Tuesday, May 31, 2005

The Dollar Rally

Well I’m certainly glad to see the dollar continuing to improve. I think a stronger dollar could have be positive psychologically to the benefit of equities. Maybe that won’t turn out to be the case. But it’s got to be more on target than the comments in this Forbes article: Dollar Extends Rally Against the Euro

European Monetary Affairs Commissioner Joaquin Almunia played down negative reaction to the French referendum, according to spokeswoman Amelia Torres said. "We had an initial effect and there wasn't a major impact on currency markets," she said. "The trend wasn't very different from what we've seen in the last few weeks and months." The bigger cause for the dollar's rise, she said, was the Federal Reserve's recent interest rate increase, which has helped bolster confidence in the U.S. economy.

I hope this was a typo. Fed rate hikes have helped bolster confidence in the economy? Come on. The Fed’s fighting inflation. The rate hikes indicate its concern that inflation will hurt the economy. I do think that rates got below an optimal healthy point, but that’s not what this says. Whose running euro policy?

posted at 3:35 PM 0 comments   

Good first week for The Market Spectator

We had a good first week with the new newsletter over at The Market Spectator. The average return for both long-term and trading portfolios was 1.5%.

This might not sound like much, but put in relative terms a measly $3,000 investment would have returned more than enough to pay a regular months subscription, that is if it weren’t discounted to a trial rate of only $1 for the first month.

Put another way, annualized this works out to a return of more than 75%. Compounding profits in the weekly trading calls it works out to well over 100%.

Of course it’s just the first week so it’s not very statistically significant. To be honest, I was very nervous all week, hoping to get off to a good start.

Well subscribers would have known either way because I’ve put together detailed tracking of the trades and reported the results in the second issue. I’ll continue to do so, good or bad. I also provided just a taste of options trading, with a single trade. I’ll expand on this in future issues.

I want you to know that I worked very hard for my subscribers. I put in many hours improving the second issue and coming up with solid trading strategies. I spent much of the holiday weekend working and sat in the local Starbucks for six hours yesterday putting the finishing touches on it. I was tweaked, to say the least. When I left the barista actually told me to drive safely as if I were leaving a bar at closing time.

I would have rather been fishing this weekend and if I can't make my subscribers money, that's exactly what I'll do. I'm not going to take peoples money unless I can give them a return on it.

So far so good. A number of blog readers have already signed up and are benefiting. Give it a try. I’m only going to do this if I can make you money.

posted at 3:08 PM 0 comments   

Public Doesn't Fall for Bear Soft Patch Ploy

Mainstream Media (MSM) outlet MarketWatch wants you to think there’s a soft patch with its super sized soft patch headline last Friday, but apparently people are smart enough to see the truth:

Confidence rebounds in May
Labor market outlook also brighter
U.S. consumer confidence rebounded in May after three straight monthly declines, the Conference Board said Tuesday.

The consumer confidence index rose to 102.2 in May from 97.5 in April. See full survey.

"It appears that households must be dismissing the soft patch as temporary, just as we have," said Steve Stanley, chief economist at RBS Greenwich Capital.

posted at 2:30 PM 0 comments   

CRB Market Summary

The CRB has one of the best market summaries I’ve seen on the web. The home page has the major markets, and there’s also a full list of all commodities and indices. Bookmark both of these links.

posted at 2:11 PM 0 comments   

Soft patch or softpatch?

Friday MarketWatch ran the headline Soft Patch Persists in a massive point font. The headline was the precise opposite of the Soft Patch Seeya mantra CNBC started chanting on Thursday, persisting Friday as well.

Well is it, or isn’t it, a soft patch that is? We’ve heard the term so much recently that I think it’s time to combine the two words into a single term ‘softpatch’.

posted at 2:02 PM 0 comments   

Competition

First it was video stores, yogurt shops, and tanning booths. Now everyone’s starting wineries and hedge funds.

Here's an interesting article I happened on about saturation of New Zealand wineries: Ominous signs for wineries. I thought there were a lot of similarities with mutual and hedge fund businesses in the U.S. as well as with wineries.

posted at 1:58 PM 0 comments   

Friday, May 27, 2005

Trim Tabs Book Recommendation

I haven’t had a chance to check out this Trim Tabs book yet, but saw an interview with the author on CNBC today and it sounded interesting and worthwhile. As I understand it, the book follows a statistical strategy for investing in stocks undergoing buybacks. The author says that these stocks outperform the market averages. I don’t have any reason to doubt this and suspect the book is worthwhile. It may be simplistic, but it should at least serve as primer in taking a statistical approach to the markets and as a stepping off point for more complex strategies of your own.

posted at 4:17 PM 0 comments   

Fund Flows

I like to watch the fund flow data for shifts in trends and this week’s data had some fascinating information. Two thirds of the $3 billion in equity fund inflows went into ETFs. What can we make of this? First off, we have to consider whose buying all these ETFs.

I believe the hedge funds, which have nearly doubled in number and assets under management over the past five years, have been large buyers of ETFs. Though I can’t prove it since data that specific isn’t available.

I also believe that the mutual funds have been buying ETFs en masse. But this is also difficult to track. For funds of funds this would be appropriate, but I suspect managed funds slip ETFs into their portfolios in moderation.

The relatively heavy ETF flows could also be a shift away from mutual funds or from individual stock purchases to baskets. In the latter case growth in the purchase of these baskets in lieu of buying the individual stocks would come at the expense of reduced commissions for brokerages.

International funds are also still getting more inflows than domestic funds, 62% to 38% respectively.

posted at 2:49 PM 0 comments   

Oil Alert

I’ve been doing some tedious number crunching this morning. Cringing every time I hear oil is up ahead of the summer driving season got me wondering what actually happens to oil stocks surrounding the summer months.

What I found was that In the four days following Memorial Day the AMEX Oil Index (^XOI) consisting of 13 oil related stocks has been up 11 of the past 15 years and 4 of the past 5 years.

I’ve also calculated this data out through June and August to reflect the full driving season. But you’ll have to sign up for a trial of The Market Spectator to get this and other tradable information. The next issue will be published before the market open next Tuesday and will include specific ideas for taking advantage of this seasonal data.

posted at 12:42 PM 0 comments   

Thursday, May 26, 2005

What Almanac Says about Memorial Day

Here’s some data from the Stock Trader’s Almanac on trading activity surrounding the upcoming holiday weekend.

The Dow has been down 5 of the last 9 Memorial Day weeks. Quite random, however the Dow has been up on June 1st 6 of the last 7 times.

