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KHRN vs PCLO and BBM is very much an apples to oranges comparison as khiron is a B2C business and the other two are pursuing the B2B market. And while both are fraught with distinct challenges, the B2C strategy is truly the tougher one as it requires a level of execution and success all the way along the supply chain including the downstream side (arguably the most costly and timely in the chain) where cultural de-stigmatization, doctor and patient education, accessibility, marketing/distribution/delivery, product differentiation, customer/patient satisfaction and retention must all be ticked off in the success category to show real topline progress. Khiron has a significant first mover advantage in Columbia for now but the growth trajectory so far looks more like that of a marathon instead of a sprint. The B2B model is more straightforward, less capex intensive (once cultivation and extraction is built out) since the downstream side is white label, and so the B2B model is garnering a premium valuation over B2C, at least in Latam. All imo
It was a very good close but volume was light. The big question is just how many institutional shares from the original spac buyers are still to be queued up for sale in coming weeks, which is why I say retail is completely in the dark and oftentimes at a disadvantage with despacs. Early institutional buyers get to ride those free warrants for 5 years, so why hold commons and keep your capital tied up and at risk to potentially many quarters of operational growing pains when you can just do the long term capital lite holding approach with the warrants. That’s the theory I’m sticking with for now until the buying pattern changes. If heavy volume spike buying overwhelms the sellers next week and all these short term resistance areas are broken , especially the key resistance in that 13.60 - 13.80 area, then it could be game on.. all imo.
We will see. I agree with your short term support thesis but anything goes in the context of a despac. As retail we are truly in the dark as to the institutional machinations. My hunch is 10 breaks within a week due to institutional selling overwhelming retail demand. If they put the hype machine in high gear and do some more CNBC plugs next week then perhaps 10 doesn’t break for an extra week or two. For now I am looking down and watching the warrants. Company has a lot to prove as they piece this model together so I prefer the leverage with the 5 year warrants...gives them plenty of time to prove they know what they’re doing. If you review the prospectus appendices for Q3 financials you’ll see a whole lot of big red numbers. But I am certainly not dismissing the longer term potential. All is just my opinion
Warrants are trading very illiquid and are overpriced currently unless the commons reverse up well over 11.50 strike. I’m watching for now. Stock needs to settle in and absorb the selling and warrant buyers need to stop buying like the stock is headed to 15 in the next week or two. Anyone else hear that MSOS was buying shares in TPCO? I just checked holding a foe MSOS and don’t see any, so possibly that was not the case.
I would advise waiting and letting this despac play out a few weeks. The FOMO buys are currently up against big block institutional sales. Why are they dumping? My best guess is because they carry the free warrants at no risk. Open to hear other theories out there.
Very nice charting nowwhat2. I’m curious if you are seeing this chart setup as a potentially significant double bottom with the March 2020 lows and recently confirmed high volume reversal? At an EV of around 35M and most of Latam opening up to medicinal legalization, it appears the future may be quite bright for early movers in the B2C space. Cheers!
Yes they are worth the due diligence. Big operation in Columbia and growing a nice sized operation in Portugal along with a very strategic focus on the internationally legal medicinal B2B market (which obviously excludes US). Capital is currently blind to CLVR as it floods into the US MSO’s. Once substantive sales contracts are inked CLVR should pull out of these current low valuation doldrums imo.
Currently under the radar but worthy of several hours of due diligence to understand this team, the investment backing and the assets they have on hand and are building out. The global B2B supply chain in this industry is being re-mapped and extremely low cost high grade product from Columbia is going to be an important part of the big picture. Clever Leaves at a sub 200M EV is a bargain for investors with an eye down field. All imo
most charts in this sector all look the same but snn sp justifiably collapsed due to mgt mistakes. If snn can answer the cash concerns and get these asset sales closed, then we could see quite a reversal imo.
TIPS may not be a very good idea either (from the latest contraryinvestor site - link below)
One last comment on how the CPI is interpreted and often used in mainstream analysis. As you know, we often see analysts use the "core" rate of CPI as the real indicator of consumer price pressures at any point in time. The core rate, of course, being the headline number stripped of the influence of food and energy costs. As we stated above, food and energy components of the CPI account for roughly 22% of the total weight of the index. If we assume that the owners equivalent rent component is also being understated quite meaningfully in the current environment in terms of the true inflation in residential housing costs, we need to remember that this component again represents a substantial 23%+ of the total headline CPI weight. So, although this might sound like a stretch, when we're looking at the supposed "core rate" of inflation, we're really stripping out food, energy, and by academic definition of being understated meaningfully, housing. In other words, the current "core rate" quotes are really excluding the true costs of food, energy and housing. That being the case, how can we really consider this a "consumer" price index when it is essentially excluding the true nature of the three largest and most important consumables, so to speak, in any consumers life? Although this is really a point in time comment more than anything else, the current CPI is telling us very little about real world cost pressures at the consumer level. And, as you know, we haven't even ventured down the path of exploring the hedonic price adjustments likewise influencing reported CPI data to the downside.
