The Market Perspective

"It's Gotten Pretty Frothy!"

Monday Morning Oct 28 2013

Dot Coms Party Like It's 1999 reads the headline no Page B1

The tag line notes Twitter $11 B No Profit

Pinterest $3.8 B No Revenue

Snapchat $3 B No Revenue

Rocketfuel $2 B No Profit

We have been writing that positive mood, see COP versus oil price next has driven stock prices higher than most expected emabarassing those calling for a top earler this year. Now the dot.com mania has returned such that companies can go public with no earnings, recall my observation that Perot took EDS puublic at 190 to one P/E

COP versus Oil Price

This weekend we noted that the XES energy service ETF was still rising as oil prices have fallen. Here notice that Conoco Phillips is still rising as the oil price falls. The opposite was true last February, and COP and oil began rising together. But it is a negative divergence when the company stock rises while its produced product falls over 10%. THis is a classic example of mutual fund investor herding at the top of a market, all chasing the same stock. 

Geese Exhibit Herding 

Fund managers all use basically the same trend following software and end up buying many of the same stocks pushing them ever higher. Then when prices fall they all sell, recall the big drop in RAX Rackspace.

RAX

We are expecting tops and bottoms in markets over the next two weeks and will attempt to post more often to follow the story. 

Newspaper Column on Oil Prices

Posted Sunday October 27 2013

 

Harley Davidson, that icon of discretionary expenditures, is HOG wild  again, reporting record sales.   The XES energy service ETF just hit a new high. Corpus Christi is booming with foreign investment taking advantage of the surplus of crude and natural gas. The stock markets hit new highs. What could go wrong?

That’s what we worry about here each and every week. We have noted that the social mood in the Basin and Eagle Ford is very much like what we had in 1981. That worries rather than encourages me. So, let’s examine the recent oil price action. Then we look at some fundamental reasons for, gulp, the recent pull back in oil prices.

The energy complex made its last significant lows in the summer of 2012. Crude bottomed at $80 and the XES at $28.   Crude topped  in August 2013 at $110. The XES peaked at $45 this past week.  Since then crude has tumbled to $96.50 as I write today Wednesday October 23. For perspective, the 200 week moving average MA comes in at $91.54. Price overshot that MA in the summer of 2012 and then took off for $110. The XES has dropped 2.5% just today to $43.40. The XES is  a blend of all the major oil service firms including Halliburton, Baker Hughes, and such. That makes it a great proxy for the energy service driven Permian Basin economy.   In the same fifteen-month period Halliburton has risen from $27 to $52, about doubling in price.

Indeed Halliburton’s third quarter earnings rose 17% to $706 million. But most of that increase came from overseas work.  

Now we get to the ‘this bears watching part of the story.’ Halliburton HAL is the largest provider of hydraulic –fracturing operations in North America. The increase in business has brought more competitors to the game. Earlier this year HAL  talked of becoming ‘more efficient.’ HAL assumed more demand for natural gas drilling which  has not materialized.  HAL took a $38 million charge for severance (read layoffs) and retiring equipment related to two efficiency drives.

In analyzing potential early warning indicators  at the top of the boom in 1981, I reached this conclusion. Oil topped in price at $36 in 1981, and then began falling. However the rig count continued to soar. So more equipment was employed chasing lower and lower prices, a formula for tragedy if there ever was one.

Now the energy service sector is becoming a victim of its own technology success. Prices for fracturing are down. Improved technology has produced more natural gas than is demanded. Hence, drilling programs have scaled back, even as oil field service companies lay off workers and cut prices.

Statistics bear out this trend. The number of rigs drilling  Eagle Ford has declined 5% from a year ago. But the oil and gas output from these wells is 28% higher than just a year ago. So we have less equipment producing ever more product.

Jeff Miller, HAL CEO, commented Monday that everyone is very, very focused on continuing to drive efficiencies in the marketplace.

There’s that  word again – efficiencies. I recall firms in the post 1986 bust engaging in what was called ‘right sizing.’  This was corporate speak for massive lay offs.