I caution that even 6 of 7 may be nothing more than a random result set to succumb to regression to the mean.

posted at 2:26 PM 0 comments   

AIG Charges Filed

New York Set to File AIG Complaint Today
This is WSJ article. CNBC alerted that charges have been filed. There will be lots of articles summarizing the details hitting the wires throughout the day. If you want to read them I suggest you do what I do; go to Google News and put AIG in the search box.

posted at 2:17 PM 0 comments   

The Great Oil Conspiracy

Oil’s back well above $50 again and it may even stay there for a while. Trader’s reason that the refiner bottleneck will keep prices high and if the refiners don’t OPEC will.

Here’s the problem with this logic. Six months ago traders said prices were high because demand outstripped supply. This was the primary reason they gave for being long oil and oil company stocks. It’s confounding because they were flat out wrong. No two ways about it. That has been proven beyond any reasonable doubt. That argument for being bullish on oil has completely faded away.

Oil inventories just kept on rising to the point that the numbers could no longer be ignored. Now inventories are at six-year highs. I want you to pause and think about this for a minute. Where were oil prices six years ago? In the low teens, one quarter of where they are today!

I’ve said it many times and will say it again, I caught a lot of flack early into the year when I started ranting that there was a bubble in oil and commodities, and that there was no oil supply or demand problem. I said that the Economics 101 arguments for high oil prices were completely unfounded. They were. I showed you the data proving this to be so. This data was readily available. I gathered it in an evening from the Internet.

You should be asking yourself why you had to get it from me? And why no one else was telling you this, when it was so readily available?

I also said repeatedly that demand would begin to wane as supply increased as consumers gradually began cut back and turned to alternatives and likewise producers would reinvest enormous unearned, undeserved, and unneeded profits into delivering more oil.

I even said that there were many people and companies that had an incentive to ignore fundamental data and talk up oil. The brokerage houses have been making most of their profits on the commodities side, not on equities, which have gone absolutely nowhere over the past four or so years.

These entities have had a massive incentive to feed the fervor and get individuals into these markets. Analyst after analyst came on TV telling us that oil prices were going higher and that we should buy energy stocks and energy funds. These analysts work for companies that make their money selling stocks and funds. And they know well that they make the most money hyping whatever financial instrument is in highest demand at any given time. They contribute significantly in the creation of bubbles.

They did the same thing with the dot coms and got a lot of the blame when things turned out badly there. They hyped the heck out of the dot coms and they’ve hyped the heck out of energy stocks.

Now even Buffett is in on the game. In my opinion the man is a stock manipulator extraordinaire. Note that I didn’t say he’s done anything illegal. The term manipulator is generally associated with something illegal, but doesn’t necessarily mean that. Haven’t you ever notices how whatever major deal he’s involved in, Berkshire makes sure the public knows all about it? Time and time again I watch the company talk up whatever it’s invested in creating widespread public interest in following Buffet’s ‘sage’ advice.

What the company does has similarities to a pyramid scheme. Berkshire can always be in and out first, leaving the naïve public holding the bag. Conseco did something similar back when the hubristic Hilbert was in charge. The company bought up many small, yet profitable insurers. It said that it was buying companies that it was going to make more efficient. But this was a ruse or guise. In reality the parent company siphoned off profits from the companies it bought and indirectly used the money to make bond payments.

Once it had bled the donor companies dry, having no many profits to reinvest, the parent took over the donors policies, relocating some but firing most of its employees. Conseco did this time and time again. But it needed bigger and bigger donors to pay it’s ever growing debts. Finally, the company got in over it’s head with Greentree.

Conseco said that it wanted to market cheap term insurance products to Greentree’s customer base. But this again was a ruse. Conseco simply needed a bigger cash flow to stay alive. It was pretty obvious that this was an flawed business plan. Greentree sold mortgages to mobile home buyers, a demographic mostly concerned with just getting buy, a group more likely to buy VCR to record The Jerry Springer Show than an insurance policy.

So Conseco was doing the equivalent of taking cash advances to make minimum credit card payments.

Similarly, the brokerage houses want us to pile into energy, knowing full well that last in is a rotten egg. So don’t be suckered in by this little bump up in oil prices. Now all we hear is the refiners this and that. But how come we never heard anything about refining issues much more than a couple months ago? And how come we’ve not seen any problems at the pumps? We’ve not seen stations with out of order signs. We’ve not seen any signs that refiners are having difficulty keeping up with demand.

No we’ve not had any new refineries built in a long time, but you can bet that existing refineries have continuously found ways to increase output over the years. We’ve also been told that there are too many regulations for new refiners to come on line. Well what about refining in Mexico? No one ever mentions this.

Long traders, hedge funds, and brokerage houses have a huge incentive to take advantage of any little thing they can find to keep the game going. Eventually, though, the game will come to an end and these people will be saying amongst themselves how great it was while it lasted, not caring one iota about the carnage left behind and all the little people that got burned along the way. “Buyer beware” and “There are know guarantees in the markets”, they will tell us.

posted at 1:37 PM 0 comments   

Wednesday, May 25, 2005

Have Analysts Cleaned Up Their Act?

An analyst whose name I can’t recall came on CNBC yesterday and told listeners to sell 3M (MMM). The main reason he gave was that people were too bullish on it, too many analysts liked the company, and no analysts had sell ratings.

I thought what a joke this guy is. Doesn’t he know that sell-side analysts don’t put sell ratings on stocks people actually own en masse. Their only purpose is to sell stocks for the brokerages they work for.

This seemed to me a good basic lesson in fact checking and statistics. In about a half hour or so I pulled all the average analyst ratings for the Dow components, of which 3M is a part, and plugged them into a spreadsheet.

You can get this information from the Analyst Opinion section of Yahoo! Finance. There you can also get the number of buy, sell, and hold ratings as well as the more convenient 1-5 Mean Recommendation rating. The lower the number the stronger the recommendation and vice versa.

I wanted to know how 3M’s ranking stacked up against other Dow components. As it turns out 3M’s ranking is only slightly better than average at 2.1, compared to 2.24 for all of the Dow.

But what was most interesting is that AIG (AIG) was tied with General Electric (GE) and Du Pont (DD) for the third best rating, only bested by Citigroup (C) and Microsoft (MSFT). AIG is actually more highly recommended by analysts than J.P. Morgan Chase’s (JPM) rating of 2.4 and 2.2 for American Express (AXP).

Conclusion: What you already knew is confirmed. Sell-side analyst ratings are completely useless. It leads one to wonder if the brokerages don’t have holdings of their own to unload on unwary investors.

It’s this kind of simple questioning of information that can give you a small edge. When you hear a guy say something on TV about a stock that’s not true and the stock declines on that information then you’ve got a buying opportunity staring you in the face.

In this case the guy was too much of a peon and the stock was too big and too well liked to be affected and the stock closed up 89 cents anyway, even as the Dow ended off a modest 20 points. But it’s a good simple example of the kinds of things you should always be on the lookout for.

