Vancouver Investment Advisor Ritch Wigham

What Are You Still Waiting For??

The last two years have been nothing short of historic. I can say the same about the two years before that and the two years before that, and before that… So, what is my point?

The market has never been a static place. On a short term basis the market is always changing up or down, on a long term basis the market has a definite upward bias.

For the last two years however the market has seen a fairly persistent rally from what were lows of devastating consequence. The previous five months before March of ’08 resulted in a wealth destruction in equities that truly had no precedent. I do not believe at any time in the modern financial system did we have a period were we were literally set back by a decade in the development of personal wealth. The result in Canada was the massive move into all things real estate while, the U.S. saw real estate wealth destruction that had never been seen before, as banks collapsed and record numbers of home foreclosures devastated the real estate market. Price declines back to levels not seen in twenty years in some places. This reaction occurred due to a massive flight to safety as interest rates declined in some places to levels not seen in literally hundreds of years, as liquidity was injected into the international monetary system to thwart a meltdown of international commerce that could have resulted in the collapse of the world economy as we know it.

So for the last two years the market recovery from Dow 7000 left many if not most retail investors, behind, perplexed and licking their wounds. A most understandable reaction. I have heard every excuse from” I don’t need the money” to a more truthful “ My wife won’t let me, we are buying more real estate” for not investing in the capital markets. Well, no more excuses. We have now made a classic 10% correction in a bull market. Is this the new bottom? I believe it is.

Before I give you my reasons for this I would like to deal with why this has occurred.

From my experience the market is always looking for a convenient excuse to make a move whenever it has become either overbought or oversold. If you look at the recent correction it has been blamed on the “CRISIS in EUROPE”. This crisis has now overshadowed all the other positive market fundamentals. Such as:

1. Great earnings recovery across almost all sectors.
2. The prospect of higher interest rates to slow inflation brought on by recovery
3. Stabilized real estate in general in North America
4. Relatively low earnings multiples in most industries and sectors
5. Low commodity prices for most food stuffs.
6. Still historically low borrowing costs
7. Modestly improving employment picture in most countries

There are more, and the bears would love to knock the ones I have mentioned, but it doesn’t change the fact that we are substantially better off than we were two years ago if only because there is a level of stabilization. After the actions that were taken during and after the melt down of ’07 and ’08 I have to feel that this can be dealt with. The world now has an understanding that it has never had, that what is bad for you is also bad for me and if my population suffers from your problems then I have a problem. Politically you might not like each other but economically there is an understanding that we are “joined at the hip” like never before. This is why we are going forward.

As for the European problem, let’s put this into a little bit of context as to just really how harmful this is:

After the Second World War Europe was devastated; the countries were broke, there was destruction of infrastructure, destruction of political stability, destruction of any form of cohesive economic future. Destruction of hope in the terms of many millions of people. Individual countries survived by surviving. As time passed Europe as a whole survived by relying on neighbors and creating new alliances that ultimately resulted in the European Economic Union (The EEC). Arguably the most important series of agreements in human history. This series of alliances also resulted in a nearly common currency, naturally called the EURO. (Britain and Switzerland maintain their own old script) In the last few years this currency has become a “reserve currency” like the U.S. dollar. A supposed storehouse of wealth, that other wealth can be measured against. Before the current troubles, by most estimates about 20% of the world’s reserves were in Euros’. Very convenient compared to the baskets of currencies that used to clutter up central bank books, prior to the advent of the EURO. This is where the current problem occurs. For the last number of years you could own Euros’ versus the relative value of the U.S. dollar and feel good about the fact that you might be hedged against problems in the U.S. You could also borrow Yen at a zero or near zero interest rate and buy European assets while not holding U.S. dollars. This is very good if it lasts, not so good when it comes to an end. So for the last couple of years you could borrow cheap Yen to buy strong Euros’ to buy cheap U.S. assets in dollar terms. What could go wrong? Well if the European Union collapses there is no strong Euro to base this trade on and consequently the Yen gets very strong as everybody scrambles to pay off their Yen denominated loans. This cross or “CARRY” trade occurred to a lesser degree in a number of other currencies as well. As of this morning, the Yen /Euro cross is at 110. A level it has not been at since 2001. The Aussie dollar is probably the most affected currently having lost 15% of it value as it is being sold for a number of reasons on top of the problems in Europe.