Don't Ask, Don't Tell...Let's get to the matters at hand that affect us as investors each day. Also some comments about what may lie ahead. First, do you really believe that the Fed and the Administration are unaware of the extremely simple data and calculations presented above? Do you really think they are that out to lunch? Do you really think they are complete idiots? Of course you don't. After all, everything above just happens to be their data. Although we're not wild fans of Fed policy over the last decade+, we indeed do give them credit for being able to carry out simple addition, subtraction, multiplication and division. That we're pretty darn sure of. The Fed knows that residential real estate prices are inflating meaningfully and rents are not. They know the CPI at the moment is not indicative of true inflationary pressures when it comes to consumer prices in the here and now. But they and the Administration have a vested interest in appearing ignorant.
As you know, the headline CPI number is the key ingredient in annual Social Security COLA's (cost of living adjustments). Moreover, the CPI is the principal adjustment factor in annual TIP (Treasury Inflation Protected securities) total rate of return payouts (some protection, right?). Military and civil service wage COLA's depend on the CPI. And so do levels of Federal Income tax tables in terms of potential "bracket creep". (A lower CPI does not allow absolute dollar thresholds of incremental tax brackets to "creep" up much at all, academically meaning a higher total absolute dollar level of taxes collected.) The bottom line is that the higher the CPI rises, the more the absolute dollar cost to the government annually. Let's face it, we have a massive Federal deficit already (both on and off balance sheet). Does the Fed or the government really want to see that move meaningfully higher due to a CPI calculation that perhaps would be a bit shocking if indeed it reflected reality? And finally, a substantially higher headline CPI could, in all sincerity, push the Fed into raising short term interest rates much faster than has been the case up to this point due solely to financial market perceptions. The Fed knows the current US economy is highly levered. They know a rapid Fed Funds rate acceleration would absolutely cause some real damage and perhaps immediately burst a number of financial and real world bubbles they themselves fostered in the first place. From our standpoint, they and the Administration (responsible for the CPI calculation) are playing a game of "perceptual chicken" with the markets when it comes to reported inflation. They are practicing a "don't ask, don't tell policy". Dangerous? Yes. But what is their alternative at this point given their failure in terms of lack of financial discipline many moons ago?
http://www.contraryinvestor.com/mo.htm
Some cogent points from Bill Gross.
A Look Ahead: Where is Capitalism Going?
PIMCO Founder and CIO Bill Gross addressed the graduating MBA class at Duke University's Fuqua School of Business on May 8, 2004. Below is his commencement speech.
Thank you, Dean Breeden for that generous and perhaps too kind introduction. Faculty, distinguished guests, family, and finally…members of the MBA Class of 2004. To this last group I say congratulations - your struggle to the doorstep of our capitalistic jungle has been rewarded. I envy your enthusiasm, your vigor, your youth, and even some of your irrational exuberance that applies not just to markets, but to life as well. They are all essential ingredients in a successful trek through any jungle.
I envy too your presence here today at your very own graduation ceremony. Yours truly had the rather odd distinction of missing both of my college celebrations. At UCLA’s Anderson, where I earned my MBA, I had collected so many on-campus parking tickets that I felt the police would use the ceremony as a sting operation to balance the Anderson budget for fiscal ’71. The gala at Duke’s football field in 1966 failed to mention my name because I had hopped a freight train in downtown Durham shortly after my last final, with the intention of heading West to Las Vegas and making my fortune at the blackjack table as one of the game's first card counters. I must report that I got an A+ in blackjack, but very few of the same on my ultimate four-year transcript from Duke. Ah, wasted opportunities.
I am somewhat chary about giving advice, as is the standard protocol in a speech such as this. The assumption is that I know something you don’t. Perhaps. Age does have some benefits if only in knowing what not to do if given a second chance. Still, I’m well aware that each of you to the woman and man have more brain cells than I do and that you have already had at least several years of experience in the jungle already. It is I, therefore, that am at a disadvantage, and if not now, then in a decade’s time, when I will be listening to you, not vice versa. Still, for this Saturday morning, it is my 15 minutes at the Cameron Stage Podium.
Being here is reminiscent of the time just three months ago when my wife Sue and hopefully future Blue Devil Son Nick, who are again with me today, ventured back for the Duke/Carolina game. At half time we were introduced to Donald Trump of real estate renown and Apprentice fame and it struck me later on that many of you are in a similar environment now as Bill and Amy and Kwame were during the filming of the show. Not that you haven’t found your future jobs, and that you have to kiss a big shot's butt like they did in order to win the competition. As we all know, Fuqua graduates are beyond butt kissing! What I mean is that you’re still in the process of learning how your skills and personality mesh with the reality of the business world. Experience of course is the best teacher, but permit me during my 15 minutes to give you a few suggestions.