That said, I think analysts are using the sell rating much more than in the past after getting caught with their hands in the cookie jar during the bull market and being accused of conflicts of interest. But what I’m also seeing is a whole lot of indifferent or ‘Hold’ calls.

I took a look at the calls on a screen of S&P 500 stocks that have had 5-year revenue declines of 10% or more and growth of 10% or more over the past five years. I assigned a 1 through 5 numerical value to the ratings of strong buy, moderate buy, hold, moderate sell, strong sell. Here’s what I found:

- No stocks in the S&P 500 had an average rating of strong buy or strong sell. In fact there are only 67 companies with a strong sell rating out of the many thousands of listed companies. And of the 145 companies with 5-year revenue growth of more than 10% in the past five years, 81 actually had average ratings of hold. It indeed does appear that analysts are afraid to go out on a limb.

- I was, however, pleased to discover that the worst performers do in fact carry more sell ratings than the best performers. Stocks with revenue declines of 10% or greater over the past five years had an average rating of 3.12, while those with growth of 10% or more carried an average rating of 2.74, the lower number being a better rating. There was not a substantial difference, but it was nice to see better performers were actually getting a better rating on average than companies that have lost money.

For all this work, though, I still won’t put much stock in analyst ratings. I was mostly curious to see where the ratings stood since analysts had supposedly cleaned up their act and removed some of the conflicts of interest that existed in the past and to a lesser degree still do. On an individual basis they do, however, still seem pretty lousy and suspect to me.

posted at 3:32 PM 0 comments   

Index Effect Revisited

Google (GOOG) jumped at the start of this week on rumors that the stock would be added to the S&P 500.



I found this brief white paper on Index Effect Revisited interesting. Click on the link in the Index Highlights window.

posted at 1:23 PM 0 comments   

Hedge Fund News

There’s been a great deal of debate and rumors over hedge funds recently. Here’s a few articles that I found interesting.

Hedge fund rumors fail to deter investors
Investors poured a net $25bn into hedge funds globally in the first quarter of this year, and have continued to invest in recent weeks despite the funds' faltering performance and market rumours about some funds running into difficulties.

Hedge funds pull in $25B in 1Q
Convertible arb managers get $2.8B in redemptions

Hedge Funds Hit Rocky Stretch As Field Becomes More Crowded
Hedge funds, the large private investment pools that have exploded in popularity this decade, have hit their most challenging performance stretch in at least a year, raising questions about whether their growth may be slowing and what that could mean for global stock and bond markets.

posted at 12:45 PM 0 comments   

Tuesday, May 24, 2005

Corning Alert

One stock I had planned to add to the Buy and Hold portfolio in the second issue of The Market Spectator is Corning (GLW). I’ve had good things to say about this company on numerous occasions both in this blog and elsewhere. I first wrote positively about it a year ago last February or March and the stock hasn’t done much until just recently, but I think it will be a long-term winner.

I heard CNBC say they were going to have the CEO on tomorrow so I wanted to let you know that. It ended the day up only a penny and I suspect no one really thought much about the upcoming coverage, which could give it a pop. So you might want to get in before that.

I’ll go into more detail on the company in the next newsletter. In the meantime, it seemed like a good teaser and shameless plug for the letter to get the alert out to where quite a few people would actually see it, given that we’re just getting rolling with the letter.

I’ll try not to drive you batty hyping the letter, but I’m excited about it and putting a lot of work into it. After the second day the five trading selections alone are already in the green to the tune more than $750 at 100 shares each. That’s nearly 20 times the $40 bucks for a monthly subscription and 750 times the buck you get the first month for.

I can't guarantee they'll stay above water as the week progresses, but I can say that there's a 67% probability that they will. Odds don't get much better than that in the markets.

At least check it out. I’m not going to give it to you here for nothing. I don’t expect investors to dive in headfirst. Get the trial, get a feel for what I’m doing, dip a toe in the water, and see what you think.

posted at 5:37 PM 0 comments   

Fed Minutes Mundane

The Fed minutes aren’t having a big impact on the markets. They weren’t as optimistic as I thought they might be, nor were they pessimistic. All in all the minutes are pretty much status quo, and the markets are stable.

One important point the Fed made with regard to oil prices was as follows:

…while pass-through effects could leave the overall price level higher, their impact on inflation should fade over time, as long as inflation expectations remain well contained. Still, considerable uncertainty surrounded the degree of pass-through from energy prices to core consumer prices, and pass-through effects might be more pronounced when energy price increases were perceived as more likely to be permanent. Persistently high energy prices were mentioned as a factor that could trim the level of potential output to a small degree over time, possibly contributing to additional upward pressure on consumer prices at the margin.

The thing to note about this is that if oil prices have in fact stabilized then we shouldn’t expect anymore inflation, except for some lag in companies passing on higher costs. But as the Fed says this should fade over time.

Prices would remain higher than say a year ago, but they wouldn’t continue to climb, thus no new inflationary pressure.

What I gather from the minutes is that it all comes down to oil prices. If oil prices fall there won’t be any reason to keep raising rates substantially. It was clear that the Fed felt that rates have been too low overall and that they want to get rates up to some happy medium point, which we’re not too far away from. I agree with this and have written many times that rates got too low to be economically healthy.

However it is also possible, though not likely, that even if oil prices subsided the Fed could keep raising rates, targeting the housing market. In my opinion that’s a market the Fed should leave alone.

posted at 2:30 PM 0 comments   

Plight of the euro

Weak eurozone stunts growth: OECD report
Hopes fading for smooth global rebound

Disappointing growth in the eurozone is hurting chances that the global economy will make a smooth transition to a broad-based recovery, the Organization for Economic Coordination and Development said in a report released Tuesday.

How can the euro stay strong against the dollar under these circumstances? I look for the dollar to continue to strengthen and for U.S. investors to sell European stocks to get out of euro denominated equities on fear they’ll get hurt on the exchange.

That would simultaneously be bullish for U.S. equities.

posted at 1:53 PM 0 comments   

Fed Speak

In about an hour the Fed is going to release the meeting minutes from its last meeting. I’m going to go out on a limb and say that the equity markets may get a pop from this information.

The Fed doesn’t want its rate hikes to slow economic growth and reasonably rising equity prices. There’s some risk that the rate hikes could stall the economy, via the perception that higher rates are bad, before rates have gone high enough to get a handle on inflation. The last thing the Fed wants to do is trigger stagflation.

So I expect it to say positive things about the strength of the economy and that inflation is under control.

posted at 12:53 PM 0 comments   

Diversity Equals Clarity

I have a very diverse job history. Over the years I’ve had numerous farming and construction jobs, was a supervisor in a UPS hub, worked for a several major financial and insurance companies, IBM Global Services, and for a short while I was even a forensic economist.

I’m a disenfranchised corporate dropout. The best job I’ve ever had is the one I have now.