The end result of all of this is a concerted effort by all of the world’s central banks to try and fix this problem:

Look at the charts above and you will see some very dramatic moves. Now look at the chart below and you will see that the EURO has only gone back to where it was before the crisis:

Now you can see that Euro/U.S. have really only gone back to were they were not more than a year ago.

So if you look at all of these charts I have posted, what strikes me is that all of these “currencies” have gone back to levels that are by no means excessive or even record setting over a period of time. What we really have here is a re-alignment of the current currency or economic relationship of the different primary world economies.

Short term dramatic, but really not more than a correction or if you will a slowing down or even a “rationalization” in the economic relationship of these countries. Does it hurt? Yes. Is it a crisis? Sort of.

I suggest that there have been many much greater hurdles overcome since the Second World War in Europe than the one that is dominating the headlines now. The stakes for Europe are un-doubt ably high economically, but are much more dramatic politically. I personally believe that if Europe could recover from the calamities of the last one hundred years that this is simply not much more than a higher hurdle than has been overcome in recent times. Not to mention the vested interest that Japan, the U.S. and China have in the “Union” overcoming this disruption to their own respective trading plans. The last thing that the U.S. needs is a stronger dollar to thwart the gains in trade it has made as the “recovery” takes hold. Or the Chinese loosing one of their great consuming markets. As the French and British stop buying Chinese made goods. I haven’t even mentioned the problems everywhere else(Middle East oil exporters) as they are hung with reserves that are loosing their purchasing power very quickly.

So what we have is a very propitious correction that has allowed us to take another look at the capital markets before they recover from this correction, and move inevitably higher as the world wide recovery continues to expand and the commodity markets also, inevitably move to higher pricing points.

So don’t wait again sitting on the side lines saying to yourself “I should have gotten in last year” here is your opportunity to enter at levels not seen for some time.

Looking forward to talking to all of you soon, give me a call

Ritch Wigham
Mackie Research Capital
http://ritchwigham.com/
PH. (604)-662-1853
T.F. 866-662-1853

Mackie Research Capital Corporation (MRCC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-MRCC website please understand that it is independent from MRCC and that MRCC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRCC.

The European Confusion

I won’t use the acronym..

The European Union is experiencing it’s first real on-shore crisis. The Mediterranean countries plus Portugal have created what may become a devastating set of circumstances for the common currency that the union adopted some years back.

In a nut shell the debt to GDP (gross domestic product) ratio that is used as a bellwether or gauge of a sovereign countries ability to re-pay its debt has been extended past that particular countries ability to re-pay that debt.

Greece is the first of these over-extended countries to come into crisis. The others are Italy, Portugal, Ireland and Spain. Pick your favourite for who comes after Greece. The problem with this Union is that Greece does not stand alone. Due to the common currency the other countries sharing that currency are forced to paddle in the same boat. So if Germany and France don’t come to some form of rescue it impacts them as well.

Originally (a few weeks ago) it was thought that the rest of Europe would come to the rescue of Greece and we would all move forward. A small bump in the road toward a better and stronger European Union. That has turned out to be “not” the case. The IMF (International Monetary Fund) had to be called in because as it turned out Greece was not the only problem for the stronger countries. It has turned out that due to “incestuous” cross borrowing contamination between the worst offenders that the intertwined borrowing of these countries has made it one larger pot of trouble. Greece owes Spain money but Spain also owes Greece money and they all owe each other money that none may be able to pay back. This creates a large problem because it is almost like one great big sovereign debt that has actually no ability to pay itself off. The fear then becomes how do you stop the domino effect of a series of countries, all with the same common currency paying off this debt?

