The Market Perspective

Modern History in Sixty Seconds

Friday Feb 23, 2012

 

Just going over old e mail and ran across this observation by yours truly, perhaps some readers will enjoy the Perspective.

Here is a short history  of the decline and fall of western nations since the Renaissance

 

Italy - Florence and Venice, daVinci

Portugal - Columbus

Spain   the Armada sinks, the inquisition terrorizes

the Dutch - world traders, Amsterdam, tulipmania

Germany - Guttenberg

France and Britain vie for control of the US, Spain looks for gold after looting South America, finds none and heads home

France and Britain lose the American continent, France sels out, Britain loses out

France and Britain after years of pointless wars against one another manage to stalemate against the end of the Austrian empire, 1870 leading to the rise of Germany

the two world wars exhaust Britain, France, Italy who become military wards of  America, as does a divided Germany, European countries live under a USA nuclear umbrella allowing them to build welfare states while their own military shrinks, unable to defend themselves or even mount a sustained campaign against, egads, Libya

Russia fritters away a WW II victory never producing a single consumer good competitive in the world market since 1945 other than the AK 47 and vodka

 

American fritters away its victory, endless wars, growing govt and welfare state, everyone is a victim, now over 45 million on food stamps

 

And so here we are, most of those countries had about a 200 year span with a few decades of real prominence like the Dutch in 1636, but they all fell back into welfare states

 

Greece and Egypt the oldest civilizations worthy of that title, are today basket cases

 

China is doubling down on real estate bets with a skewed demographic and  a sort of alternate dynasty govt, all the other countries on the Pacific Rim  lean economically against China,

India after all is China with more bureaucracy

 

and that is modern world history according to TMP, and that's what's wrong with the USA

 

We are Rome, circa 400 AD, handily we have the Atlantic and Pacific oceans between ourselves and potential Visigoths and Huns, at least other cannot march here....

 

$4 Gasoline

Friday Feb 23, 2012

A call from an alert TMP reader reminded me that of course, there is an alternate world to Texas, yep,

Planet Pelosi.  Which is to say that prices are already nearing or over $4 in California now. Here is a sign in Modesto, the agriculture area in Central California. 

So no need to wonder when or if $4 might hit, it is here now. A big spike of course on some sort of saber rattling news could take this to $5 for a true parabolic  conclusion.

It is a fact that environmentalists encourage high gas prices to discourage driving.In fact this is simply a tax on travel in the western states where residents deal with long distances. This is of course not the sort of problem in the Boston to Wash DC public transportation corridor. Or Chicago come to think of it....

 

OPEC Ad Absurdum

Friday Feb 23, 2012

OkayI am on my soap box on this one. I heard the same story at my high school reunion last summer. The Speaker was a Houstonian, and this OPEC controls things seems to pervade their thinking. Probably a good excuse for the cylic crashes that Houston endures- huh, hey, not our fault, rather like Obama this week. 

At any rate, let's use a bit of Sherlock Holmes dedeuction here. Let's start with the Houston premise that yes Virginia, OPEC and the Saudis control the oil price. If that were true, what would the price be?

Well the price would obviously not be all over the place which is what it is.That alone should decimate the Houston position but, to make my point I will continue. If the Saudis acted in their best rational self interest, what price level would they seek?

The rational answer is, a price that would be profitable to them and at best only marginally profitable for the rest of the world. 

Now, sidebar explanation. Understand the Saudi advantage.

• Their wells flow naturally, no artificail lift required. Lufkin would  go broke in Saudi.
• And the wells flow, a LOT. LIKE 10,000 barrels a day (what interior would you prefer in your Bentley Super Sports Your Highness?)
• And the oil is the highest quality in the world, which means the easiest to refine.

I googled for cost information but all I can find is price information. But I did run across this graph which makes the point that OPEC cannot control price. This graph also makes it clear that spikes in prices prcede recessions!  See 2001, 2008. 

So with these advantages a rational OPEC would look to their  cost of production. I know there are new fields that were featured on Sixty  Minutes which have higher costs. But for  the sake of discussion, let's say OPEC cost is $15 a barrel. 

If the North Sea cost is then say $35 a barrel. OPEC should price their product between $40-$50 a barrel. The North Sea could seel some but their margins would be low. This would discourage production.

But OPEC does not do this.ITo my knowledge there is no enforcement mechanism in OPEC so the arrows shown at suggetions at best. But our point is, this sort of all over the place price pattern is not regulation. 