Now I think we all know what makes for a good Apprentice and we don’t need a reality show to point it out. Intelligence, a drive to succeed, communication skills, managerial moxie, and of course ethical standards (and the willpower to stand your ground when upholding them) are all key elements for a successful career in the business world. And you don’t even have to be as good looking as Bill or Amy, thank God. Look at me for instance, and I did pretty well. And look at the Trump Meister’s hair - if that can pass muster, then any "Do" will do.
But beyond these qualities I would mention two others as perhaps most critical in your future pursuits. First of all to use a playground expression, you must have the "Love." Not a love of hoops or the gridiron, but a fixation, an obsession, an exultation in what you do each and every day. You must find not only your niche, but also the niche through which you can symbiotically nurture your business enterprise and yourself at the same instant. This is not an easy task and I am not naïve enough to believe that all of you or even most of you can do it. There was, after all, only one Apprentice. The true winners from this group here today, however, will be those that can marry their education and people skills with their passion. It is a dynamite combination. If you haven’t already, find something eventually that makes you want to get up every morning and go in - not for the check and what it can buy, but for the LOVE. You should be working in a TGIM environment - Thank God It’s Monday. That alone will make you a life’s success in the businessworld.
If, in addition, you want to climb the ladder towards the top, let me recommend one additional thing. You must be a risk-taker. How much and how often depends on you and your business environment and associates, but faint heart never wins a fair maiden or a handsome prince for that matter. You must take some chances. My success at PIMCO in large part has come from the fact that bond people are a cautious lot and rightly so. Preserve and protect is our motto much like the NYPD and NYFD. The opportunity that I recognized at PIMCO, however, was that the same industry-wide caution that prevailed in bond portfolio management was being carried over onto its business playing field. Bond people were unwilling to play the schizophrenic role of cautious investor and aggressive entrepreneur at the same time. I found that by innovating with the use of conservative investments, such as mortgage pass-throughs in 1975, financial futures in 1981, and global bonds in 1987, that PIMCO had a chance to leapfrog the competition. I and PIMCO took some chances. We took the chance of being thrown into the same perception pot as pork belly traders when we talked about bond futures. We took the chance that clients would think I had an accent as I explained the advantages of a German Bund instead of a Treasury Bond. But it worked - we stood out, we outperformed, we and our clients thrived.
In sum, to win at the ultimate business reality show, you can do no better than to love what you do and as you’re doing it to slough or molt your everyday business skin by taking measured risks and calculated chances. Strange words from a bond guy, huh?
Now a word or two about the future world in which you will hopefully be joyously molting. While acknowledging ahead of time that I am a glass half empty guy when it comes to any economic forecast, let me at least acknowledge that capitalism in the future will be a going enterprise. That said, I believe the question of the day to be not "Is capitalism a going enterprise?" but "Where is capitalism going?" And since the United States is the role model, indeed it’s at the center of the entire process, a brief analysis should begin and end with a discussion of the U.S. of A. My conclusion first. I am not optimistic. Over a span of several decades, America has morphed not just from an industrial economy, to a service based one as is well known, but then additionally to a finance-based economy dependent on the production of paper and the innovation of financial instruments for its well being. Over the past 20 years our total private and government debt as a percentage of GDP has skyrocketed to historic levels, even beyond those reached during the depressionary 1930s. While some would claim that the servicing of this debt remains under control, when and if interest rates do go up, the servicing costs of an accelerating debt economy eventually bite the hand of its master. The result will likely be slower economic growth and the potential for renewed bubble popping whether it be stocks, bonds, or housing prices.
Similarly, in an environment in which profits, business success, and jobs themselves have been driven in substantial part by a 20-year trend of lower interest rates, an observer must make the unmistakable conclusion that we have come to the end of the road. One percent short rates have nowhere to go but up, (that is for certain) and nearly as certain is a similar conclusion for interest rates further out along the yield curve. Joining this near slam dunk forecast with the observation of historically high leverage in our finance-based economy leads one to conclude that the bloom of capitalism’s rose will surely come off over the next few years. We will all pay in some form or fashion, whether it be via higher inflation, subdued returns on stocks and bonds, a depreciating dollar, or a loss of competitive influence relative to our capitalistic competitors.
This, of course, does not even reflect the enormous demographic liabilities represented by boomers who will demand social security and healthcare benefits at the expense of your generation. In just four years, the first of around 77 million baby boomers will start collecting social security benefits. In seven years they will start collecting Medicare. By estimates generated by a study commissioned by ex-Secretary of the Treasury Paul O’Neill, the present value shortfall of government social security, healthcare, and debt service obligations amounts to $45 trillion, or more than four years of this country’s annual output. Your generation is being handed a bill that can likely be paid only by higher inflation and dampened consumption over the next several decades. Since at 60, I am not technically a boomer, I owe you no apologies, but you certainly have my condolences.