At the moment the bond market is trying to distinguish between the debts of these laggards by penalizing with interest rates the debt of one country verses the other. I.e. Greece v. Germany. The problem with this is eventually how do you distinguish between the players if the common currency has to be devalued while some parts of Europe are solvent and others aren’t?

It is a certainty that at some point (especially if they feel like they are standing alone) France and Germany will not pay the debt of their profligate partners in this fragile union.

That is what the world is afraid of. What happens if the E.U. breaks down?

What happens is that some parts of Europe become insolvent and others regain their old currencies and move forward. The prospects of this are untold. I don’t believe any one can accurately measure what the ramifications of this will be. I can tell you that the whole world will pay and pay dearly. After the melt down of the last two years I don’t believe that the leading countries will let this happen. The pain of the recent past was too severe to have been forgotten this soon. What ever gains we have made to leave the “Recession” behind will not be jeopardized by what are the relatively minor problems of a relatively small country such as Greece. If the problems spread to the other countries in this group a series of events that can not be controlled, may be unleashed, and those effects would be even worse.

The way the world would have dealt with this if Greece had not been a part of the E.U. is it would have been to crush their currency, and impose severe borrowing penalties (interest rates) until Greece had at least started to fix their problems. Since Italy, Portugal, Spain and Ireland are also involved the only outcome is then for the common currency to be devalued and stiffer penalties being imposed on the borrowing costs of all of the countries collectively. This may not seem very palatable to Germany or France but they really do not have a great deal of choice in the matter unless they start the breakup of the E.U itself.

The conclusion then is that the Euro Dollar will decline and the pricing of commodities as we know it will change. Remember that the modest and as yet fragile recovery in the U.S. is largely based on a cheap U.S. dollar relative to the rest of the world. This is a fact that should not be lost on us hear in Canada as this is exactly the mechanism that we used when we allowed our dollar to trade down to the $.60 cent level to stimulate our economy in the 1990′s and early 2000′s

So if I was in Europe, what I would do is buy gold and essentially convert my holdings to U.S. dollars and understand that the U.S. period will do whatever it can to keep their currency relatively week while helping Europe through the IMF to keep their Union together and thus keep the current fragile world recovery in tact.

Till’ next time

Ritch

Mackie Research Capital Corporation (MRCC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-MRCC website please understand that it is independent from MRCC and that MRCC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRCC.

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital Corporation (”MRCC”). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRCC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRCC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member CIPF.

Market Perception! Thoughts on U.S health care

I was asked early last week what was on its way, in the stock markets, if the U.S. finally dragged their respective butts into the twentieth century, and advanced a health care strategy?

My answer was effectively nothing would happen. And that by the way is what we saw today (03/22/10).

There is only one reason for this:

1.It was already in the market.

Most of the market people that have been around for any length of time already are aware that any one piece of news ,that takes any length of time to come to a conclusion, has already been dealt with by the market. It is only unanticipated surprises that move markets. There is certainly a short term hesitation (like the first hour this morning) but markets will go to where they were headed anyway.

That is not to say that there are many times when the market cannot possibly anticipate the outcome of what it knows is coming. For example, I can think of nothing more frustrating than trying to anticipate the release of most government statistics. Whether GDP or something that should be as simple as a crop report, government release can give markets fits trying to get an advantage before the report in question is actually released. We have been through one of the most volatile periods for reports in the last two years that I can remember. To say these were uncertain times would be an understatement, but the markets seem to have recovered in a steady manner despite slowly improving numbers.

In broad terms, individual reports have a minor effect but can have a major impact when taken collectively. This is arguably why sometimes bad numbers have no effect or good numbers are ignored in the context of the broader market. “If the market didn’t want to go higher it wouldn’t.” “Why didn’t the market go up on the good news?” “That should have been a disaster, why didn’t the market crash?”