You could say I’m a bit of a jack-of-all-trades. I’m a fare wrench turner having a ’66 Mustang 2+2 and a big ole Jimmy I take even farther up into the mountains than I already am. In the past month I put a cam in the ‘stang and an axle in the Jimmy.

Vicariously I’ve gotten to know the inner workings of the fund industry via my wife who worked for Berger Funds until Janus took it over and canned everyone. She worked for Conseco at the height of its hubris.

I’ve been meaning to let the world know about her experiences with the weasels at her last job, a startup financial spun off by a major insurance company. Sometime I’ll get around to writing that story. I figured I’d wait until they were belly up, but it’s still hanging on.

Suffice to say for now that immoral people needing to cover up a long trail of indiscretions and bad if not illegal business practices paid for our move to the mountains.

Between the two of us, with my trading and newsletter industry experience we’ve seen the seedy sides of the financial industry and corporate America and it’s not a pretty picture. I think about the only times we’ve been treated fairly in our careers has been when we’ve worked with good-hearted country folk and when we’ve been laid off and collected hush money.

Hard to believe I’m still a bull?

My family is even more diverse than my job history. Growing up visiting relatives meant splitting time between Chicago’s cultural attractions and catching crappies in the cricks of rural Kentucky.

Drawing on my diverse life experiences helps me to understand businesses and the people that invest in them. I understand what motivates people and how all sorts of people come together to make a market. It helps me to keep an open-minded big picture perspective on the markets and see what others can’t.

I’ve told you past posts that against my better judgment I was for a time a China analyst participating in the crafting a newsletter on investing in Chinese companies. From the start it rubbed me the wrong way. I had so much trouble trying to research and verify even the most rudimentary of information.

Yet I never have been able to express as eloquently or quantitatively as I’d like my many concerns about investing in China. I simply don’t have first person experience with the many pitfalls and tiger traps.

My friend Vic Niederhoffer certainly does, having lost a fortune in the Asian markets. On his site dailyspeculations.com he’s posted an email he received from someone with a very interesting perspective on the Chinese markets. You’ll have to scroll down a ways to find the letter. It starts out with this: An Anonymous Mapo Tofu Chef contributes. Take advantage of your browser’s search feature using control-f. It’s worth your time.

I realize that the vast majority of you would never even think of investing in China anyway.

I'm no Suzy Orman, wagging her finger to millions of people about the hazards of putting someone else's home in your own name. How many people do that?

But I dwell on the topic so much because I believe that understanding the problems with Chinese markets, the horrendous risk reward ratio, and the greed that drives people to ignore the many pitfalls, is very educational.

You have probably forgotten already, but the biggest IPO in 2003 was for the ADRs of a Chinese company.

The extremity of the example makes it easier to see the many less extreme ways people act irrationally in the markets, such as they have done so in bidding up the energy and commodities markets without regard for fundamental economics.

posted at 12:27 PM 0 comments   

Monday, May 23, 2005

Au contraire, Monsieur

The Street.com writes for MoneyCentral: Good riddance to the commodities rally

Needless to say I concur.

But as usual I couldn’t disagree more with Fleckenstein of the Contrarian Chronicles column who writes Gold and silver won't be down for long. Being contrarian doesn’t mean consistently taking the opposite side of anything bullish.

posted at 4:55 PM 1 comments   

What do Economists Know Anyway?

U.S. Economy to Expand by 3.4% in 2005, Survey Finds
The U.S. economy will slow more this year than previously thought and inflation will accelerate, a survey of economists showed.

What do economists know anyway? Yes, I went to school for economics, but not long enough to get big headed about. I don’t typically associate myself with the academic economist.

Well they try, but the economy is just far to complex to predict via economic models, with this level of detail even six months out. The truth is the economy is on the cusp. It could go either way largely depending on what happens to oil prices.

If you don’t believe me, consider that if economists were right say 80% of the time how much of a killing you could make timing the markets.

posted at 4:42 PM 0 comments   

Oil Clings to $50

With good reason I am tardy in blogging today. I am pleased to tell you that we have published issue number one of The Market Spectator. I won’t dwell on it except to say the first issue consists in large part of introductory content and I have great plans for improvement in the coming weekly issues, though there are some solid market calls to get you going.

Back to today’s market action. The newfound bullishness continues. Investors are fickle, to be sure. Here’s a reminder of just how fickle they are in this article How stock investors chant ‘deee-fense!’ published just one week ago today. We’ve turned on a dime. Get used to it. But logic does seem to be ruling out, with the exception of the crude markets taking oil back to $49 a barrel even as OPEC said it wouldn’t cut production.

This brings me back to oil freighters. I have a Bloomberg article in my inbox that I have been unable to dig up a link for. Here’s the first paragraph that sums up the issue well: “Persian Gulf oil supertanker rates to Asia fell to their lowest in almost 19 months as a glut of vessels made shipowners cut prices to win contracts. Some owners may be forced to run their ships at a loss, shipbrokers said.”

And here’s another related article:World-Wide's Sohmen Says Tanker Rates May Have Peaked, April 26th

posted at 4:17 PM 0 comments   

Friday, May 20, 2005

Kohn on Economy

Here’s a heavy article Modeling Inflation: A Policymaker’s Perspective. I suggest you enjoy the weekend and put off reading this one until next week.

posted at 3:11 PM 0 comments   

Yuan Hypocrisy

Readers know that I don’t have much good to say about investing in China. When I started writing negatively on the topic more than a year ago I was nearly all alone, and caught quite a bit of flack over it. Today I don’t hear much in the way of disagreement, which I take as a good sign investors are finally waking up to the reality of the risks and the relative risk reward ratios.

But in the spirit of remaining open minded and viewing market related events with a continuously realistic perspective I can’t help but note that our government is being hypocritical with regard to its dealings with the Chinese.

We’re telling China that the tariff increases just announced aren’t doing enough to protect our textile industry, while simultaneously demanding that the country float its currency and let free markets prevail. If China were to suddenly set the yuan free I suspect the currency would rise by 50% and this would the same effect on the textile market.

Consider with regard to the yuan that speculators are already going long the yuan betting that the country will widen the currency’s range. This would put pressure on the currency to move quickly if it were unpegged.

posted at 2:54 PM 0 comments   

Oil Trend

I’m very pleased to see oil trading well below $50 and holding, at time of writing trading at $46.50. Is oil on a downtrend? The funny thing about trends is that you can’t see them until they are fairly well advanced. Whether or not that predicts a turning point or whether the trend will continue is a complex topic of its own. It’s the never-ending battle between the contrarian and the trend follower. But what I want to point out is that oil has now pulled back about $12 a barrel, or 20% from its peak of around $58 a couple months ago.