So, if true, what to do? Become Chicken Little like and refuse to work in the open air? Of course not. I am arguing, though, for realism and for the possibility that standards of living may not grow at the same pace as they have for the past half century. My forecast and personal advice to you argues for an entrepreneurial spirit full of the Love, spiced with timely risk taking, but cautioning even those that succeed to set aside reserves for increasingly stormy weather. Be a bond person like me - take business chances but invest the fruits of your labor conservatively. And unlike me make sure your kids, just like yourselves, will be attending their own graduation ceremonies. After all, absent a scholarship, it’s likely that you’ll be footing the bill for that too, and you’ll deserve a payback.
Thank you for listening, the best of good fortune to all of you in the future. And I hope that you’ll be starring as chairperson of your own reality show sometime soon. Even if you don’t, remember as John Lennon wrote, that "we all shine on, like the moon and the stars and the sun." - two into one, no separation.
Hussman's latest (apologies if already posted)
http://www.hussman.net/wmc/wmc040517.htm
Here are a couple of cogent points from the update:
With the massive U.S. current account deficit hitting fresh lows, there is little room to expand capital inflows from foreigners (a large contributor to past U.S. investment booms). Moreover, corporate balance sheets were improved not by debt reduction, but by swapping to short-term interest rate structures, so there is considerable yield curve risk to balance sheets. This also implies that unlike past experience, it is not at all clear that the next recession will require any sort of inversion in the yield curve – even a flattening could create sufficient strains on the economy. Oil prices have been rising as well, but unlike past spikes in oil, this one is accompanied by a significant spike in long-term futures prices. As the analysts at Bridgewater have noted, this implies that the market sees the increase in oil prices as structural, not just a temporary supply/demand imbalance. Finally, unlike other expansions (outside of the short-lived 1980 experience), indicators such as the ISM figures, new claims for unemployment and so on have been belied by a stubborn lack of improvement in capacity use and help wanted advertising (not even in the trend, which would occur regardless of internet advertising).
In short, the market is focusing on income trends without recognizing the importance of balance sheets, valuations, risk premiums, and the underlying demand for capital and labor. These factors will eventually get the attention they deserve, but unfortunately, many investors will have to learn to give them attention… a lot like someone would learn to attend to a swinging beam after getting whacked in the head a few times.
Zeev, far be it for me to question the turnips but with all the BP's having reversed down and none of them even close to bottoming out yet, aside from a powerful DCB, I just don't see your rally to new highs. But that's what makes a market I suppose...
Regards
http://stockcharts.com/education/glossary/bullishPercent.html
magic # is 376 on gold, that would be a triple bottom breakdown and break the bullish support line (using the 4 pt box) and should mean a move to 350's at least, maybe lower.
Regards
http://stockcharts.com/gallery?%24gold
Funny you should mention oil, Marc Faber has been pounding the table on the oils lately. I like a lot of the charts too (GSF, DO, RIG, GIFI and ESV come to mind) . The osx appears to be on the brink of breaking out of a multi year consolidation pattern, although if the overall market tanks I don't think the oils will be immune from sharp pullbacks so it will be important to buy near support on the charts instead of chasing them, just my 2c...
Regards
http://www.ameinfo.com/news/Detailed/38236.html
Commodity prices and the very bullish case for oil
We could see prices of certain commodities double or even treble in a speculative mania. And there is one commodity on which a very bullish long-term fundamental case can be made: crude oil.
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In the past, I have frequently discussed long-term price cycles and observed, based on research carried out by economists such as Nikolai Kondratieff among many others, that these long waves last between 45 and 60 years, with each rising and declining price wave lasting around 22 to 30 years. These long price cycles are well supported by historical price statistics of the 19th and 20th centuries.
The last commodity rising price wave took place between the mid-1940s and January 1980, when gold and silver peaked at $850 and $50 respectively. Thereafter we had a persistently declining price wave, which most likely came to an end between 1999 and 2001 when most commodities bottomed out. I must point out that at that time commodity prices, adjusted for inflation, reached their lowest level in the history of capitalism.
But upon further consideration, while accepting the existence of long price waves for an index of commodities, I have also come to the conclusion that price waves for individual commodities tend to be of far shorter duration. In addition, different commodities move up and down quite independently from each other.
If we look at sugar, for instance, we find that it peaked out in 1974 at 70 cents per pound, collapsed into late 1978, and then soared once again to a high in the summer of 1980. In other words, within less than ten years, sugar went through two huge price cycles before settling down for the next 20 years or so in a price range of between 2.5 cents and 16 cents.
I am mentioning this fact because investors should be aware that commodities can reach a new all-time high and subsequently new lows within a brief period of time, since during the price boom massive additional supplies are produced that later depress prices. Just look at the chart of Soybean prices; the 1997 highs were followed by new lows in 2000!
Even if we assume that the long-term commodity price cycle did turn up in 2001, we should also be prepared to occasionally see 50% declines in the prices of individual commodities within a long-term up-cycle.
In other words, investors who are betting on commodity price increases due to the rising demand from China should be aware that significant downside volatility for individual commodities, even in the context of a long-term commodities bull market, is almost a certainty!