These are all questions that people ask when they think they guessed right but still didn’t make any money. They get very frustrated (understandably so) when it seems not to make sense. This is not always the case, but it is usually in the market already. This weekends decision on health care is a perfect example. If you really think about it, individual stocks may be affected but why should the overall market take a hit. The reality is there are probably many opportunities to make some of the nearly trillion dollars of newly printed government money being distributed as there are ideological reasons to dislike this government initiative. So why wouldn’t the market prefer to look at the money and not the esoteric reasons for a negative reaction?

To finish,” Anything that takes a length of time to realize, and is not of a spontaneous nature, has already been dealt with by the capital marketplace.”

In my case, I learned this when it took Bush 1, literally months to finally invade Iraq!

Talk to you soon,

Ritch
Mackie Research Capital Corporation (MRCC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-RCC website please understand that it is independent from MRCC and that MRCC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRCC.

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital Corporation (“RCC”). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor RCC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRCC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member CIPF.

It’s up to China

This article by Kenneth Rogoff helps explain why we have a dynamic change in the way the world is going to work moving forward. As you know if you have read any of my recent blogs/posts I am a firm believer in the premise that it will be Asia (read China primarily) and the other BRIC economies that will lead the world recovery.

The way that I interpret Mr. Rogoff’s assumptions is essentially that China primarily, and other emerging economies, can either spend their U.S. reserves back into their own economies or buy what they need in the open market for what their economy needs to develop further on it’s own. Spend it or loose it.

In the case of a currency that means basically spend it or watch it devalue ‘till you will only get a fraction of what it was once worth. The unwritten and verboten subject, and attitude in the U.S. may well be to allow their currency to devalue vis a vis the Yuan/Renminbi until it hurts. Remember that all those dollars have already been devalued by as much as 50% depending on when they were accumulated by the Chinese central bank. We also have almost everything that these economies needing, having gone up substantially in U.S. dollar terms. Copper, oil even the prices of the grains should continue to get support as these dollar rich economies continue to “spread the wealth” before it devalues further. Other producers such as the Oil cartel will continue to try and force higher prices from their production as the value of dollar pricing continues to decline and the monies they receive in U.S. terms diminishes their ability to support their own economies, and import purchases.

Again, as I have said before, as long as U.S. interest rates stay low, the need to spend dollars will continue, as the currency relationship is the proxy for these rates and gold becomes also the store of wealth that you would normally ascribe to the U.S. dollar as the primary reserve currency in global terms.

In essence Mr. Rogoff is suggesting as we have that Chinese spending will be of benefit to all and they not the U.S. consumer will lead world economic recovery.

Talk to you soon

Mackie Research Capital Corporation (MRC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-MRC website please understand that it is independent from MRC and that MRC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRC.

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital (”MRC”). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member CIPF.

The Great Inflation!!

By Ritch Wigham

In the last piece I wrote on the gold bear argument I used the term “The Great Inflation”.” What the heck does that mean”, I was asked by a friend.

Let me try and explain:

Back in the old days of the late 1970′s and early 1980′s interest rates were taken into the stratosphere and reached into the high teen’s and low twenties for borrowers in North America and Europe. It wasn’t pleasant. They reached these levels because the world was caught in a spiral of ever increasing costs directly related to ever increasing wage pressures. If it costs me more to feed my family, you must pay me more and therefore it costs more now to produce the product that my company sells. This nasty circle created a time when everyone went on strike for a “fair” living wage. It is when “cost of living” clauses were introduced into almost everything. Consequently,” The Great Inflation” became the economy’s greatest test.

In Canada wage and price controls were tried for a period but ultimately it was the use of interest rates to sky-rocket that was the mechanism that brought inflation back into check. This of course shut down the economy and a recession ensued that can be argued lasted until the great expansion of the nineties. Productivity was crushed and inflation finally receded.