Does the price of Rice Krispies vary all over the graph like this, no way. The cereal maker has a targert and sticks to it. 

I suspect the real danger to price now is if and when we have the ability to ship the new oil being found in North Dakota all over the country. And the ability to ship supply at Cushing, now 32 M barrels, to where it needs to be. Note the WSJ suggested today that the gas producers whould provide their own supply stations, bingo, alternative fuels. 

Oil prices are up like comic  books, expensive mechanical watches, and Coach Handbags. It's just that simple.

 

Social Mood and Oil Prices

Friday Feb 23, 2012

This Forbes Article Tired of High Gas Prices You Ain't Seen Nothin Yet is a good example of what I meant about the emotion surrounding crude oil pricing. 

The article admits, as I pointed out, there is no shortage of supply .And demand is down. A Univ of Houston professor is then quoted as, of course, blaming the Saudis, claiming in the familiar Houston chant that the Saudis control the oil price. Gee Prof don't the wish. 

Our point is that the article misses the big picture here. There is no mention of social mood which is driving prices on everything from 1939 comic books to Malibu homes to new levels. There are supply bottlenecks here thanks to our own government. And the patchwork quilt of crazy different grades of gasoline means we do not have a sell it anywhere to anyone gasoline formula which is jus plain nuts. 

I hope they will interview that same professor in a few months when I suspect prices will have mysteriously dived. Gee did the Saudis manage that as well?

OPEC always cheats in these situations. How else does one pay for the 1-77 Aston Martin for $2 M?

And it is the cheating on production that inevitably brings prices down, you know that supply and demand thing. The lure of $90 gross margin on oil is just too much, no way a Sheik is going to throttle back on that opportunity. 

But the charade that OPEC works marches on, at market tops. No one asks why OPEC fails to prevent prices from tumbling, but that's fickle social mood for you. 

 

Gasoline News Goes to the Front Page

Friday Feb 24, 2012

An old adage in this business has it that when financial news becomes front page news, the move is about to end. Just weeks ago, European leaders were announcing there was no hope for Europe or Greece and the Euro bottomed just about then aourn 128. 

Over the last two days, the President, who never missed a chance to criticize Bush when gas prices moved up, says he has no control over price. Gingrich, seeking a handhold for his one shot pony South Carolina win, promises $2.50 gasoline if elected, probably a sign of desperation. That's not a jab at Newt. OPEC began in 1961, they control most of the world's production, and have not managed to control price beyond a  few months in 1972 and 1979. 

But the socionomic point would be that when gasoline prices are seen as INEVITABLY going to $4 by the popular media, we should be looking for signs of a top in contrarian fashion.

Here is a nice all in one picture of what is happening. The main panel is the beaten down Euro. As with $4 gasoline, there are numerous predictions of a recovery to 1.40. As one can see that coincides with the downtrend line. If the Euro rises to that level, the 200 day MA should be about that price as well by that time. If this continues, what's reasonable, another month, or maybe March 9, the three year anniversary of the financial panic low?  That would make for a nice symmetry. And 3 is a FIB number. 

In the top panel gold has risen above its 50 day MA. At bottom crude oil has done likewise. Again, note the big drop in May for both oil and stocks. Count us as nervous nellies but we do not want to be long when that happens again. It is far better to sell two months too soon than two days too late!!!! We admitted yesterday that we exited energy too soon. But...

Energy Complex

Now same time frame but crude oil in the center, energy service XES at top and gasoline at bottom. 

I drew support resistance lines for crude in the center chart at what appears to be the nominal trading range. When oil broke above this resistance at 102.5 last March, it only spent two months up there before it crashed, all the way to 77.5 in just three months!  Really, trace that price action for yourself. 

Is it me or is XES a bit more leisurely in its move up at top?  At any rate crude oil is only 6.50 from its previous high. Of course no one in the popular media is pointing this out though we may hear of it on bloomberg or cnbc. 

At bottom gasoline has been on an absolute tear since January 1.  Let's look.

Gasoline

One of my earliest readers of TMP wrote complimenting me on my explanation of the slope function in the lower panel. The slope is the rate of change of the actual price in the main chart. As price moves higher and higher faster and faster, SLOPE gives us a fell for this. If prices moves fast enough it begins to take the shape of a parabola. This is known as a parabolic rise in price. The reason that is important is because all parabolic rises end in collapse. Look at the previous chart of crude oil going into May and then, look out below. 