Regular readers are aware I have been asking this question on these pages. With more and more oil and gas produced why are prices so high?  Indeed, now prices of oil and the stock prices of service companies are coming off recent highs. But this is occurring as the entire sector has geared up, built up, and assumed there would be an inelastic demand for their services. From the 52 story office-building  in Midland (ground breaking in January, 2014) to HAL’ largest ever North American facility south of San Antonio, hubris and confidence are on display all around.

Oil was the last market to top in 2008. We are just about where we were in January of 2008, ie, stock and oil price highs.  Indeed, this next month will be the five year anniversary of November 2008 stock market lows.

If oil prices  peak in the period between now and the ground breaking in Midland, we will have the perfect 34 year Fibonacci anniversary of the topping out of the ten stories added to the First National Bank of Midland in 1979.

Meanwhile I suggest watching that 200 week Moving Average for oil at $91.54. 

Obamacare Looks a Lot Like Ron Johnson at JCP

Weekend

A reader asks for acommnt on Obamacare. Here goes

 

 

There was an article by a doctor in the WSJ this week that even if the website eventually works, the number of doctors will surely shrink resulting in even fewer physicians to serve another 30 million who now think they have insurance. 

I will write a column on this next week but Obama violated the dictum of Kaizen and lean manufacturing , continuous improvement coupled with  the toyota lean manufacturing method (make small incremenatl changes ) is de rigger in all advanced supply chain managerial accounting classes. Ron Johnson's destruction of JC Penny in less than two years was the warning for Obamacare, don't attempt to change an entire system all at once. JCP a 90 year old company may collapse. Ditto, for what Edward Lampert did at Sears, wrecking a 100+ year old company. A retail analyst posted photos of a Sears store in New Jersey on finance.yahoo this week showing the neglect of proper detail  in the store. 

Obama's hubris still makes him think he can govern by decree, decree that it happen and it will. Imagine if Bush cheney had rolled out Bushcare and it went like this. The Press would have demanded Bush's head on a pike. 

Cruz made his mistake by not offering an alternative which would be a Medical Care IRA with a catastrophic benefit for something truly unexpected which is what insurance is supposed to be. The Republicans continue to be completely inept at the political game. 

 

A Peak In Bullish Sentiment

Weeekend Oct 26 2013

Several readers have forwarded remarks about how overbought the market is, buoyed by extended positive sentiment. Michael Gayed sums it up citing the low percent of bulls in the sentiment survey. 

Walter Murphy notes the smallest percent of bears since 1/12/12.

As one reader put it, Looks like the “little guy” is back in with the AAII survey showing a drop to 17% Bears, lowest in about 3 years.  Also Investors Intel, Advisor sentiment at 18.5% Bears, about as low as it gets.

We agree and will attempt to identify a top for you over the next couple of weeks. 

If you have not read the last two posts, please do so now. We compare 2013 with January 1973 forty years ago. We have been writing for some time expecting a parallel between the market action for the next two years and the disastrous 1973-74 experience. Then the DOW declined 50% in two years.

 And we have a look back at our stock market training under Ross Perot. We will be serializing that experience in our weekend updates. 

The Stock Market Short Term Count

Walter Murphy mentioned the SPY being in a fifth wave from the october low, looks like he is right. 

Hedge A Bear Fund shorting Actual Stocks

Hedge is not a fund designed to trade directly opposite the SPX. Rather it shorts in diovidual stocks. Still it shows a fairly close correlation in the oposite direction to the SPX. If the SPX is topping in the next week or two, we whould be preparing to scale in HDGE. 

Non confirmation from NASI

While the QQQ has gone to a new high, the NASD summation index has not. This is a glaring non confirmation of the new highs in various tech indexes. Participation is failing as the overall price index grows higher. We noted GOOG stockholders celebrated with a move to new $1,000 on its chrome book launch. 

VIX

the Volatility Index has made its third higher low while stock indexes went to new highs. One would think this indicator would be at a new low but it is not. So there is some sense of apprehension out there. 