After the rapid rise over the past seven years from the low teens, the recent decline may not seem like much. But put into relative terms such as a 20% decline in the Dow or S&P 500 in a couple months or consider the consequences of a long futures position put on near the peak when one sell side analyst was irresponsibly enticing investors into the companies commodities accounts and energy funds by calling for oil to go to more than $100.

posted at 2:07 PM 0 comments   

The Dark Side Of Technology

This article Hosed at the gas pump -- by your debit card is somewhat off topic, but I thought it was interesting enough to pass on. I wasn’t aware that gas stations were putting these $75 blocks on card transactions. It’s the first I’ve heard of it. It certainly doesn’t seem right to me.

It reminds me of an incident when I was working nights as a supervisor for UPS in a large package hub, while working my way through college. No I didn’t attend some highfalutin university. At the time, which is probably still true today the company paid its management monthly. That was a long stretch for a poor college student.

When I left the company to move on to bigger and better things they paid me a couple hundred bucks too much through direct deposit. I went about my business paying my bills then a few days later UPS backed the entire paycheck out of my account and never put what they owed me back in.

I bounced a bunch of checks, racked up a couple hundred bucks in fees, had to borrow money from my parents, and spent days on end trying to work my way through the UPS corporate system to someone in billing that could cut and expedite a check, then with the bank trying to get them to reverse the charges.

I’m sure everyone has stories like this. It was just the start of a long series of disenfranchising incidents with the corporate world for both me and my wife that, despite my appreciation for the role of the corporation in our society, has pushed me towards entrepreneurship.

posted at 2:05 PM 0 comments   

Thursday, May 19, 2005

Blogger Peace Offering

A couple of days ago I posted Where’s the Body?, posing the question as to why we were no longer were hearing much about the supposed hedge fund debacle only a few days after the main stream media ran with the rumors.

About an hour later CNBC answered the question very specifically responding with short list of hedge funds that had suffered losses. The worst was down 20% and the bottom of the list was insignificant. What wasn’t stated clearly was the source of the losses, i.e. were they directly related to the GM short stock, long bond position?

Regardless, it was fun to see another incident of the media responding too or using my comments. Ever since bloggers called out 60 Minutes in the Bush military record scandal the main stream media has been keeping an eye on influential bloggers. So I guess it should come as no surprise that the market media would be following this blog, yet I am. That’s all well and good, I just wish they’d give me a quick plug the next time they lift my ideas. I’ve watch, use, and credit CNBC regularly. Respectfully, they should do the same.

Unfortunately, the MSM doesn’t think that bloggers are deserving of any real professional recognition. But they don’t realize that many of us are on the money because of our passion for the markets and our dissociation with the sell-side analysts that the media depends upon.

In fact tapping the blogging community would be a good source of less biased market feedback. Doubt that will ever happen so long as the bloggers and MSM stay at odds. Truce?

posted at 2:32 PM 0 comments   

Just the Facts

This article Why you’ll feel the hedge funds’ pain by Jon D. Markman on MoneyCentral leaves more questions than it answers. This isn’t a typical Markman column as it lacks evidence to support the statements made.

If “one or more hedge funds” actually do blow up what is the market impact? If a few funds collapse and they are of average size in the sea of 8,000 such funds, then the impact from a fundamental standpoint should be nil.

The real risk is far less from hedge funds actually blowing up, than it is from redemptions and therefore market selling as a result of the media frenzy and articles such as this providing no facts about the situation.

But consider if there are significant redemptions and selling of holdings what it will hit. My theory is that the increase in the number of hedge funds over the past several years has been driven in large part by investors’ interest in diversification into alternative investments (i.e. commodities, emerging market securities, energy, private equity, and real estate).

Consequently, if my theory is correct, then these are the funds that contain the weakest hands and would suffer the worst redemptions, which could lead to the bursting of what I perceive as bubbles in many of these alternative investments. Though I don’t think this very likely to happen, because I think the hedge fund problems are overblown and I think investors will come to see this before redemptions can become a serious problem.

This is all purely speculation, but at least I’m telling you it is and not presenting it as fact. My basis is the media’s consistent propensity for blowing the news out of proportion, binging on rumors, and eventually rationality ruling out.

If in the unlikely event that serious hedge fund redemptions do occur, expect to see alternative investments decline, and likely equities to actually increase as investors move back into traditional markets.

posted at 1:55 PM 0 comments   

Newsletter To Go Live Monday

If you’ve been reading this blog for some time now, hopefully you’ve noticed that I’ve been right on every call on the markets I’ve made thus far. I really don’t like to brag and I’m really not. My calls haven’t been the artifice of genius. The strategy is quite simple really.

I tune into the markets consciously attempting to maintain a big picture outside of the fray. I think being far away from the Street sitting up here at 9,000 ft helps. It does take some practice to not get sucked into the day-to-day ebbs and flows. But all I need to do is constantly remind myself that the media and therefore investors nearly always overreact to every situation and new information they are presented with that is considered important to the markets.

The most recent examples prompt me to write on the topic because they are so patent. Almost universally a few weeks ago pundits and analysts started talking about an economic slowdown and investors actually began moving money with the assumption that the economy was going to stall, selling cyclicals, buying defensive stocks, etc…

With 300 points added to the Dow in three days, minimal inflationary signs in the CPI, and oil seemingly on a down trend, the very same analysts and pundits simultaneously determined that the economy wasn’t in a ‘soft patch’ after all. I actually heard one analyst, who went on CNBC as a bear a few weeks ago, saying that the information has changed and citing a number of positives for the economy. He now called himself a worried bear. Well, if you’re going to be a perma-bear you’d better be prepared to do a whole lot of worrying.

Now if you’ve been reading this blog over the past few weeks, hopefully you noted that I made several posts outright rejecting the so-called soft patch theory as near sightedness. I told you to buy cyclicals when no one else wants them and to get long the markets.

Again I don’t want to brag, but I like writing about the markets and particularly doing this blog and would like to keep getting checks once a month so I can keep doing it. My getting paid depends on add clicks. We get those by volume of visitors and we get volume by having repeat visitors. So I feel compelled to make it very clear that I’ve made readers money on numerous occasions in the past six months of doing this in addition to saving investors money by passing on things I have often learned the hard way about the markets.

When I was approached to do this blog I thought a lot about how I would approach it. Now I’m no saint by any stretch of the imagination, but the amount of fraud in the market information industry has always bugged me.

When I day traded in the 90s and spent time in some of the day trading chat rooms around then, there were a couple people in each of them trying to gather a following. They would either hype their trades in such a way as to get people in the chat room on the other side of their trades in low volume stocks, or they would just make up profitable trades altogether. Several of them went on to offer all sorts of services of their own, publish books, etc… and are still doing so today. Yet they are complete phonies.

