Posts from — December 2006
The Top is Coming, The Top is Coming
For all you contrarians, the surest sign of a coming decline is that everyone thinks it’s unlikely to occur.
Reports and surveys of every description say the economy will keep growing, inflation and interest rates are in good shape — and stock prices are a sure bet to rise in the U.S. and elsewhere for a fifth consecutive year.
“Money managers are bullish on stocks for 2007,” says Russell Investment Group, which invests $180 billion, reporting on its latest quarterly poll. The survey found “the highest percentage ever” of managers who consider the market undervalued.
Low levels of risk are priced into VIX and credit swaps. These market professionals think that record profits are more likely to be followed by more record profits instead of lower ones. Either that or they believe that P/E’s will expand. Those are the only two ways for stocks to go up – more earnings or a higher P/E.
What will drive it? It’s not home equity extractions by tapped out owners in a falling real estate market. Its not more consumer credit when savings are negative and credit quality is declining. Some observers say that “liquidity” will save us – in other words we will inflate our way out. Don’t believe it.
Have a safe and profitable New Year -
December 29, 2006 No Comments
Euro at Record High vs Yen
The pair moved up on hawkish ECB statements. The trend is clear – from the lower left to the upper right.
December 28, 2006 No Comments
Constructing an Index – Why Dow’s Price Weighting Gives the Wrong Picture
The price weighting of the Dow means that a firms that have a high stock price have more influence than firms with a lower stock price. Basically the index price is the sum of the stocks divided by an adjusting factor for splits. This lets a stock with a price of $100 have twice the influence on the price weighed index then a stock work $50, regardless of the size of the firms.
All the news about the DJIA reaching new highs? As many observers have pointed out only 10 of the 30 stocks are above their January 2000 highs. If a market cap weighting was used to calculate the index the return would have been ~1%. Meaning the Dow’s daily “new highs” are a lucky accident – not indicative of a trend.
Market cap weighting is a smarter way to go. The new trend is fundamental weighting – based on dividends or net income – back testing shows these concepts work.
A unique take on fundamental weighting is by using patents. Ocean Tomo Patent 300 ETF which picks equities on this basis and according to thestreet.com:
Over the last 10 years, the patent weighting has averaged 3 percentage-point better returns annually over the S&P 500, with a 92% correlation to the index. The methodology assesses the economic value of a company’s patent portfolio, then assigns a score to that portfolio and ranks it with other companies.
December 27, 2006 No Comments
Soybean Prices at 3-decade Highs
Growers in the U.S. are preparing to sow the fewest acres of soybeans in 10 years. At the same time, demand is rising, creating conditions that traders say may double this year’s average price of $5.98 a bushel and allow soybeans to replace corn as the best- performing farm commodity.
Well maybe not the best performing. But the article goes on:
“As more acres are diverted to corn, the picture for the soybean balance sheet gets tighter and tighter,” said William Plummer, who manages $106 million of commodity futures at Range Wise Inc. in Chicago. Plummer said he is “likely to triple my corn position and double beans,” probably early next year.
Not everyone is convinced there will be a soybean shortage. Brazil and Argentina, who together account for 43 percent of the world’s supply, may produce bigger crops, and a price rally before U.S. planting begins by April may encourage farmers to cancel plans to switch to corn. Soybeans are the world’s fourth-largest crops by acreage, after wheat, rice and corn.
December 26, 2006 No Comments
Worldwide Oil Rig Shortage
There quotes are from a Bloomberg article about the global shortage of oil rigs:
it were up to Thornburg, there’d be a dozen more $1- million-a-day rigs plying the Gulf of Mexico…global shortage of deep-sea drilling rigs is costing Chevron precious time as it taps the Gulf, and the equipment deficit may keep oil prices high…Day rates have climbed aggressively because demand for these rigs far outweighs the ready supply…But we have to bear in mind there’s no chance we’ll see any of that oil on-stream this side of 2010
There is a long term demand for oil rigs, prices are going up, and supply is slow to come to the market. A stock to look at in the sector is Diamond Offshore. DO is a deep sea contract driller is booking rigs up to six years into the future! This stock could have a dividend yield between $3 and $5 and is trading with a .57 PEG even with triple digit growth.