BID Sootheby's

Sootheby's usually displays a high correlation to the stock market. As an auctioneer of expensive items, this is another casual way to gauge risk on risk off sentiment. It has actually been going sideways since 2010 but is climbing once again. what a huge recovery from near nothing in March 2009. 

Our conclusion is simply that stocks are nearing five year anniversary highs. Negative sentiment is swelling, in advance of that high, see social mood section later. We have been expecting a high in early November. Recall that Tom McClellan expected a high in early January (1/2/14) based on tax selling and top to bottom stock market moves. 

 US Dollar

I am going to hazard a guess that the Dollar makes its third higher low this next week or two. That should coincide with a high in stock prices and possibly gold and silver. 

Bonds

TLT a fund of 20 year government bonds

The rebound to the 125 day moving average and the 38% FIB re-tracement level looks like the correction of an oversold market. Some closed end municipals are still trading at discounts to Net Asset Value. If it is all one market, bonds would roll over and head down in price again with stocks. It will be interesting to see if that happens or if investors decide bonds are that flight to quality hide out in a stock sell off. 

Janet Yellen and Barack may be surprised to discover they are not in charge. See the  graphs posted yesterday courtesy of our friends at EWI. it shows a huge increase in the FED balance sheet from buying bonds but no bump in PPI or CPI, where is the inflation.  About all we can say is that this bears watching. 

Complacency on Parade Crude Oil Volatility Index

As the price of oil has risen from $35 to $110 and now fallen to $97.90, the volatility index has fallen to new lows. Hence complacency abounds. The conventional wisdom is therefore that oil prices will remain high. Regrettably I cannot locate a copy of the cover of Texas Monthly magazine latest issue. It proclaims Another Oil Boom, Want In is asks. This is of course exactly the style of magazine cover one sees at the TOP of an oil boom. it literally assumes the boom will continue. 

Research however indicates magazine covers tend to be contrary indicators.  Read this story to learn that after long periods of any upmove in some market, positive magazine covers emerge reporting the story. the timing of such covers often coincides with or near market tops. 

Crude Oil

Crude Oil remains in an uptrend. it is testing the weekly MAs. It has fallen along with the dollar. If we are right and the dollar strengthens, will crude overcome its dollar based pricing and rally?  Like bonds this will be interesting to watch. As we say sentiment is over the top. 

 Gold

Since the dollar high in July and subsequent reversal, gold has rallied. If the dollar firms expect gold to turn down again, We remain bearish. LIke the TLT chart this looks more like a rebound from an oversold condition. 

This is a big essay in the Review section of the Weekend WSJ. Actually from a market valuation standpoint, Shanghai has been slowing down ever since its post 2009 recovery. 

The downtrend has apparently resumed. The article above mentions higher wages and the inevitable slowdown just as Japan, Korea, and the Asian tigers experienced is setting in. 

 All One Market Revisited

 In putting together the weekend letter I noticed the similarity of gold silver copper tlt long bonds and a closed end municipal bond fund. All look to be making weak rebounds in downtrends. Will the downtrends resume with a Dollar rebound, I expect so. 

 The Bottom Line

Stocks should peak in the next two weeks. That should be coincident with a bottom in the US Dollar. That may then begin a resumption of the downtrend in gold, silver, bond prices, will oil fall as well? 

Socionomics

If you can't run a country, declare a Vice Ministry of supreme Social Happiness, really, now in Venezuela the poster boy for failed socialism. Meanwhile the resource rich country runs short on milk and toilet paper. 

Page B 5 Stock Funds Rake in Cash

Cash poured into US stock mutual funds and exchange traded funds at the fastest clip in more thana month...S & P jumping to record high. Recall that extreme expressions of social mood occur at the end, not the start, of a move.  

See our opening references to all time low bearish sentiment, another contrary indicator

The Remakening - Friday WSJ Section Four Arena

Behind the horror boom: film makers rea reinventing the genre dialing back the Gore nd emphasizing old fashioned story telling. 