Having seen this side of the business early on, I have always told myself that I’d never do that. Fortunately, I’ve got other skills. I’ve been a bit of a jack-of-all-trades and have pretty much always worked, literally, beginning with regular lawn mowing jobs at eight years old. No I’m not Rodger Riney of Scottrade and I didn’t build any Swiss Family Robinsonesque tree houses.

I do get requests daily to do significantly better paying contract IT work so I don’t need to do this. I like doing it. I like working from home, living in the mountains, coaching my son’s t-ball team, etc…

So I decided if I was going to do a blog I’d do what few other people do and that is tell the truth about the markets. Few people do so because, unfortunately, a lot of investors are in fact gullible and naïve, which makes it very easy for the dishonest to make a quick buck. And the web provides anonymity.

Most people don’t want to hear the truth about the markets, rather they want they’re own theories and beliefs verified. I’ll admit that it always feels good having my own theories bear themselves out. But it’s much better having the markets verify them than being star struck by some pundit only for the markets to prove both of us wrong.

I suppose I don’t get as many visitors clicking ads by telling them what they don’t want to here and debating them, but I sleep better at night. But I do believe that in the long run the strategy will win out through making people more money and growing my audience.

I do have one confession to make. From day one I’ve held back on providing specifically actionable trades and investments. I’ve given them here and there, but mostly I’ve only provided the clues and the tools from which you should have been able to come up with profitable positions. But I’ve not held the readers hands.

My opinion is that hand holding, in this case providing very specific market observations, is a different level of service. I’ve provided generalized market yet still profitable market observations as a free teaser, but in depth detailed analysis is something I should be rewarded for because it does require a great deal of effort and acquired knowledge on my part.

Providing in depth market information does require a significant investment on my part, both in time and money. The value of the time component is different for everyone. For me it means time away from; family, friends, hobbies, and other entrepreneurial projects.

Then there’s overhead in the purchase of equipment, market information, and if all goes well also in human capital.

With far too much said, if you’re still reading, I want to inform you that we’re planning to publish the first edition of our subscriber newsletter next Monday. I’ll provide the address once it’s published.

posted at 1:09 PM 0 comments   

Wednesday, May 18, 2005

China Relations

Have you been following the tension between the U.S. and China over the value of the yuan? I’ll tell you that this worry’s me both economically and politically more than oil prices and deficits, though they are all interrelated to some degree. I will come right out and say that I have a great deal of distrust with regard to China and its motives. In part, I’ll admit, that it’s in part a fear of the unknown.

But I think that is justified. Nearly all U.S. dealings with China are from the perspective of a consumer. China has long been known for putting up marketing fronts to the world.

What’s curious to me is how much emphasis our government has been putting on the Chinese currency when there are is so much at risk. There’s the political tension and real concerns that a rising yuan would be inflationary for the U.S.

It seems as if our government knows something about China that we don’t. What could that be? Well, there’s been a lot of talk about Chinese commodity demand. In part this has been overblown. The sell side commodity analysts have used this to market commodities.

But it’s true that China’s appetite for many commodities has increased. It started a couple of years ago with concrete and steel. I’ve long suspected and occasionally seen it suggested in articles that the demand is primarily related to the countries hosting of the Olympics, rather than pure economic growth.

My feeling is that the country is going to much greater lengths to prepare for the Olympics than any other country has done thus far. Partly this may be because of the country needs more infrastructure improvements than other hosts, but also I suspect they are spending big yuan to control visitors such that they’re access to country is that of a rat in a maze and they’re vision of the country is akin to a taking a tour of a company, only seeing what they want you to see.

But I don’t think that is what our government is concerned with. In recent criticisms of the yuan’s artificially low tie to the U.S. dollar, the government has been accusing the country of price manipulation. What I wonder is to what extent China is manipulating prices beyond its currency. It has had a history of manipulating prices such and dumping to promote its industries.

My suspicion is that our government is concerned that China is taking a Wal-Mart approach to market domination.

Increasingly I think Americans are becoming removed from just what communism and a planned society is. For one thing it means that the government can use any amount of taxation to support any industry it wants to whatever extent it wants.

When you think about it, this is very similar to the way Wal-Mart operates. What Wal-Mart has done better than anyone else is vary its products and prices from store to store. Target, on the other hand, tends to make every store virtually the same.

I live near Keystone, CO. We have six months of winter here and the lakes are fed by snowmelt. Yet sometime around March our local Target switched out all of its winter clothing for summer clothing, shorts, swim trunks, etc… The last time I was in the store it had a whole section of beach toys. The closest thing we have to a beach around here is The Beach at Arapahoe Basin, which is tailgating at the foot of a ski area that stays open through the 4th of July weekend. I suppose kids could use the sand toys to make snow castles and igloos. Seems quite idiotic and it’s no wonder Wal-Mart has dominated retail.

But Wal-Mart also has some highly criticized business practices because it takes things much further than just varying products and prices. It’s known for subsidizing prices to squeeze out local competition. For example it will have super sales on tires until the local tire franchise goes out of business. Then prices return to normal.

In the U.S. it’s we’re somewhat accepting of conducting business this way, though we preach free markets at the national level.

It’s important for us to remember that just as strongly as we believe in free markets, China believes in controlling markets. That is, after all, what communism is. As probably the countries largest single purchaser of exports, it’s likely that China has learned from Wal-Mart and is applying the “Wal-Mart Way” at the national level. Although, given China’s history of dumping it’s also possible that Wal-Mart initially learned from China.

Imagine a country run like Wal-Mart, bent on economic, political, and possibly even military supremacy, muscling out all competition. Now I hope you have a better perspective on China and will think twice about investing in its state-owned companies.

posted at 2:00 PM 2 comments   

Economic Front

Lot’s of economic and political market news to cover. Topping the news today is the climb in crude inventories of four times estimates and an increase in gasoline meeting estimates. Immediately upon release of the data the equity markets climbed, while the oil prices paused while the details were gone over. The oil prices started to fall, but not precipitously.

We haven’t seen a serious fall off in oil prices yet. I think this is in part because of the number of traders playing the crack spread, though it seems to make more sense to sell oil and go long gas since that’s where the bottleneck is. Also I think traders are holding out to see what they supposed summer driving season will do for demand. This is probably wishful thinking. There are already signs of slowing worldwide demand and the fact is that, while it’s difficult to save gas day-to-day, it’s likely many people will forgo the luxury of a long drive this summer at the current prices.

As an aside expect tourism dependent on automobile traffic to be off this summer.

It’s hard to believe that weekly oil data could overshadow the monthly PPI and CPI, but that’s what is happening. There were some concerns in yesterday’s PPI data about stagflation due to a decrease in industrial output combined with modestly higher prices, but the numbers weren’t too bad. Combined with today’s tame CPI release, the data seems to suggest that producers are finding it difficult to pass on higher prices to consumers, that consumers are willing to forgo many goods rather than pay higher prices.

