stuff exported to other countries declined 0.2% in October.
For the mathematically challenged that's a -0.3% shortfall. Think about it this way, just for kicks. A 0.1% increased in jobs is apparently large enough to make the trigger-shy, Yellen-led Fed pull the trigger. When in doubt the usual ploy is like those usual suspects: Feed the big dog.
Higher interest rates and a stronger dollar will feed the safe harbor perception on the buck and likely drive it higher when feathers get ruffled in a global world where ruffled feathers are as certain as politicians who look you in eye and lie. In past few months if you've been paying attention several firms have closed or curtailed their emerging market exposure. A lot of that has to do with the crumpling commodity markets. For many EMs commodities is the name of the game.
Today comes news that Goldman Sachs, you remember them from their close ties to the Federal Reserve Bank, "closed its BRIC fund after years of poor returns, the latest sign of how falling commodity prices and weak global demand growth have upended long-held investment strategies," according to the Wall Street Journal.
Apparently, Goldman moved the funds into larger-emerging markets fare, abandoning for now once Wall Street darlings of the future, Brazil, Russia, India and China, the Journal noted. It was Goldman back in 2006 that coined the term BRICs fund. Citing another source, the Journal says, "Retail and institutional assets in commodity investments in the third quarter are down more than 50% from their 2011 peak."
We don't know if this is capitalization and we are well aware of so-called value traps. But if we had to guess, given all that we read, that door is well ajar.
HOMEWORK
As rig counts continue to decline, more hand wringing about China's slowdown and a host of other concerns about slow global growth, here's a chart you might want look at. It's from
oilprice.com/Energy/Energy-General/A-Big-Week-For-The-Oil-Markets-Ahead-Of-OPEC-Meeting.
Along with an interesting read about energy, it raises some questions. What do these traders know, if anything, that so many others seem not to know? Has the energy glut seen it's worst days and so on. Hedge funds of late have been wrong about many issues, but is that just an aberration or are they onto something here?
Much of today's news in the industry centers on the International Energy Agency's recent report about OPEC's apparent stubbornness to cut production. The fear here is sustained low prices for an indefinite period. Several members--Venezuela, Iran and Algeria--to name a few, face crying time again with prices at this level.
But they are not alone as non-OPEC members pick up the refrain. Much of this comes before what could be a difficult meeting early next month. Where will energy prices settle for 2016 is the latest market topic of conversation and there, like always, is no paucity of opinions. Is it the current price or $60 or $80 a barrel?
That's a scenarios nearly as opaque at the black gold itself. About the only thing that remains clear is investors have their homework cut out for them.
Monday, November 9, 2015
CONFIDENCE
It's been said that banks and other financial firms benefit from higher interest rates.
Well, nearly all the talk today after Friday's job number, headlines like this one from Barron's are common: "Job Number Add Up To Rate Hike." In other words, what was a needlessly protracted media hand-wringing circus about rising interest rates, is now an absolute certainty owing to 0.1% improvement in the job number as it went from 5.1% to 5.0%.
There must be an awful lot of magic in that one-tenth of percent. Charles Schwab's stock price jumped nearly 6% based on the news you can bet bankers love. At the opposite pole are the capital intensive industries like utilities.
As a result you can expect utilities to get a fair amount of heat (no pun intended) in the media as their stock prices sink some more, though they have been going down for a while. There is an old Wall Street bromide that the market discounts the future. That's a two-way street. The future is not always up.
The Fed's footprint, however, is far deeper than just this rate hike if it happens next month, as Barron's points out. Just last week Fed Chair Janet Yellen openly expressed concern about bank lending policies, however she tried to ensconce it in Fed speak. Yellen was suggesting tighter Federal scrutiny of bank lending.
Yet a recent Fed survey of loan officers and their lending showed that they remain tighter than before the 2008-09 financial debacle started. According to one report, the U.S. is currently 12th in the world in creating new businesses. Regulation and scrutiny have their not-always visible costs.
Higher interest rates usually bring with them a stronger dollar, something U.S. exporters will hardily embrace. Speculation in the U.S. dollar before Friday's announcement hit its highest level in nearly two months. Cash will likely leave the market as higher bond yields compete for it. We've already written about the stock buy back situation.
According to one report today on MarketWatch, "U.S. corporations, meanwhile, are painfully aware of the adverse impact of a firm dollar. Goldman Sachs economists reviewed transcripts of conference calls from 44 companies and concluded that the continued strength of the greenback is among the themes most often discussed this quarter, along with divergence between consumer and industrials sectors, inflation, and buybacks."
This administration just stuck to the COLA crowd again, postponing any cost of living increase for 2016 based on the Fed's inability to locate any inflation. Yet several big firms, Costco, Pepsi and BigMac, to name a few, mentioned concerns about rising wages in their recent earnings reports. Congress just raised the debt ceiling, most likely creating more fixed-cost obligations not so easily swept under the higher interest rate carpet.
There is also something nearly as abstract as those Fed numbers--confidence. That's something we're going to find out more about soon enough.