This isn't to say that commodity prices, certain of which have recently seen parabolic increases, will collapse right away. A friend of mine, Richard Strong, once took me to task for being bearish on the U.S. financial markets and asked me why, if Japanese stocks had been selling for 70 times earnings in 1989, the U.S. stock market couldn't reach similar valuations.
Richard proved to be very much on the mark - the Nasdaq sold for even higher valuations in the spring of 2000 than Japanese equities had sold for in 1989. The same rationale could also be applied to the commodities markets.
We could therefore see prices of certain commodities double - or even treble - from their present levels in a speculative mania. This is not a forecast, but a warning to investors of the extremely volatile and short-term nature of bull markets in individual commodities.
There is one commodity, however, about which a very bullish long-term fundamental case can be made: crude oil. Unless the entire Asian region goes into a lengthy recession/depression in the next few years, oil demand will undoubtedly continue to rise.
Oil consumption in Asia, with its population of 3.6 billion people, is about 20 million barrels per day (by comparison, oil demand in the U.S., with a population of 285 million, is 22 million barrels per day). Based on demand trends in the last ten years, Asia's demand for oil is likely to double within the next six to 12 years. This Asian rise in demand, which compares to a total current global oil supply of 78 million barrels, will inevitably mean higher energy prices.
There is also the supply side of the equation to be considered. Recently, Matthew Simmons of Simmons & Company published a very interesting study on Saudi Arabian oil reserves. And while he kept short of forecasting a decline in Saudi oil production, he nevertheless questioned in his analysis the widely held assumption that Saudi Arabia is in a position to meaningfully increase its production of crude oil.
For instance, Simmons raised the possibility that Ghawar, Saudi Arabia's largest field, with a daily production of five million barrels (by far the largest in the world), could be past its best years. Moreover, based on the experience of declining production at other large oilfields in the world, Simmons' report suggests that Saudi Arabia's five super-giant oilfields will at some point (maybe sooner rather than later) also experience declining production.
The possibility of declining oil production isn't the only problem the Kingdom of Saudi Arabia is facing. Its population has almost quadrupled since 1970 and per-capita incomes have been in a steep downtrend since 1980.
It has therefore become increasingly politically unstable and, in addition its own oil consumption is rising rapidly. Rising oil demand is also common in other Middle Eastern countries whose combined population has increased in the last seven years by more than 40 million, and now numbers around 160 million people. (It is estimated that Middle Eastern countries could by 2015 have more people than the U.S.).
I may add that in 1956, Mr. King Hubbert predicted that U.S. oil production would peak out in the early 1970s. Hubbert was then widely criticized by some oil experts and economists, but in 1971 Hubbert's prediction came true. Hubbert's methods of oil reserve analysis now predict that a peak in world oil production will occur sometime between 2004 and 2008.
Now, given the certainty that oil demand in Asia and the Middle East will rise substantially (by around 20 million barrels per day over the next ten years or so) and the high probability that world oil production will peak out in the next few years, the fundamentals of crude oil as well as oil companies look very attractive.
What is more, unlike the seventies commodity bull run - when global oil demand was levelling off - the fact that the coming energy crisis will happen in an environment of rapidly growing demand from Asia means it could involve price increases of unimaginable proportions.
And of course, neither Mr. Greenspan, who should never have been Fed chairman in the first place, nor his lackey Mr. Bernanke will be able to do anything about these price increases! Moreover, if we look at the recent very substantial increase in practically all commodity prices and the behavior of the ISM Prices Paid Index, it strikes me that the CPI figures reported by the U.S. government statisticians cannot make any sense at all to anyone except Mr. Greenspan and Mr. Bernanke.
In fact, the bond market has now woken up to the fact that inflation is far higher than what U.S bogus statisticians are trying to make us believe. The naïve CPI followers had suddenly to readjust their views and saw that the bond market by selling off over the last two weeks has begun to discount higher inflation rates in the future.
The period directly ahead will be very important since there is a possibility that bonds are about or have completed a major head and shoulders top traced out between late 2002 and now.
In previous reports, I have stressed that the year 2003 was unusual in the sense that every asset class including commodities, real estate, bonds in developed and emerging markets, as well as equities everywhere in the world increased in value. In fact, we had in 2003, a real flight into garbage with lower quality assets rising the most. This was unusual since bull markets in one asset class, are normally accompanied by bear markets in other asset classes. How can bonds and commodities rally in concert for long?
Therefore, it has been my view that in 2004, we would see diverging markets, with some asset classes rising, while other would decline. However, since Mr. Greenspan created a gigantic worldwide bubble in just about any imaginable form of assets, and because we had last year such a close connectivity between the different asset markets, in 2004, every asset class could also exhibit simultaneously downside volatility!
Moreover, once again I would most like to warn investors about short-term volatility in commodity prices - even in those with great fundamentals, such as the energy complex. Although it is true that commodity prices are likely to have begun a long wave-up cycle, which could last for a decade or more, cycles for individual commodities tend to be of far shorter duration. Indiscriminate buying of commodities that are in the midst of a parabolic rise purely on the China demand story, for example, may result in large losses.