Carrie from 1976 has been re made. Insidious 2 made for $5 million, grossed $81 M. Horror films have taken in $495.7 million this year, 52% more than at the same time last year. While socionomics is not an exact science, but  this is a startling indicator of the embrace of horror in just one year.This would be typical of a mood change preceding a change in a market direction. As the article puts it

Almost any way you slice it, horror is surging. 

 The White House is clashing with Congress over Iran sanctions, the Health Care Roll Out Has Dems in red states on the run, Germany and France bristle that the US hacked Merkel's cell phone, Tunisia riots, the Saudis publicly rebuke the US and decline UN Security Council Membership (after the US ambassador sent congratulations) the interview in the weekend WSJ is with a Chinese economist who got tossed from his University, and so it goes. 

There is plenty of negative sentiment to fuel a market down turn. 

Thanks for reading The Market Perspective

[email protected]

 

The Market Perspective bases its information on techniques and sources that have been found to be reliable in the past, and The Market Perspective tries to base opinions on sound judgment and research, however, we do not guarantee that future results will match past performance ands no guarantee can be made that advice will be profitable. The Market Perspective accepts no money for stock recommendations and is purely motivated by its own research in recommending any stocks.  Put another way, the responsibility for decisions made from information contained in this letter lies solely with the individuals making those decisions. The editor and persons affiliated with The Market Perspective may at times have positions in securities mentioned.  Nothing contained herein represents an offer to buy or sell securities. The Market Perspective encourages investors to be diversified, and to maintain sell stops and risk control over their valuable investment capital.  No guarantee can be made to the accuracy of text or charts.

 

Inflation versus Deflation - Who's On First?

I thought the two graphs here were worth re printing this brief from EWI. 

While Bob has been a bear on most markets most of the time, his staff comes up with xome interesting observations

Read Jon Markman's worry about inflation here, and his doubts that the markets will recede. Now compare his inflation worries to the graphs below from EWI.  Thanks to an alert TMP reader for this article. 

 

Dennis Elam

Deflationary Forces Stymie the Fed's Economic Rescue Efforts
See a stunning chart of the Federal Reserve's assets

By Elliott Wave International

The Federal Reserve's efforts to rescue the economy have been historically aggressive, starting with the initial round of quantitative easing in 2008 and continuing through 2013.

The central bank's assets have skyrocketed due to the Fed's bond purchases, which you can see clearly in this eye-opening report that Robert Prechter presented to the Market Technicians Association and his Elliott Wave Theorist subscribers.

Editor’s Note: Visit Elliott Wave International to download the rest of the 8-page, free report, How to Protect Your Money When the U.S. Debt Bill Comes Due.

---

The main reason investors are expecting runaway inflation is illustrated in [the chart above], which shows the value of assets held at the Federal Reserve. The Fed has been inflating the supply of dollars at a stunning 33% annual rate over the past five years. ... [N]o wonder investors expect inflation and have aggressively positioned for it.

Look just about anywhere else, however, and you will see subtle evidence of deflationary pressures. Given knowledge only of the Fed’s inflating, many people would expect the Producer and Consumer Price Indexes to be rising at a rate of 33% annually. But, as you can see in Figure 2, the PPI’s annual rate of change is stuck at zero and the CPI has been rising at only a 2% rate.

The Elliott Wave Theorist, July-August, 2013

In an interview at the recent San Francisco Money Show with financial author Jim Mosquera, EWI's Chief Market Analyst Steven Hochberg explains why the Fed has gotten so little in return from its stimulus programs. Here's a brief excerpt from the interview published on Aug. 18 on the Examiner.com website.

Question: The Fed wizards have been pushing buttons and pulling levers rather furiously since 2008. The discount rate is rock bottom, and the Fed balance sheet has swelled to the tune of trillions. What button is left for them to push?

Steve Hochberg: That is a really interesting question the way you phrased it because the fact that they have been pushing buttons and have gotten very little in return tells us … that the Fed is not in control. The Fed does not control the markets, and it doesn’t control the economy. Both are bigger than the Fed.