Sunday, November 8, 2015
A FEW WEEKEND NOTES
Recently, we warned about the stock buyback meme beware-of-buyback-meme that's been so popular in driving up equity prices during this market cycle. Stock buybacks are related to earnings and drive prices. Fewer shares outstanding, higher booked or reported earnings. More shares out, more earnings dilution.
A blurb in this week's Barron notes: "Even stock buybacks, which boosts earnings per share, appear to be falling out of favor.....All told, shares of companies that have been buying back stock under performed the S & P 500 by 2.7 percentage points during the third quarter...."
The current panic over the dangers about climate change is like that summer lobster you unfortunately left a bit too long on the barbecue--overdone. The first clue is the most obvious. To scare up more traction they had to change the name from global warming to climate change.
Global warming is too specific. Climate change covers a great multitude of sins. It much easier to slide a few by the populace that way. The more specific the closer one's feet can be held to the flame. That's the only real global warming. So when the bureaucratic worry-peddlers and scaremongers meet later in a fortnight in Paris, look for the carrying cost to the solution to this exaggerated nemesis to escalate. And that's with a capital E.
The scaremongers, taking their lead from the recent Halloweenies, are out in force ahead of that meeting blaming everything and anything including the flooding of my grandmother's basement on climate change. The only problem is my granny never had a basement.
Related to the climate change madness is the PC craziness. Here's an insightful, long over-needed,
truthful exposure of that crap from ZeroHedge. Read the entire piece at .zerohedge.com/news/2015-11-07/thin-skinned-minority-ruining-nation-professor-crushes-political-correctness-wave-sw
In a time where college students are offended by pretty much everything, The Federalist Papers reports that one professor at UNC-Wilmington decided to cut through the rhetoric and let his students know that they aren’t the special snowflakes liberals and their parents would have them believe.
His epic class introduction has gone viral, and for good reason: this is the most common sense lecture to come out of any college in a long time.
Friday, November 6, 2015
ALL WRAPPED UP
As we noted in an earlier post today, be careful what the Fed wishes for. And that by all the evidence seems to be "getting the rate hike" wrapped up before Xmas. And in the eyes of some they now have the excuse, the just out as yet-to-be revised job numbers.
Here a blurb from a story on MarketWatch today you might find of interest marketwatch.com/story/gundlach-says-the-sp-500-cant-handle-a-december-rate-increase-2015-11-06
In his latest salvo warning the Fed off a rate increase, DoubleLine Capital founder Jeffrey Gundlach told a packed audience at the 2015 Inside Fixed Income conference on Thursday night just what a disaster it could be.Gundlach said the Fed’s seeming obsession with getting the job done next month makes no sense, given financial conditions are largely worse than they were in February 2012, when the central bank started its third round of quantitative easing.
He said the biggest red flag against a hike is the S&P 500 itself. The index has recovered from losses in August and September, but looks “vulnerable to another pushback down because earnings are not there,” said Gundlach. “The S&P 500’s trailing 12-month P/E is 19; that’s not cheap.”
“Junk bonds are signaling with clarion bells: Do not raise interest rates,” Gundlach said, advising investors to sell junk bonds “on strength.” And if oil can’t get its head above $50 a barrel, the investment-grade bond market will start getting hit by downgrades, he said, according to Reuters.
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PERFECT MOMENT, PERFECT ANSWER
Market attention today shifts to the jobless rate.
The September number came in at 5.1% and any drop in that figure, even as some are saying, as small as one-tenth percent, could cause the Federal Reserve to crank up interest rates for the first time in what has become a long, melodramatic act in the theater of economic absurdity.
Here's a paragraph that pretty much says it all from today's WSJ. It's what you really need to know.
After keeping rates at near-zero for almost seven years, the Fed has been waiting for the perfect monument to raise rates. That would be one when jobs are plentiful, markets are calm and inflation is just right.
The two key words in that paragraph are waiting and perfect. Waiting here is synonymous with indecisiveness and clueless. Even neophyte investors sooner or later learn there's never a perfect time to invest and waiting for it is usually--spelled missed opportunity.
"This has proved elusive. Meanwhile, the longer the Fed waits, the greater the danger delay downs the seeds of future problems,either with inflation or financial stability," the article continues.
But the significance of the jobless rate remains in question, particularly when one looks at the last 15 years, a period the Journal points out which included two boom-and-bust cycles, and the jobless "rate averaged 6.4%."
There are other indicators connected to jobs like the labor participation rate and such the Fed watches, but the bottom line here is pretty simple: these indicator-paralyzed bureaucrats, whatever they opine and do, perfect moments are as rare as truthful politicians.
And for those who argue the hike would most likely be 25 basis points, no big deal since it's reversible, actually defeat their own point. They first apparently downplay those dreaded unexpected, unintended consequences and, second, if the 25 basis point hike is no big deal, why has it taken these economic Federal soothsayers so long to act?
The answer is perfect.
N.B: The number came in for what it's worth at a seven and a half year low of 5% setting off numerous articles about a December rate hike.
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