I did not label this chart but I am guessing it now exhibits an extended fifth or final wave. Note the overbought condition of RSI at top. My point is that this confirms both the Presidential address on energy and the front page news in the last Republican debate, we can do better, the exact opposite of course of when Bush was last in office. 

Will oil go to $145 as it did in 2008. I doubt it but the wild card here is whether Israel might bomb Iran. The nonsense about sanctions hurting Iran's ability to sell oil are just that, China is a ready and willing buyer. And as Alan Abelson observed years ago, oil  is pretty slippery stuff. The socionomic point about bombing Iran is that the bombs would be on the potential nuclear facility not the oil fields. So a bombing raid would do nothing to change the actual oil supply. But it would certainly heighten tensions. 

And oil is the most emotional commodity in the world. So let's allow for a price spike if a bombing raid occurs. But that is a wild card and cannot be predicted. We can conclude that in traditional charting, gasoline is taking on parabolic characteristics which usually precedes the END of a move. 

After looking at how far along the gasoline chart has become, I think like Ulysses I will stay tied to the mast and out of long commodity positions. 

Addendum

My first buy of TVIX was filled yesterday at 16.77, I have other orders at 15.77 and 14.77 and  will add to the succession lower today. The gasoline chart is so extended that March 9 is begining to look like a potential end date for  this move but of course it could happen sooner. Stocks look poised to take out 1370 today which was another target. One Barrons Roundtable participant. Zulauf, said he would cover his shorts if the market did that. We of course are just now initiating a few mild short positions at this point. 

Socionomics

Did you notice in yesterday's WSJ that the original Batman Action Comic book sold for north of $320,000 while Superman fetched about $299,000?  That's positive social mood on boil for you. The WSJ is heavily promoting its monthly luxury magazine which appears tomorrow. Spring bright fashion colors, $300 K comic books, 20,000 sf McMansions, Hollywood types feverishly buying and selling mega million dollar homes, yep, it's all here!  Here is a screen shot of my list of luxury stocks.  The green bars say it all. 

 

London Fashion Swings Again - Thrusday Feb 22, 2012, WSJ

Nowhere was this excitement more evident than at fashion week, where prodigal children Stella McCartney and Alexander McQueen returned. Though both will still show their main collections in Paris next month, Stella McCartney unveiled a special evening-wear collection—in a memorable night that included a magic show and a flash-mob dance with top models Amber Valetta and Shalom Harlow—and Alexander McQueen debuted its more-affordable, military-infused McQ line in a leaf-lined warehouse-turned-woodlands.

It's Really Simple or What Was I Thinkin'

February 23, 2012

I said this would not be a blog where we never acknowledge a mistake. The mistake was that our original analysis was correct, and then we ignored it, exiting gold and energy markets too soon.

The culprit in the jump in commodities today is the weak dollar, let's take a look.

UUP represents the US Dollar, the black line is oil, and at top we have the Central Fund. 

The big drop  in UUP today boosted crude oil to a new high for this move. Now remember there is no shortage of crude oil now. The rise in price is due to fears of a potential Iranian attach by Israel and the weaker dollar. 

At top Central Fund has  moved sideways until the dollar began dropping again. 

The mix I had in my retirement fund was exactly right, energy service, energy, gold, international commodities. 

CRB

Notice that the CRB is just under the 200 day MA. It broke a downtrend going back to last May. With the dollar down we are thinking that a re entry into commodity plays is called for here. As long as the dollar declines, commodity prices will move to the upside.

More tomorrow morning, gee, Friday again!

 

2008 vs 2012

Thursday Feb 23, 2012

Bloomberg tv was just showing a graph demonstrating that spikes in oil prices precede recessions, again and again. I was thinking just that, so let's hop in the time machine and see what was happening on this same day in 2008, and then some.

2008 Oil SPX

Crude oil is the red black bar and the SPX is the solid black line. The SPX was 1350, far left and oil was 100-105, gee

We showed the summation index rolling over this past weekend, the effects of that are evident in the increasing down volume across the indices shown below.  Note the heavy declining volume in the NASD, th smaller stocks are falling faster. 

that's what the SPX and Oil are Now!  Amazing eh?  But I as I recalled stocks peaked in May and oil soared into July, those darned speculators as the press says. And then of course everything fell apart.115 is th recent previous high for oil and that seems a realisitc target for now. 