You say they have been doing this furiously. They have been doing this historically! Yet if you look at inflationary measures, such as the Personal Consumption Expenditures, which is the Fed's favorite way of measuring inflation, it's bumping along at 1%.

We have had historic fiscal and monetary stimulus and yet no inflation. Why? The forces of deflation are overwhelming the forces of inflation. The Fed dropped interest rates in 2000 to 2002 and that did not stop the Nasdaq from dropping 78%. The Fed dropped rates from 2007 to 2009 and it did not stop the Dow from going down 59%. There is historical evidence that the Fed does not control the markets but that the markets control the Fed.

As the next leg of the bear market starts unfolding, they are going to do more unconventional things. Things will accelerate to the downside when the public realizes the central banks aren't in control.
For a limited time, you can read Robert Prechter’s 6-page report to prepare for what EWI sees ahead. In this report you'll learn why the risk of deflation is mounting and how you can see it coming in the prices of gold, gas, real estate, crude oil and other markets. See below for full details.

---

How to Protect Your Money When the U.S. Debt Bill Comes Due Read this new FREE report from Robert Prechter The Federal Reserve has been inflating the supply of dollars at a stunning 33% annual rate over the past five years. You don’t want to be unprepared when that bill comes due! Read this free report from Robert Prechter, market forecaster and a leading opponent of the Federal Reserve, and learn how you can protect yourself. As a result, you will understand today’s biggest risks to stocks, commodities, precious metals and the economy – risks that most mainstream sources cannot see because they’re blinded by decades of inflationary Fed policy. Download your FREE report by Robert Prechter now - for a limited time >>

This article was syndicated by Elliott Wave International and was originally published under the headline Deflationary Forces Stymie the Fed's Economic Rescue Efforts. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

duPont Glore Forgan, Ross and Me, a Wall Street Recollection

Weekend Oct 26 2013

 Last weekend we noted Tom McClellan had suggested 1/2/14 as a low for money funds and therefore a potential high for the stock market.. The high forty years ago was on 1/11/73. Coincidence?

close Jan 11 1973 1051.70

In 1972 the market traded sideways making three tops over 960. It then finished the year with a mad dash to the final high of 1051.70. That was it, the market then quickly returned to the previous March levels below  960. 

Forty years later the market has been trading sideways for the last several months. It has recorded three highs. Even John Murphy is esta tic, noting the Industrials are the only index which has not recorded a new high. But with the Transports at a new high, he is certain it is about to happen. Hmm, will history repeat?

While stock charts refuses to reveal the pattern of  2014 to us, we do have 1973-74 available. 

From that 1051 peak the market sold off to 577 by December 1974. The truly remarkable statistic is that the market top in 1929 was 390.  by Dec 1974 the market was only up by  47% from 45 years before. 

duPont Glore Forgan

Forty years ago today I found myself sitting ina  former Shearson office on Wilshire Blvd in Los Angeles CA. F I duPont had foundered beset with back office woes. Not wanting major brokerage firm collapse during his administration, Nixon's group arranged for EDS to assume control of the company Electronic Data Systems was doing the new back office work and thngs seemed to be improving. And who was CEOof EDS, none other than boy wonder Ross Perot. Ross was out to show Wall Street that he knew better than they. 

To make the point he began the most expensive training program ever undertake before or since by a brokerage firm. He flew potential recruits to his Dallas office for a final review. He dismissed many and issued orders to the offices 'not to send anyone else in a black leather jacket with long hair to him.' by that Ross meant anyone with normal length hair who might have worn a sport coat rather than a dark suit. 

While the first class actually began in New York, we were as far as possible from Wall and Broad. Our class had the designation 72-2.  In fact I never did visit downtown NYC. Back then the rules stated one had to be employed for six months before one could do a trade, even if one had passed the Series Seven exam. The usual routine was to become the office go fer, go fer coffee, sandwiches for lunch from the deli, help the wire operator, etc. Most firms sent recruits to NYC for three weeks to tour the Exchange, and pass a cram course for the Series Seven. 