This is picture we expect to see being painted because realistically consumers have had their discretionary income squeezed by higher gasoline prices. That suggests to me to expect weakness in some cyclical stocks. But note the use of the word ‘some’.

It seems that the term cyclical isn’t very clearly defined or well understood. There’s a lot of confusion as to what companies are economically cyclical. More often than not when pundits tell people to sell cyclicals they are mistakenly referring to the cyclicality of institutional investors moving among various sectors, not truly cyclical stocks.

The companies that are apt to experience weakness in this scenario are those that sell luxury goods to the people most feeling the crunch of high gas prices. Maybe these people will buy a fewer cigarettes or six pack instead of a twelve pack.

Interestingly though, in comparing a cyclical discretionary ETF to a consumer staples ETF the former had Target (TGT) as a top holding and the latter similarly held Wal-Mart (WMT). These two companies share too much overlap to be contrasted in this way. While Wal-Mart does seem to be more staples oriented, I’m not sure this is as true as it seems.

Look at the size of Wal-Mart’s electronics and sporting goods departments, for example. They are more substantial than Targets and these are certainly discretionary items. Target’s also into the grocery business with its Super Targets and sells a great deal of staple oriented products in all its stores. Target’s stocking of look good functional house wares tends to give it the perception of being more discretionary than it really is.

So if you’re thinking discretionary vs. staples you should be thinking Budweiser (BUD) vs. Colgate-Palmolive (CL) or even Harley Davidson (HDI) vs. Whirlpool (WHR), but not Target vs. Wal-Mart or Home Depot (HD) vs. Pep Boys (PBY). You’ve got to look at niche, not diversified, companies and items that mainly sell to those most impacted by higher prices.

Higher prices won’t have much of an impact on sales of Porsches or BMWs, though lack of corporate earnings growth and equity prices will.

posted at 12:37 PM 0 comments   

Tuesday, May 17, 2005

Where’s the body?

Have you noticed that all the talk of a hedge fund blow up has faded away, or have you already forgotten about it altogether? I suspected this was either an unfounded rumor or a taboo subject when nothing was being discussed among friends in the business.

Though it's still a possibility, I doubt that many if any funds had enough leveraged exposure to automobile manufacturers alone to blow up a fund. I can't imagine any fund being significantly leveraged in such a depressing sector. Hedge fund managers get paid for performance and the car builders certainly haven't been providing it.

I understand the short stock / long bond trade, but a fund would have to be extremely highly leveraged to blow up on this trade, which they could not be because no one would loan them that kind of money ex LTCM.

Little was written about it today. The media chased the story and moved on. The media chases a story like its a gold rush. Here's a few of the articles that have circulated on the subject in the last week.

Market Report: Man Group suffers as hedge fund gloom growsIndependent, UK - 15 hours ago... It seems that hedge fund managers are struggling to deliver at present. In fact, for the past week, rumours have been rife that ...

Hedge fund has little exposure to structured credit marketMarketWatch - 22 hours ago... Highbridge Capital Management is telling investors that it hasn't suffered big losses, scotching speculation that the $7 billion hedge fund firm was among ...

Hedge Fund LossesBloomberg - May 14, 2005... Everybody's waiting for somebody to blow up,'' Ralph Axel, a US government debt strategist in New York at HSBC Holdings Plc, said of the hedge fund speculation ...

What's Spooking the StreetBusinessWeek - May 15, 2005Corporate earnings are up, oil prices down, and economic indicators healthy. ... "There are a number of potential blow-ups out there," says ... THE HEDGE-FUND FACTOR. ...

posted at 1:14 PM 0 comments   

Flight to Quality

This is an interesting article: Investor gloom gathers over world economy

"We have got a major shift in how fund managers perceive the world," said David Bowers, Merrill's chief global strategist. "We are now starting to see people position themselves for global growth disappointment.

Can you say “flight to quality”? Where do you suppose fund managers are going to bail out too? And where do you suppose all the individual investors that have been piling into international funds and ETFs for the past couple of years, are going to go when fund the managers are bailing en masse?

posted at 12:58 PM 2 comments   

Mass Confusion or Conspiracy?

Does anyone have a clue anymore? I listen too analysts all day. I want to know what they’re thinking. Sometimes I don’t know why I do. No one seems to agree on anything anymore, even on fundamental economics and its impact on stocks.

This morning I heard an analyst recommend financials, technology, and energy stocks for this summer, counterintuitive advice. These sectors are hedged against each other. There’s nothing wrong with hedging, but don’t sell it under the guise of sectors likely to do well.

If energy continues to rise, the fed is apt to keep hiking rates. Investors would be concerned about financials and the economy slowing. If they are concerned about the economy slowing they aren’t going to be interested in tech stocks.

Conversely, if the economy keeps its footing investors will want to own tech and financials, not energy. Some of the speculative money comes out of energy. The fed stops hiking, etc…

This is a con, albeit a small and subtle one. By recommending financials, technology, and energy simultaneously the analyst is sure to be right about one or the other. Then in hindsight the analyst will remind anyone willing to listen how he had such a great call on such and such sector, while hoping you will have forgotten about the other sectors he recommended.

Any analyst that knows anything about the markets knows these sectors are counterintuitive. They also know that the average CNBC viewer doesn’t know it.

A firm upgrades Exxon Mobil (XOM) on its fundamentals. Where will its fundamentals be if oil keeps falling? Home Depot (HD) is up 4.4% thus far today. Many analysts call this a cyclical stock. Aren’t we supposed to be selling cyclicals? That’s what we’ve been told for the past few weeks.

Market information scammers like to set up multiple accounts then they will dispose of the losers and market the one winner in five. Fund families similarly play with return information by shutting down losing funds and removing the negative results.

This is fortune cookie analysis. Every fortune applies to everyone and says nothing. “Your planning will bring rich rewards”, “You will always be surrounded by true friends”, and “Your talents will be recognized and suitably rewarded.”

posted at 11:35 AM 0 comments   

Monday, May 16, 2005

Get Your Head Outta' the Wolf's Mouth

ABC’s version of edgy is a political blog called The Note, which uses the tag “A man soon forgets that he trod on a lions tail, but the lion never forgets the man.”

This reminds me to remind myself of a favorite quote I use for the purpose of instilling humility in my life and particularly with regard to the markets.

You have put your head inside a wolf's mouth and taken it out again in safety. That ought to be reward enough for you.

AESOP 550 B.C.
The Wolf and the Crane

I’ve been hanging onto this saying for a few years now and it has become more of an underpinning to my philosophy and approach to the markets. It has become something subconscious. When I write about the risk reward ratio of investing in China, how far oil has come so quickly, or the virtues of the dollar it’s with this perspective. It says more memorably and with more substance, don’t be greedy, take what profits you can and get out.