The real 'death cross' occurs when the SPX plunges below a rising oil price. I would not be surprised to see that happen again.  145 oil might seem unlikely but Israel takes the Iran threat seriously. Obama does not and that is why oil is rising on a possible Israeli attack on Iran. 

At any rate we have the same sort of set up as in early 2008, the stock market internals, which we consider the paramount indicator, are falling.  Crude oil is rising. 

I have a succession of lower and lower orders to buy HDGE and TVIX, a few hundred shares at this point. 

This weekend we will compare PSQ, HDGE, and TVIX for you. Each is designed as a way to profit from a declining market. 

Dow Theory Update

The divergence between the Transports and the Industrials is increasing. This as we showed is the result of higher oil prices. And this is another early warning signal to be safely sidelined mostly i ncash, we are. 

Markets Closed Today

Monday February 20, 2012

 The SPX is at 1368. That means it is a mere 2.3% to reach 1400. Our judgement was it was not worth the risk of being long when the reversal occurs and so we exited a week ago. We listed three  reliable indicators this weekend

Dow Theory

Summation Index

Bullish Percent 

All of which are flashing warnging signals. One comment on this blog is whether the market might celebrate the March 9 low with a three year anniversay high. Given the bullish percent in the high 80s, another two weeks would surely take it over 90% at which point the exit bell would be ringing loudly. 

Recall the violent reversal of this past May and of course August. Relax and enjoy the show for now. 

Looking Ahead

Sunday February 18, 2012

I was just reading The Genius of Renoir: Paintings form the Clark. Sterling Clark, an heir to the Singer Sewing Machine fortune, was an art collector. This volume describes his collecting history and features many from his Renoir collection. 

But I call your attention to this paragraph on page 26.

Although he fretted heavily  about the heavy tax burden imposed under the New Deal and railed against theconomic policies of FDR, the Depression turned into the collecting opportunity of a lifetime for Clark. 

Taking advantage of the dip in art prices caused by the economic down slide, Clark dramatically increase the pace of his acquisition. Many collectors were hurt by the crash and began it liquidate their holdings, flooding  the market with quality paintings at discount prices. Clark bought  M W Turner's Rocket and Blue Lights in 1932 (Elam-near the dead low for the stock market) from Charles Schwab who was forced to sell it hat half of what he had been offered during the 'boom period.' IN 1933 alone  Clark bough a dozen paintings  form Duran Reul in NY and five more form Knoedler in NY and Paris including works by MOnet and Pissarro.

Learn from history. While bullish enthusiasm for near everything is bubbling the markets to highs again, we are safely in cash for the most part. It is time to shift the thinking to the bargains that lie ahead. These will be much greater bargains than most can imagine, whether in the art or stock market or real estate world. 

Luck is the intersection of preparation, experience, practice, and forethought. Clark had it, Schwab did not in the above example.  This is a political year and one can bet Washington will attempt all sort of shennigans to keep the markets elevated, certainly going into the election.

Divergences

Sunday February 19, 2012

Commodity producing firms and some energy service companies are sounding discordant  notes. CNBC is as usual cheer leading for the market. Al those green dots, stocks opening to the  upside on the opening are more a reverse indicator. Once everyone is in and the money runs out, the market tops out. We have noted how the bullish percent indicators are near their decade highs, as well as the summation indices. 

The media continues to magnify the importance of the 'trophy' stocks making new highs. Let's take a look. 

NYSE Summation Index Early Warning System

We have three reliable indicators flashing Early Warning Signals of  a top.

NYSE Summation Index

Dow Theory Non Confirmation by th Transports

Bullish Percent of Stocks over 150 day Moving Average

Here is the New York Stock Exchange Summation Index. We can easily count five waves up. And this week recorded the FIRST NEGATIVE WEEK since the take off in December. We constantly harp about the market internals. ONe can easily see the NYSI here identified the dead low of August, the next low of October and now the high in February. Gee, whew, I feel a lot better about being in cash with exposure to natural gas. 

Dow Theory Anyone?

In July the Indus trials failed to confirm the new high in the Transports. This time the Transports are failing to confirm th new high in the Industrial. One can see how August turned out as a result?  Again this suggests extreme caution. While it may appear that all are easily making money (don't they always on CNBC?) note the violent reversal in late July when things turned. 