See the following report. (opens a .pdf)

If you look at the charts from the link above you will see a very close correlation from 1980 onward between the CPI (consumer price index) and the bond rates in the U.S. The interest rates were how the Federal Reserve and the Bank of Canada here in Canada were able to finally get inflation in check. At different times the economy suffered but it was realized (or at least believed) that short term interest pain was much better than longer term price pressures that were more economically deleterious. So the balance between price and interest rates has dictated what has happened since roughly 1980. So far that balancing act has been relatively successful with the central banks world wide collectively patting them selves on the back for their collective interest rate policy.

Gold and the present

Sooooo, this is why the gold bugs are saying that gold prices are going to the MOON. The theory is that the central banks will no longer be able to control inflation through monetary policy (interest rates) without throwing the entire world into a deflationary recession. Raise interest rates, stop the economy or allow rates to stay low and allow inflation to rear its ugly head and recreate the wage/price/production cycle of the 80′s but on steroids. What has been left out of all of this is the effect that these rates have on the currency markets.

Normally low rates happen when your currency is strong and getting stronger. Everybody else is “buying” your currency and consequently rates on your financial instruments decline. Hence lower rates. But if inflation is causing your currency to “cheapen” or decline, so you have to raise interest rates to support your currency and make yourself more attractive to foreign investors. i.e. Give them a better rate of return on your financial instruments (T-bills, Bonds, Corporate paper)

Well the problem has been that we have effectively no interest rates on anybody’s financial instruments and the currencies of the world (in general) have been appreciating against the U.S. dollar anyway. So the price of gold has gone up, and so have most other commodities relative to the U.S. unit since most world commodities are priced in U.S. dollars. The problem that the gold bugs have is that inflation may seem to be happening in the U.S. but it is not happening in everybody else’s terms.

The really big question is how long this balancing act can continue were the currency market in effect is enough of a proxy to keep inflation in check.

The simple answer is as long as money continues to plow into the American bond market. There is effectively no return on this money at this time, and as I have said before, coverage on U.S. bond auctions has been stunning. This means that if you are buying these bonds it must be that you think your “safe” return will be made up from an appreciating U.S. currency. And if you believe this than the appreciation in gold will come from tightness of supply and not inflation on the near term. This last week saw gold go back under $1000/ounce the stock market slightly decline, and the U.S. dollar to appreciate against most currencies. Sooooo,”Where is the GREAT INFLATION”?

Talk to you soon,

Ritch

Mackie Research Capital Corporation (MRC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-MRC website please understand that it is independent from MRC and that MRC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRC.

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital (”MRC”). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member CIPF.

SPEAKING of NUMBERS and the MARKET

By Ritch Wigham

The other day I was talking to a client and he told me that the money market fund that was being suggested to him by another advisor (presumably a mutual fund person) was returning something like .2 or .3%. He said he worked it out and it would take something like 350 YEARS to double his money. BUT IT WAS SAFE!!! I was then talking to a good friend of long standing that also happens to be a broker, he tells me he got a report

from some fund company stating, that if you bought Canadian t-bills and rolled them at current rates that it would take 275 YEARS to double your money. Now I haven’t worked out the numbers myself but I do know that it is an egregiously long time to get any kind of return on your money. Why do I bring this up, you ask? The stock market.

Coming into September if you had listened to all the hype and crap out there you would have sold, been on the sidelines and be waiting for a correction that is not coming right now. Our statisticians and talking heads suggested and reported and slammed down everyone’s throat that September statistically is the worst month of the year! Sell my god you will buy it back cheaper in October. Wrong, wrong and wrong. I cannot predict the rest of the month from here, but my bet is that if there is this long awaited correction it isn’t yet and won’t happen this month. Why do I say this? Read paragraph one again please.

To everyone’s great surprise and the relief (can you hear the collective exhale) of the U.S. government. Bond auctions in the U.S. have had significantly higher coverage than one would have expected with the un-relenting supply of paper from the U.S. treasury.