December 20, 2006 No Comments
Dig a hole in the ground – then fill it back up.
That’s my suggestion for more productive things the SEC could be doing rather than raising the net worth requirements for hedge funds.
Small investors should be outraged. Hedge funds offer innovative services that previously only the very rich had access to. Relentless competition has driven down fund minimums and extended hedge fund benefits to whole new classes of investors.
One of the hallmarks of capitalism is that goods that used to considered luxury are soon common place items available to all. That is the current trend in the hedge fund world.
Do you really want the SEC telling you where and how to spend your money? Do you need the government to decide your asset allocation strategy? Why are our tax dollars funding initiatives that strip our freedom?
“We are from the Government and we are here to help.” Those words should send a shiver down the spine of any astute investor. It means that someone is after your wallet. By cutting off investors investment choices the SEC is taking steps to make sure the poor stay that way.
December 20, 2006 No Comments
Miner Inflation Surge
Today US Producer Prices were up 2% – the most since 1974. The stock market shrugged off the news but miners surged (See chart). Gold and precious metals are seen as a hedge against inflation.
With record corporate profits we may see margins compress before the Producer Price rise shows up in CPI. Make no mistake, this is bad for stocks and it will show up in CPI eventually .
December 19, 2006 No Comments
Thai Market Crashes and Rule is Reversed
Capital goes where it is wanted and stays where it is well-treated. – Wriston’s Law
After a massive stock market plunge of 16% Thai authorities removed the restrictions they had put into place about foreign ownership. The rule imposed a penalty to prevent funds from being taken out of the market unless they had been in the country one year. Bloomberg reports on the result:
The government lifted a requirement that banks lock up 30 percent of new foreign-currency deposits for a year for funds earmarked for stocks, Finance Minister Pridiyathorn Devakula said in Bangkok. The rule, intended to slow a 16 percent gain in the Thai currency this year that threatened exports and economic growth, sparked investor selling that wiped out $23 billion of market value in Thai stocks.
What an embarrassment! Even the barrel of the gun is no match for the capital markets.
December 19, 2006 No Comments
Huge Insider Sells Continue – A Bearish Sign
From todays Gartman Letter: dollar weighted sell/buy ratio at its most extreme level in more than ten years.
He goes on to quote Paul McRae Montgomery:
The M&A/LBO mania we are currently witnessing is very bullish for stock prices, but the fact that it is based on “Other People’s Money,” while insiders are taking their chips of the table, suggest that this.. .bull market may not have many months left.
We’ve written previously about what insider transactions mean for the market here: http://www.gocurrency.com/international-investing/2006/11/30/what-can-insider-trades-tell-us-about-the-market/
December 19, 2006 2 Comments
The Beauty of Real Gold
The Wall Street Journal today writes about the increased popularity of coin collecting, ‘”The ‘coin geek’ has turned into ‘coin chic.’ ” Several of the coins discussed are valuable only because of errors or subsequent changes in design like, “a red 1909 Lincoln penny, part of the first issue of U.S. coins to include a portrait. Also featured on this particular coin was a feature that the mint removed from subsequent issues: the initials of the portrait’s sculptor”.
! I understand subjective value, but the idea that a fiat coin made with cheap metal commanding prices in the $10’s of thousands seems wrong. There is no substitute for real gold.
Can a stamped piece of copper ever compare to the splendor of a Krugerrand or a gold bar? Does anyone ever lust after zinc or nickel?
When Patriot Act 3.0 bans private ownership of gold to prevent terrorist financing and forces you to use ever inflating World Currency Credits (minimum increment $1 billion) which would you rather have:
Exactly. The one that has had value for thousands of years – not the fad.
Any New York based readers should get over to the American Natural History Museum for their gold exhibit. Its impossible to see and not want to own the metal for yourself.
December 18, 2006 3 Comments
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