To be fair Ross was ahead of his time. the CFP Certified Financial Planner designation was not yet created but the idea was there. We would not depend on the stock market alone. Rather we would be licensed and trained to sell stocks, bonds, mutual funds, insurance, and even commodities. 

And so we entered a six month five day a week training class in Los Angeles. The day began with a walk from the apartment past the Ambassador Hotel and the original Brown Derby. The days were split with market training in one half of the day and sales training the other half. We were required to join a Toastmasters group. We did and attended weekly. 

While readers of this blog probably associate Ross with two failed presidential campaigns and his quirky personality, he had quite a different reputation back then. It went like this.

Ross grew up in Texarkana, Texas watching his Dad trade horses. 

Ross attended the Naval Academy and thought highly of the military. (The fact that he had worked to get out of the Navy on his first tour was handily hidden from public knowledge). 

Ross was the top salesman at IBM. He had made his 'quota' in the first month of his final year there. 

He left taking some IBMers with  him. He formed Electronic Data Systems. Keeping 85% of the stock to himself, he finally took the remaining 15% of the shares public at an astounding 190 to one price earnings ratio. (Only the dot.coms managed to better this by going public with no earnings whatsoever). It made him our first paper billionaire. 

He gained national publicity by attempting to send Christmas presents to US GIs in held captive in North Vietnam. (In a personal appearance he told us that he had spent $300,000 on the effort and had landed on all three networks evening news shows for weeks, a bargain in terms of ad dollars). 

I mean, what could go wrong?

The NYSE member firms had put up $100 million to keep duPont afloat. With King Midas in charge, Ross had the golden touch, all his projects succeeded even in failure like the christmas gifts, this was sure to be a successful gambit. 

And with Nixon smashing McGovern in the election (McGovern carried South Dakota and Massachusetts) and the market approaching the highs of 1966, again, what could go wrong?

We, and President Nixon,  would shortly find out. 

I think I will serialize the rest of the experience, I have gone on for about one newspaper column which is about all one wants to read at once. 

Like any great Saturday morning serial, stay tuned to the weekend edition of TMP for how this all played out, my impressions of Ross, the move back to Houston, live in LA , and much much more. 

Bottom Line

No matter what you may think of the personalities or politics of Nixon or Obama the smiliarities are striking.

both won re election in a walk

both display arrogance and hubris

both demand unquestioning loyalty from staff

both are lawyers

Nixon adopted wage and price controls, Obama passed the AFCA ,both centrist ideas

both enjoyed a rising stock market their second term

both were president in an  18 year period of stagnation, which exhibit regular repeating patterns

Nixon's secret plan to end the VIet Nam war is a lot like Obama's plan to end Iraq and Afghanistan, they are similar in that neither works

Nixon went down with the Watergate scandal, Obama has labelled the following phony scandals, IRS investigation of tea party, Benghazi, Fast and Furious, Red Line with Syria then capitulation and now the Health Care debacle.

But markets like alternation as well. It is never quite the same. Nixon was a Republican with a Democrat House and Senate. Obama is a Democrat with a Republican House.

Sentiment was clearly turning negative then with the public watching replays of the 1930s gangster and horror films this time with Godfather I and II, the Exorcist (billed as the most terrifying movie ever made) and then a new genre, the disaster flick, the Poseidon Adventure. It was fitting that a new genre had to be created to match the despondent mood of the time. Now we have the Sopranos, Public Enemys, True Blood, multiple zombie shows on tv and in theaters,  and a new raft of horror films detailed in the fourth section of Friday's WSJ. HIgh gasoline prices were another feature of both eras. 

so the puzzle pieces are finally lining up....stay tuned

In coming weeks topics include

the Players, a description of our class

the Instructors

the Clubby atmosphere of Wall Street in that day, the fire wall of fixed commissions

Wire Houses versus investment banks

Keeping the cards close to the chest, a lock on quotations, limited news, the pink sheets

Ross comes to Visit

Los Angeles in 1973

Officer Candidate School goes Private, the class size dwindles

Meet Walter Auch or as Ed DeStefano described him, Wally Ouch

the Well to Do Rats desert the Ship, Ross gets a stay from the SEC

Ross grabs Walston

 

 

 

 

January 1973 Approaches

Posted thursday Oct 24 2013

One of our long standing predictions is that the markets and the US would endure a collapse similar to the January  1973-December 1974 meltdown. We are getting ever closer to the moment. 