As a kid I remember thinking what I would grab if the house were burning down. I never think of that anymore because the answer is obvious; I’d grab my wife and son and if the risk weren’t to great I’d grab my 25 year old parrot who’ll probably outlive all of us.

The saying also makes me think back to a point in my life when I would have put my head in the wolf’s mouth to see how many times I could get away with it. I don’t think that way anymore, rather I think I’ve got too much to lose and putting my head in wolf’s mouth was a foolish thing to do so I won’t do that again.

I think back to incidents in my younger days that I’m thankful to have lived through, of which there are more than I care to ever admit too.

I’m still a risk taker for sure. I love the good adrenaline rush of skiing down a double black diamond. I still like to push and test myself. But my risks are now meticulously thought through. I’ll still put head in the wolf’s mouth, but I’m going to sedate or restrain the wolf first. I’m going to have some level of control over the situation.

In the markets I get that control through facts, statistics, and research.

posted at 4:50 PM 1 comments   

Motive

This story about seat belt use being lower in trucks than in cars is chock full of biased statistics. It’s a good case study for the investor trying to see past such noise often found in market reporting.

The statistics as reported say that 80% of the people in passenger cars buckled up in 2003, compared to 70% of those in pickup trucks, and that 70% of those killed in pickup truck crashes in 2003 did not wear safety belts, compared to 50% of the fatalities in cars.

The article doesn’t say how many of the people not wearing safety belts would have died anyway, or what percentage of accidents involving pickup trucks results in deaths compared to accidents involving cars.

Another way of looking at this is that only 30% of those dying in pickup truck accidents were wearing safety belts, while half of the people dying in car accidents were wearing safety belts. This could mean that buckling up in truck makes a bigger difference than in a car because you’re more likely to die anyway in a car accident than in a truck.

While it is probably true that some of the The Transportation Department is spending $26 million on its “Click It or Ticket” campaign. It is incentivized to provide shocking and misleading statistics.

The same is true of much market information. Consequently, you should always try to be somewhat skeptical asking yourself whether something is being left out in order misrepresent information or what the motivations of the provider are.

posted at 4:04 PM 0 comments   

Don't be a Worrywart

This is an interesting article in the WSJ today:
How Stock Investors Chant 'Deee-fense!'For Protection From Every Rumor,They Shun Steel, Buy Cosmetics;Surprisingly, Tech Stocks Hold Up

The article summed up pretty well the moves we’re seeing the markets at the moment, but I think it was off in a number of places with regard to why.

First off, it talks about investors getting defensive since the March jobs report. But how can these two events be correlated when the April report was much stronger than expected?

Then the article uses the quote, “Generally, in the past, it has been something no one was talking about,” in reference to investors worrying about hedge funds blowing up, corporate disaster, and bubbles in China and real estate.

A few weeks ago I posted Climbing the Wall of Worry. In the posted I linked to another WSJ article from 1998 citing all sorts of concerns about the economy.

There are always things to worry about and there are always people who are glad to inform you if you are not aware of anything you should be worrying about. It seems that there is just as much to worry about when the markets are rising as when they are falling.

I think you’ve got to look at the big picture. From mid 2000 until 2003 we really did have something to worry about. Companies were eliminating jobs left and right. Now we’re adding jobs regularly and we’re still worrying about interest rates, deficits, etc…

In my opinion this recent spate of negativity seems to be quite short sighted and shallow. I don’t think it will stick around long.

posted at 2:44 PM 0 comments   

Oil and the Dollar

The dollar’s rising and oil’s falling. I just hope it continues. The fact is that investors are still stinging from bursting of the bubble in equities. That sent them looking for ways to diversify their investment portfolios. Commodities, real estate, international funds and ETFs have all been inundated with capital.

Sometimes investors think they are diversified when they really aren’t. Investors have wanted to be in everything except equities. This, in my opinion, has created a bubble in ‘everything except equities’ such that should investors decide they want to be in equities and only equities then everything else is going to be hurtin’ for certain possibly all at once. We’re now beginning to see that possibility in the dollar and oil.

Investors have thought they are diversified when in reality they have been short the U.S. I believe that will prove to be a mistake for many.

But I should clarify that I don’t think all investors realize their mistake. The number of hedge funds and the assets under management by hedge funds have both nearly doubled in the past few years. Investors have thought they could do better there, little realizing that few hedge funds actually do any real hedging other than to hedge their own excessive risk. And with the number of inexperienced managers stepping up to the plate there’s bound to be a lot of strikeouts.

posted at 1:20 PM 0 comments   

Friday, May 13, 2005

Will Large-Caps Have Their Day

A few weeks ago the media began to use the term “soft patch” to describe a potentially slowing economy. They proceeded to wear it out.

Interestingly, Greenspan used the term to describe the economy in July of last year saying that while there was weakness last June, “July seemed to be somewhat better, even though we are going through a soft patch.”

Hmmm. Funny, no one was saying soft patch last fall or this spring. Now as we’re once again rounding June we’re hearing the same thing. And we managed to have a fall rally even as oil rallied from $35 at the start of the year to $55 in October, a sudden increase of more than 50%, further illustrating the irrationality and ignorance of fundamentals.

But from early October to the end of the year oil fell back to $45. I don’t think it’s any coincidence that the S&P 500 climbed 10% at the same time oil was falling 18%. I suspect this was the result of a sector shift among institutional investors, hedge funds, etc… For this reason oil and stocks are apt to trade inversely going forward.

A lot’s been said recently about the near doubling of hedge funds to about 8,000 funds since 2000 and the how this must imply a significant number of amateurish funds out there. I believe this is behind much of the commodity rally and especially oil. These are weak and jittery hands. If and when they bail on energy, where will they invest being desperate for returns? Most likely they will turn back to U.S. large-cap equities.

They’ve already run up just about every possible alternative investment. They’re facing troubles in the corporate debt markets, they’re giving up on small caps and international stocks, commodities seem to be in limbo becoming increasingly less certain, and there’s non stop talk of real estate speculation having run its course.

U.S. large-cap equities are about the only investment that hasn’t been pushed up.

posted at 3:16 PM 0 comments   

Doin' the Oil Stock Bop

Investors should realize that the oil companies are falling in tandem with oil prices. Actually, they’re taking it on the chin. For example Exxon Mobil (XOM) has fallen more than 1% thus far today, while oil prices turned positive. Similarly, ChevronTexaco (CVX) is off 1.5%, ConocoPhillips (COP) more than 2.2%, Royal Dutch Petroleum (RD) 1.2%, and BP (BP) also off 1.2%. Speculators are finally beginning to pay more attention to the economics of oil, questioning, and for the first time in a long time talking about expecting prices to go lower.

Buyer beware! I’m still hearing a w