Simply put “If you print it, we will buy it”. So far the coverage on 3 to 30 year bonds being auctioned every week has been exceptional. Two or even three times coverage for every issue. What this means is that the Federal Reserve doesn’t have to raise rates to attract the buyers needed to fund the U.S. budget deficit. The world is willing to fund these short falls with almost no return on its investment. Why???

1.Fear. Economic uncertainty. The U.S. is still the safe haven for the world.

2.The weak currency.

3.A bet on the U.S. recovery.(technically a currency bet)

4.A place to park money that is safe until you want to deploy it elsewhere

What all of this really means is that we haven’t gotten the huge flood of money into the stock market, that is out there, yet, but we get enough all of the time to keep the whole thing moving forward every time there seems to be enough weakness to offer a buying opportunity.

As I have said before and will re-iterate now.

“Markets like low interest rates and low bond returns. Money needs to make money or you loose over time and duration, and the only place to do this consistently is the stock or commodities markets.”

It would appear that the storehouse of funds is growing in U.S. treasuries. If it continues to be deployed quietly over time as it has been for the last number of months,

Any correction should be bought because, it will be, by the population still on the sidelines.

If it takes literally generations to make a return on your safe money, that money will find a way to make itself a higher return than inflation. Real estate, stocks, gold (commodities) pick your poison, but it will happen.

Yours,

Ritch

Mackie Research Capital Corporation (MRC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-MRC website please understand that it is independent from MRC and that MRC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRC.

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital (”MRC”). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member CIPF.

Consumers in the U.S Recovering?

This was in today’s globe. It is coincidental that it covers the Consumer in the states “NOT” leading the recovery. I would like to emphasize if I could that I wrote this last piece just before this Globe published the same thing in essence that I said on Saturday morning.

Mackie Research Capital Corporation (MRC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-MRC website please understand that it is independent from MRC and that MRC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRC.

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital (”MRC”). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member CIPF.

Is this a U.S. Market Turning Point?

On Friday we had a release of employment numbers from the U.S.Commerce Department that the market had heavily anticipated for the previous couple of days. They turned out to be market positive and some very interesting reactions ensued.

I spoke (wrote) only last week of the desire of the government to use the U.S. dollar as a proxy for interest rates. Whether that was from direct manipulation or regular market forces is up to the reader. My belief is regular market forces in this circumstance. The Fed got exactly what it desired without ever once having to discuss the need for an interest rate adjustment. (higher rates).

Listed below I have attached links to 5 charts relevant to this article:

• September Euro
• Dollar index
• S&P
• 30 year T-Bond
• Copper

As you can see all these charts are 30 minute charts to highlight the action for the 6th and 7th of August. The 6th was as quiet a day in these commodities as we have had in quite some time and then “BWAM” (Emmeril has copyright on Bam) on the morning of the 7th immediately after the release of the numbers and lack of revision(to higher or more unemployed than had been reported earlier) all “HECK” breaks loose as the market tries to quickly adjust for what just happened. Remember that everyone was worried about these numbers signaling a longer and more protracted recession.

NOTE: There is a huge argument as just how important these numbers ultimately are, all I know is that they always, always, always have a market impact. Therefore we better try and understand what the reaction means, even if we could care less about the number itself. Remember everything big and small always has a market reaction and so consequently we must try and interpret its short term meaning in a broader longer term context.

So the longer time frame numbers were not revised upward and the short term numbers were more mild (newly unemployed) than expected. Result was a very bullish reaction.

As you can see the Dollar Index shot up, the Euro the same, the market the same(S&P) and the Bonds went into the crapper and copper shook off a stronger U.S. dollar.

Simple interpretation:

1. Everyone loves the dollar because the U.S. economy must be pulling out of the recession.
2. That is good for the stock market and the copper. OOPS did I say that
3. The bonds went down and increased their yield. OOPS that’s bad for the stock market and copper because it costs more to borrow and will slow down the recovery.
4. BUT THE MARKET WENT UP ANYWAY, even with a strong dollar and higher yields.