Here are the similarities.

We are once again in an  18 year period of stagnation, now as then, 1966-1984 versus 2000-2018. 

The stock market has recovered to new highs, now as then. 

The President has been re elected with a  large majority but his popularity and trust are now falling just as rapidly. 

Political polarization abounds.

Now scan today's WSJ. Front Page - 

Democratic Unease Grows on Health Law.

Germany Alleges US Spied on Merkel

Plans for Politicdal Union Unravel in Europe

thousands of protesters in Tunisia - where the Arab uprising began

It gets worse...

Page A 15 - Obama's Credibility is Melting

Page a 17 -= A Lawyer Lost ina  region of thugs, this author notes that the Saudis have distanced themselves from the President. 

Approval on foreign policy and economy is about negative 13%

Page B1 CAT profit falls 44% -  this reflects our prediction that the oil patch, mining, is expanding at the top, here in San Antonio the US larges CAT dealer has a huge expansion underway

My newspaper column to be published Sunday sums up the oil price condition, but for the time being we seem on track to have a 40 year, two generations removed, anniversary of the January 1973 stock market top.  we are certainly witnessing a change to negative mood to support such a reversal. 

New Highs on the Horizon, Refiners, Pipelines Jump

Weekend October  20 2013

Bud Conrad suggests the bond bubble has burst.  As he says, let the interest rates go back to normal of say 5%, let the debt ceiling run to $20 T and the interest cost is $1 trillion a year. 

Replacing Bernanke with Yellen suggests permanent QE.

Tom McClellan

Tom McClellan
Editor, The McClellan Market Report
www.mcoscillator.com
(253) 581-4889

The idea is that the capital gains holding period results in a 13 month cycle from bottom to top in the stock market. This means money funds reach a low at stock market tops. The ext low is 1/2/14. 

NYSE A/D

That view is supported by the Advance Decline which ticked up after consolidating the last few months. 

Consumer Discretionary

And so Consumer Discretionary hits a new high as well.

XES Oil Service

 

 The top of the oil market in 1981 occurred with the rig count in the US soaring over 5,000 and the price of oil dropping. Here we show the XES energy service stocks in red black. The price of oil is the solid black line. The price of oil dipped as the XEX hit a new high. This may be a temporary thing but it bears watching. The two should move in synch with one another. Otherwise we have too many rigs chasing a lower price of oil. 

EEP

I suggested pipelines as a way to play a suspected uptick in this sector. EEP, OKS, and TCP have all taken off again. Yields are still around 7%

Refiners The Crack Spread

An alert reader asks about the refiners. Great question and timely to boot! The refining business does not depend on high or low crude prices. Rather it depends on teh difference between the price of gasoline which can be sold versus the price of the raw material to produce the gasoline. This difference is known as the crack spread  a term derived from the catalytic cracking process that produces gasoline from oil. I have attempted to graph this crack spread with a ratio chart of gasoline to crude oil prices. When the chart hits a low, gasoline prices have outperformed oil prices. I plotted the big refiner Valero VLO at top. At the end of 2011, VLO bottomed along with the crack spread. The spread is bottoming againn, and again VLO has pulled back. 

VLO

HFC Holly, Tesoro TSO, Valero VLO have all taken off as a resutl. VLO shown above. VLO has  a 7.72 P/E and over $5 per sahare earnings. 

 

US Dollar

A drop below 79 will really turn the dollar chart to the downside. This suggests the Administration wants a cheaper dollar to pay on the debt. 'We need to move away from confrontational politics' ( the President) means no one should oppose further raises in the debt ceiling, my way or the highway. 