Having made this point, however, the view that certain commodity prices may have become vulnerable in the near term doesn't change the presumption that a long-term (but volatile) commodity up-cycle began in 2001. The future for this sector would seem to me to be far more attractive than for financial assets, which tend to perform poorly when commodity price rise, such as was the case in the 1970s.
There is one more point that should be considered, which is the following. In the past, rising commodity prices have led to an up-turn of the historically well-documented War Cycle, as nations became concerned about sufficient supplies of vital resources. Thus, an increase in geopolitical tensions is only a matter of time - another negative for equities.
Lastly, the period from late April to November has in the past only led to very modest gains for equities. A failure to better the recent March highs for equities in the next few weeks would confirm that we have again put a major top in place, from where markets could sell-off sharply in May/June.
FWIW, haup is quickly closing in on that breakout zone, it has room all the way to 5 which should act as strong support. Haup's becoming a value stock again rather quickly....
http://stockcharts.com/gallery?HAUP
On HAUP a .28 Box size seems strange to me....? Use a .35 box size and we're right at support, which is why I prefer the .5 box size as that is standard at this price level and it helps mitigate the "noise" -
http://stockcharts.com/webcgi/Pnf.asp?S=HAUP&Y=U&B=.5&N=A&C=2
but even using your .28 box, haup is simply tracing out a shakeout pattern common in uptrends to scare the weak hands out.
I will admit though that if zeev's 7.30 doesn't hold (not entirely sure how he came up with that number) the P&F chart suggests it could retrace toward the low 5 breakout area.
Regards
If 7.30 is broken I think haup will end up retracing all the way to the low 5 range, which was a significant P&F breakout zone. Just my 2c
http://stockcharts.com/gallery?haup
Bearmove
is this haup target based on TA, if so, what type??
thanks
FWIW, I think haup could spike down slightly under 8 to shake out a few weak hands before continuing its uptrend. Overall, the chart looks really good - this low volume selloff is textbook...
Regards
The hui/usd has also broken a major support area, that 220 area must hold to keep the short to intermediate bullish case alive
http://stockcharts.com/gallery?%24hui%3A%24usd
Gold's chart is really the only one holding up technically thus far; however, if it prints 388 that would be an important sell signal and suggest it was headed for 375 and possibly 350 imo.
http://stockcharts.com/gallery?%24gold
Zeev
the hui has really broken down here and is pointing to a 150 area target. I think the short to intermediate term gold setup is quite bearish although we could certainly get a counter trend move to relieve the oversold condition.
http://stockcharts.com/gallery?%24hui
and the hui/gold ratio had a breakdown several days ago and is taking on more water today....
http://stockcharts.com/gallery?%24gold
Regards
Zeev, Faber is also calling for a similar pullback in China although maybe a little sooner. This one's a bit shorter than Mauldin....
Regards
http://www.ameinfo.com/news/Dr__Marc_Faber/index.html
Should you buy what China buys?
A veteran China watcher Dr Faber believes this market is overheating and will experience a severe slowdown in the near future. China's economic Archilles heel is a lack of water, food, oil and other industrial commodities.
It is true that China with its extremely competitive manufacturing sector whose productivity is rising rapidly, and India with its very low cost but increasingly sophisticated service sector have a deflationary impact on the world, which certainly played a part in the 'jobless' US recovery since 2001.
But, as the industrialization of particularly China is progressing at a breakneck speed, and as real incomes and standard of livings are rising rapidly, China's voracious appetite for certain goods and commodities has over the last two years also inflated some sectors of the global economy through its incremental demand. Moreover, because of the large size of the Chinese economy its growth has by itself become a driver of other countries' economy, as it sucks in imports from them.
China has a steel production capacity of 260 million tones - rising to 330 million tons in 2005, which is larger than the one of the US and Japan combined but it still requires importing steel in order to cover its growing needs. China's domestic reserves of iron ore, however, only cover the production of 90 million tons of steel, fueling a voracious appetite for iron ore from countries as far as Brazil!
In 2003, China became also the world's largest user of copper, its share of the world's copper demand having risen from 6% on 1990, to 12% in 2002 and more than 20% presently. Its cement production and own demand is five times the size of the US cement industry!
China is also a huge user of pulp and paper. No wonder, since it publishes every day 82 million newspapers compared to 55 million in the US. China has the world largest cellular phone market with 200 million subscribers and is with its 330 million smokers by far the largest consumer of tobacco.
So, should, therefore, investors buy everything China is buying? Before jumping enthusiastically into the 'China investment theme' there are a few considerations investors should take into account.
China is relatively resource poor and, therefore, its need for industrial commodities will only increase over time, as its industrial production continues to expand and as net capital formation remains strong. Conversely, China has an unlimited supply of labor, as more than 700 million Chinese still live in the countryside and are now gradually moving to the cities in order to be integrated into China's industrial society.