Conclusion:

The dollar acted as a proxy for the bond market as usually a strong dollar is bad for the market. Higher yields are bad for the market and metals and a stronger dollar makes it harder to sell your bonds ( read U.S. weekly bond auctions). For the first time in a very long time this didn’t result in a flight to “QUALITY” and a much weaker stock market.

Lets see what happens from here, but what this is really saying is get off the sidelines or you may be stuck there as your bonds loose value and the stock market goes higher!!!

Talk to you soon.

Ritch

Mackie Research Capital Corporation (MRC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-MRC website please understand that it is independent from MRC and that MRC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRC.

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital (”MRC”). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member CIPF.

That could be a good idea!

This last week has been a “mental” mess. We started with the world on its way back to hell in the proverbial hand basket and ended it with definitive statements that the recession was over and all was back on track. Confused yet?

The first thing I would like to say is that either we all learn to dismiss the talking heads on T.V. or we are never going to be able to keep any kind of clear thought . I am now convinced that the reporting is generally and consistently more harmful than it is beneficial. I am not saying this from the view “If you don’t agree with me, you must be bad” I say this because I believe that the average person watching is enacted to make decisions that are not beneficial to their finances. If you had watched and then acted the first part of last week you would have sold all of your holdings, run for the hills, and contemplated stopping at Joes Gun’s & Gas to make sure you were well equipped to survive the next several years.

Within the next 48 hours you would have bought back all your stocks, paid more for the privilege and been told to go buy a new boat for the cottage, all was well! The reality of what happened last week was that a group of core companies released earnings results that were on track or better than our talking heads expected. Brilliant analyses, from brilliant people, who think they must “shock” to keep you watching. How about we try to report the news a little bit more and reduce the commentary a little bit more until at least after all the facts are out. I know our job is to try and “predict” the future so to speak, but my colleagues try and do this in a thoughtful manner and are taken to task very quickly if we don’t. It is becoming more clear to me that, that standard is not being met by the financial reportage that we are fed daily.

Moving forward, it has become clear to me that there is a growing stability developing in the markets. Individual stocks are still swinging more than they should, but the overall market seems to be less likely to over react to either individual good or bad news. This is what should happen at the end of a recession. “The worst is over but more bad news is inevitable.” What to do then?

WRITE CALLS!!!

In sideways to moderately increasing markets writing calls is the way to go. The premium bleeds out over time and still maintains a level of downside protection for those inevitable little short term surprises that our talking heads like to exaggerate. This also currently should give an extra level of comfort for those who are still trying to time their re-entry into the market. Buy the combination. When you buy the banks write the calls. When you buy the pharmaceuticals, write the calls. And especially when you buy your energy stocks, write the calls. Done properly this should add 8% or more to your returns over the next several months while we are finding out just how robust these markets really are and still offer a level of protection for your peace of mind. There are lots of opportunities out there right now for this.

Those goofy sun spots! At the moment and for the start of this year we have a much cooler and moister start to the growing season. “Perfect” growing conditions are being experienced in mush of the U.S. Corn Belt. Yields have been predicted to exceed generational numbers and final harvest results are maybe going to bring the second largest crop in American history. Don’t bet the farm just yet. If it stays cool early frost is the call, if it finally gets hot(currently being predicted by some models for August) it may stay that way and impact the crop because the root systems stayed shallow with all the early cool moist weather. Suffice it to say “the crop is not made yet”. It looks very good, but it is still very early. If you follow these things it looks like buying wheat and selling corn is probably a very good trade. This is no longer considered a spread trade for margin purposes by the CBOT(Chicago Board of Trade) but I still view it as one. Those who have known me for a very long time will know we have made out very well with trade in the past.

Final note; good crop or bad crop farmers in North America do not have the luxury of going another year without fertilizer. All this noise with Potash prices is just that “Noise”.