 GOOG the New Leader

We have a new leader. Google is running ads for multiple versions of its Chromebook by HP, Samsung, and Accer. At less than $300, this is the product MSFT failed to produce. Coupled with other android systems there is now an alternative to Apple and MSFT.  Google is not selling a stripped down version of its Office system as MSFT used to do. And the boast is start up in ten seconds. At school my MSFT systems take forever to boot up. The stock jumped $100. No wonder Ballmer resigned at MSFT.

 IBM

Here is more evidence of new leadership. In the same time frame that DELL went private, IBM has bumbled from 212 to 172. Note the air pocket drop to the downside for IBM as GOOG shot up. 

Closed End Municipal Bonds

Closed end munis have rallied on whatever deal we have in Washington. The weekly chart suggests we finally have a trade able low.

 CRB Index

The weaker dollar has the CRB Index perking up, note the pattern of higher lows. And so oil, the CRB and even gold was up this past week. 

Bottom Line

Stocks continue higher, commodities rally on the weaker dollar, Google is the new IBM/MSFT. 

Socionomics

While markets have picked up, the themes at the theater are decidedly downbeat. 

Robert Redford stars in a one man show with little to no dialog. in All is Lost. Here is the tag line.

After a collision with a shipping container at sea, a resourceful sailor finds himself, despite all efforts to the contrary, staring his mortality in the face.

This suggests a population grappling with whether the future is indeed brighter than where they are today.  I have not seen the film but presume Redford survives. Contrast this with the first Rocky movie that appeared shortly after the Dec 1974 low of 577 on the DOW. Rock resonated with audiences as the underdog winning the day. Here potential movie goers are navigating their own lives comparing it  with the sailor lost at sea. 

Audiences are flocking to see a similar story in Gravity. Contrast the theme of Gravity, lost in space, with the 1983 film The Right Stuff. The Right Stuff finally gave Chuck Yeager, first man to break the sound barrier, his due. All seven of the Mercury Astronauts had, as Tom Wolfe described it, the right stuff. This was just what audiences wanted to hear as the markets lifted off the 1982 final lows of the 1966-1982 bear market.  In the photo at right, notice the astronaut floating helpless in space, a metaphor for the contiinued jobless recovery in the country. 

 

 

Now contrast the image of Gravity with the image of The Right Stuff. Quite a difference!  Even in their space suits the astronauts look bold and confident, the opposite of the Clooney and Bullock adrift in space. 

 

 

 

 

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Kicking the Can Down the Road Again

Thursday Oct 17 2013

One economist thinks the debt deal is no deal at all.  Indeed there is still no budget. I suspect this Administration can run the Debt Ceiling up another trillion in one year, then what?

CIti chimes in with the same conclusion. Check out the chart on mandatory spending in this article. 

Paul Ryan agrees this is no deal.

Tom Demark  likens the stock market  to September 1929. 

And I thoought a $10 M collectible Ferrari or or $30 M Mercedes was a big deal, how about a $10 M Victoria Secret Bra?  Showing off wealth is a another feature of market tops. 

An alert reader responds to my wondering about oil prices with this observation on the XLE

XLE

The XLE for energy is in a contracting wedge, much as it was going into the 2008 high. THis sort of massive optimism usually leads to  a market top. 

I am with the analysts cited in the first two articles. This is the brinksmanship the administration wants. Now it announces no more brinksmanship, ie, we get what we want when we want it. Revenue is always about 18% of GDP no matter where tax rates are placed. With spending at 24% of GDP, this is the ticket for long term disaster. 

Defining a Bargain

Monday Oct 14 2013

Investors Seek Bargains in Battered Munis

At the end of the article one fund manager is buying 30 year New York Water Bonds yielding 5% claiming this is a great buy. Perhaps among current yields, but historically this is hardly a great deal. 

No doubt it is a heady experience to be anointed as the next FED Chair. And no doubt Ms. Yellen believes that she alone can command the market as to what level interest rates should be. I am not so sure that is the case. As Jim Rogers says, the FED is A player not THE player in the markets. 

A move to 7% on municipal bonds would generate quite a drop in the price of a 5% thirty year bond.