 

Bullish Percent INdicator  150

Still topping is a process. The popular averages like SPX push higher, the Dollar forms stealth higher lows, the Bullish Percent over 150 days is at nose bleed 88.6!!!!!

We overlaid the BP indicator with the actual SPX. Both are coming to a crescendo. The BP may be making  slightly lower high than on its last visits to this area. The alarming thing of course is that previously the price index was much lower. Now both are in social celebration mood!

 

Commodity Funds

To listen to the media one would think all stocks are making new highs, not quite. Here Metals ad minint XME, GDXJ junior gold miners in gold and Patterson PTEN have all been making lower highs, for a year!

Insider selling in tech stocks and mining stocks is up, buying is simply not happening. 

Crude Oil

Most investing websites, subscription services, and such almost never admit an error. To read them one would think that someone had finally 'figured it out' No Fear, No Losses, No Dollar Left Behind, We Captured the Whole Move..... 

We will not be so bold. It looks like my original analysis of oil going higher on a break over 102.50 was correct. The weaker dollar in green via UUP is in the bottom panel. That weakness friday finally lifted oil over the resistance. Continued talk of Israel potentially bombing Iraq of course helped things along as well.So s this a break out ot the upside, or a fake out designed to lure on in at the wrong moment.

Yes I exited the Energy Services, was that a mistake, well before you jump  in tak a step back look at the Dollar. 

US Dollar

At bottom crude oil has turned up, but in the main panel the Dollar has made  a higher low. And it remains above the buy level for the PAR SAR. 

THE DOLLAR AND CRUDE OIL WILL NOT BOTH CONTINUE TO ADVANCE. I just wanted to emphasize that point. 

Notice the nice stair step up pattern to the dollar, no one on CNBC seems to notice. Could that explain the decline in GDXJ and XME?  You bet it does. 

I see France officially retired the Franc this week, now its Euros or nothing. The never ending Greed drama is just postponing a real fall out on what to do. The Greeks are not going to adopt an austerity program past the first loan re payment date, nor will Spain, Italy or Portugal. 

Now remember it is All One Market, on one side, stocks, gold, oil on one side and the Dollar and US Govt Bonds on the other. so which is going higher, and for how long, oil or the Buck?  I ran the same chart but with WTIC in the main panel, it too is on a weekly PAR SAR buy signal. So the jury is out.

GM

My call on GM also appears to ave been correct. As soon as Romney called for the government to sell its GM stake, GM shot up7.22% for th week.Readers may recall my sheer speculation that it would be in the best interest of the Obama campaign for GM to shoot back to or past it high of $40. Hmm, is David Axlerod reading The Market Perspective?

After I sold it pulled back to the MA and then took off, another example of how the quant programs funds utilize have the moving averages as their trigger. Should we get back in the GM water, probably.This is of course the psychological problem of getting out, tough to go back. I will leave this one to rreaders and their own risk preference. This is also the difficulty of trading in individual stock. The funds will claim they have some winner at quarter end, GM might be it. 

 

San Juan Royalty Trust

 

And now something great to report on our strategy. We recommended SJT and HGT, two natural gas realted trusts paying nice fat dividends. Several readers e mailed pointing out obvious weakness in SJT which in fact promptly took a dive after our recommendation. But for now it appears both at attempting to put in bottoms. Confirmation comes from CHK which jumped just over 4% for the week. Nat gas futures jumped 4.7% for the week. 

One reader points out the lack of natural gas fueling stations. This is true for cars not so for trucks. Most large truck stops on the interstate at least have propane re fueling now. As we have remarked many pickups in the western states have been modified to run on propane. I would not be surprised to see Congress pass a tax credit incentive for doing this for pickups and SUVs. IT is relatively easy to mount an extra LNG tank in the bed of a pickup truck. And remember the best selling car in the US is still the Ford F 150 pickup. 

Socionomics

Obama's percentages peak?

http://iemweb.biz.uiowa.edu/graphs/graph_Pres12_WTA.cfm

Bob Prechter is publishing an Academic Paper showing the high correlation of a bull stock market to the winner of the White House. Not surprisingly Obama's chances  have risen to a new high with the market!  If the summation index, bullish percent, and Dow Theory are correct, he should be peaking for the time being right about now.

The Republicans remain a mixed bag with hundreds of delegates to be decided in by March 9. 

Dennislelam@gmail.com

 

 

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.