The reality of our world is that there are billions of people that continue to drain our growing soils. Only one thing fixes this, and that is fertilizer. Like it or not, it is cheaper for the Indian government and the Chinese farmer to fertilize than it is to import more grain because your population is going hungry. Remember that up to 50% of your yield can be attributed to fertilization.

Talk to you soon

Ritch

Mackie Research Capital Corporation (MRC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-MRC website please understand that it is independent from MRC and that MRC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRC.

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital (”MRC”). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member CIPF.

What to think of this correction?

Well needless to say, the long awaited correction appears to be with us. We are certainly now seeing a number of stocks over re-acting in the negative. The move higher was arguably more than it maybe should have been, having said that the move back down should probably be tempered somewhat by the amount of money that was sitting on the sidelines.

This is certainly an interesting correction for a number of reasons, but primarily for its breadth. From agriculture to copper, if it comes from the earth nobody wants it right now. There has been a resumption in the attitude that the world economies are in worse shape than anticipated. I don’t believe that to be the case. I feel that the markets were just a little too optimistic with the speed that things would pick up. It seems to me that if we look at most of the forecasts from a few months ago that it wasn’t until 2010 that anything would improve in any meaningful way. It seems to me that we are right on track for that to happen.

If you remember what I said in previous posts you will recall that I mentioned how political the price of oil was. Well guess what, if you are following the hoopla right now about how the price drop back to $60.00 is manipulated we should all be getting a good laugh right now. It seems to me that we spent a number of months being told that the price was too high because there was no demand, and oil was being put into storage at a record pace. Well why would we now say that the price is out of line as crude comes back down to earth and gives the poor consumer some relief from gas prices that were out of line with demand? If there was manipulation in this last price it was all on the upside as the large fund pools entered a market that they did not understand. Economically I can assure you that $60.00 dollar crude is much easier on everyone than $70 or $80 dollar crude when your economy is trying to recover.

The same situation is happening in the grain complex. The wheat, corn and soybeans have all fallen a great deal in the last three weeks. See this chart…

If you look at the December wheat chart (same as above link) you will see a very precipitous decline in the last few weeks. These moves are only partly due to farmer or end users (grain companies) hedging in the markets. These very large swings have much to do with funds chasing trades. If you look at the market you would surmise that the crop was large, wonderful and already in the “bin”. It isn’t! It is doing fine right now but ask any farmer how he feels about the next 60 to 100 days. In Canada a very substantial amount of the crop has already been written off for insurance due to drought, in most of the U.S. the pervasive cool temperatures are starting to worry many corn and soybean growers as time to tassel and head out are quickly approaching. I can promise that if you asked them they would not be nearly as sure as the market seems to be that the crop will be as good as the low prices that are with us. Remember what I said about making and breaking a crop all within a few weeks every summer. We made the crop the last two weeks, when are we going to break the crop? Next week or the week after?

So to end this at the moment, we should all be using this last price action to get ready to enter the markets that we have been waiting for. Agriculture is cheap, potash is cheap. If you like oil at all, most of the better oil stocks have sold off much more than the crude has. This correction will be the opportunity for the vast pools of money that stayed on the sidelines as the market over recovered, from the over done lows, that it made earlier this year.

Talk to you soon

Ritch

Mackie Research Capital Corporation (MRC) makes no representations whatsoever about any other website which you may access through this one. When you access a non-MRC website please understand that it is independent from MRC and that MRC has no control over the content on that website. The content, accuracy, opinions expressed, and other links provided by these resources are not investigated, verified, monitored, or endorsed by MRC.

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of Mackie Research Capital (”MRC”). The information and opinions contained herein have been compiled and derived from sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Neither the author nor MRC accepts liability whatsoever for any loss arising from any use of this report or its contents. Information may be available to MRC which is not reflected herein. This report is not to be construed as an offer to sell or a solicitation for an offer to buy any securities. Member CIPF.

Next Page »