Moreover, flushed with foreign exchange reserves and overwhelmed by a tidal wave of foreign portfolio and direct investments it has the necessary capital to fund any capacity expansion for manufactured goods. As a result, there is in China cut throat competition for consumer goods such as TVs, appliances, motorcycles, cars and cellular phones.
In 1999, China's domestic cell phone manufacturers had a combined domestic market share of just 3%. Today, 36 domestic manufacturers hold more than 50% of the cell phone market, which has become glutted and where prices are collapsing.
The problem with investing in China's huge and rapidly expanding consumer markets is that new capacities can nowadays thanks to instant communication and information as well as very efficient transportation be brought on stream in no time. Does a shortage of DRAMs develop, any quantity of new capacities can be brought on stream within 18 months, which then depress prices once again.
Moreover, if a foreign company launches a sophisticated and highly profitable new product in China, you can be sure that almost instantly numerous local Chinese companies will copy the product and flood the market, thus depressing prices and margins. Thus, the manufacturing in China is characterized by vast overcapacities.
The conditions in the commodities markets are very different. Since commodity prices were in a severe bear market since 1980, little new capacity has come on stream in the last few years with the result that the mining capacity utilization rate stands now at 95% or higher.
In addition, from the time exploration begins to the time new substantial reserves come into production, a minimum of 7 years elapses. Therefore, production capacities for most industrial commodities cannot be increased meaningfully in the short term, which means that cycles of rising commodity price tend to last 15 to 30 years. So which commodity should one buy given China's lack of resources and existing supply constraints?
Particularly sensitive to industrialization and rising standards of living is the energy market. The industrialization of the North American continent lifted annual per capita consumption of oil from one barrel to close to 30 barrels. In the cases of Japan's industrialization between 1950 and the early 1970s and South Korea's industrial rise between 1965 and 1990, per capita oil consumption rose in both countries from one barrel to 17 barrels.
But here is the scary part. Despite its rapid growth, China's per capita consumption of oil is still just a tad north of one barrel of oil per year. Moreover, the entire Asian region with 3,6 billion people or 56% of the world's population and the world's fastest growing economies of China, India and Vietnam still only consumes 20 million barrels of oil per day, which is less than the US consumes with 285 million people.
Simply put, the US has a per capita consumption of oil that is more than 12 times larger than Asia, where rising standard of living - the move from bicycle to scooter to car, the proliferation of shopping centers, office complexes, hotels and entertainment venues, increased traveling, and larger homes - and industrial development, as well as rapidly growing populations and urbanization mean that oil demand doubles every six to ten years.
Thus, it is doubtful that the oil producers who currently produce 78 million barrels of oil per day, but whose own oil requirements are themselves soaring due to fast population growth among OPEC countries, will be able to accommodate a doubling of Asian oil demand to around 35 to 50 million barrels of oil per day within the next ten years or so without very significant price increases.
Investors should, therefore, overweight oil companies with large oil and gas reserves such as Chevron Texaco, British Petroleum and the Russian oil producers but avoid the now popular but expensive Chinese oil stocks, which lack substantial reserves. In addition, as oil prices are likely to surprise on the upside and drive exploration, oil drilling and service companies such as Schlumberger, Halliburton, and Diamond Offshore should be purchased as well.
Compelling are also the fundamentals of food products. Taiwan, South Korea and Hong Kong have per capita consumptions of meat, sugar, coffee, dairy products, wine, beer and fish eight to ten times larger than China. With rising standards of living in China and other Asian countries, food products richer in protein than rice will proliferate and put enormous upward pressure on food prices at a time of declining food production in China.
Therefore, investors should also be long a basket of agricultural commodity futures consisting of wheat, corn, sugar, coffee, and orange juice futures, or own large tracts of agricultural land.
But before jumping recklessly into commodity futures, and iron ore, steel, pulp and paper, nickel, aluminum, fertilizer and copper producers investors should be aware that some commodities such as copper and nickel have already had huge price gains, as the 'China appetite for resource play' has become well recognized by speculators.
China's economy is overheating and will, in my opinion, experience a severe slowdown in the near future, which will lead to a commodity inventory liquidation and depress prices temporarily. Moreover, whereas I am a strong believer that a long-term up-cycle for commodities began in 2001, investors should be aware that for individual commodities price cycles are of far shorter duration.
I would also like to point out that since all asset classes including commodities, bonds, stocks and real estate rose in price in 2003, it is conceivable that everything will decline in 2004!
Still, the long term fundamentals of commodities, particularly of oil, are by far more compelling than the ones of US equities - this especially since according to several historians including Arnold Toynbee, rising commodity prices have always turned up the war cycle, as the drive to secure the supply of finite and scarce resources intensifies. This should be particularly true for China whose economic Archilles heel is lack of water, food, oil and other industrial commodities!
higher oil prices too...?
my unsolicited TA shows resistance right here between 14 - 15. Take a ganders at the P&F chart (link below) and you'll see that this zone served as strong support on the way down(in fact I believe that was my stop loss point last year...) Perhaps it needs a pullback to 12.5 - 13 before making another run at this resistance? Chart looks good though.
http://stockcharts.com/gallery?skx
Regards
I am using the hui/gold ratio to guage the action of the miners. A break of 52 on the P&F chart IMO would be a big negative and would cause me to remove most of my trader shares.
http://stockcharts.com/gallery?%24hui%3A%24gold
Regards
Zeev, I'm certainly not trying to sway your map, which has been spot on lately, as I realize your turnips incorporate a wide variety of factors but the NYSE BP, which has been on a P&F buy since March 03, just reversed down today from nosebleed levels. Does this affect your forecast at all?
Regards
Zeev, do you have any thoughts on vlnc? To me the TA looks quite good with strong support in the mid 3 zone but valuation seems absurd at a psr of 36.
http://stockcharts.com/gallery?vlnc
Regards
fun guy, if i recollect correctly, velo nailed the oct 10, 02 bottom almost to the day, at which point due to his and zeev's viewpoint among many other technical indicators I read I was lucky enough to go long (btw Thanks Velo...). Everyone has good and bad calls but taunting someone over a recent erroneous call seems a rather infantile approach especially when your remarks do not incorporate the whole of someone's posting "career"...
Regards
your points are well taken and thanks for pointing out the triangle pattern support in the 360's - that should hold or we could be re-visiting the 320's...!
I actually am a fairly simple chart reader. I like p&f b/c it mutes most of the "noise" and just lets me focus on the big picture although i do know it has its drawbacks.... For gold, the short term picture is we are testing the quad top breakout from 396 and are possibly in the midst of a shakeout pattern (short term sell signal within a very bullish pattern remaining above the bullish support line)- the shakeout pattern would be broken if another sell signal is given at 376, until then I will be using a possible pullback to 380-385 or thereabouts over the next couple of weeks as a fairly good risk/reward buy to add to my gold holdings.
Regards
imho the breakdown is a textbook p&f shakeout pattern and it is occuring at a strong support zone to boot, overall the chart still looks very bullish. that would change somewhat if 380 could not be held on any further pullback..
http://stockcharts.com/gallery?%24gold
Regards
I have a gtc for obas slightly under 6 to buy back my trader shares. Their recent qtly was quite disappointing from an operational standpoint so i think technically it could shake out some weak hands by heading toward the 200 ma. That is the way i'm playing it anyway...
Regards
-- http://stockcharts.com/gallery?obas
Just my 2c...
I think the hui could move toward the 190 region (the major support line). What could transpire would be a reversal back up toward 230 - 235 and then a reversal back down and head under 200. That would trace out a bearish catapult pattern on the P&F chart.
http://stockcharts.com/gallery?%24hui
on gold, i'm looking at the 388 - 396 range to add to my goldmoney (www.goldmoney.com)
http://stockcharts.com/gallery?%24gold
Regards
Dan
I appreciate your suggestions and I agree as to the $CAD supremacy over the USD. I'm still holding some AUD and CAD cd's in my "conservative" account for the next inevitable leg down in the USD. I will do some reading on sur.v this coming weekend. Glad to see I'm in good company with the gold juniors I'm looking at - your bgo also looks like a winner. Thanks again!
Regards
Kahlua
Dan
yes, they are a merchant banking firm financing junior miners. I recently came across a couple of good write-ups on them from Financial Insights and National Investor. I'm thinking of diversifying some of my nzd and goldmoney holdings into a few juniors and edv.to seemed like a good, albeit slightly more conservative, way to do it. I'm also considering sml.v, ckg.v and mng. Thanks for the feedback.
Happy Holidays!!
Kahlua
Dan, what do you think of edv.to? I've been doing a bit of reading on these guys and they seem quite sharp.
Regards
Most recent Crosscurrents - A very good read, click on the link for charts.
http://www.cross-currents.net/charts.htm
Metamorphosis
- MONUMENTAL CHANGES IN THE U.S. CAPITAL MARKET -
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DATED DECEMBER 2, 2003
A SPECIAL REPORT BY ALAN M. NEWMAN, EDITOR
LONGBOAT GLOBAL ADVISORS CROSSCURRENTS
MR. NEWMAN'S SPEECH "METAMORPHOSIS" WAS PRESENTED AT THE INTERNATIONAL FEDERATION OF TECHNICAL ANALYSTS (I.F.T.A.) CONFERENCE AT THE CAPITAL HILTON IN WASHINGTON, D.C., ON NOVEMBER 8, 2003. WHEN FIRST WRITTEN, THE SPEECH RAN OVER AN HOUR AND HAD TO BE PARED TO 35 MINUTES FOR THE FORMAT, WHICH ALSO ALLOWED A FEW MINUTES OF QUESTIONS. THE SUBJECT IS ONE THAT CAN BE EXAMINED EXHAUSTIVELY. THIS REPORT IS COMPRISED OF THE FINAL VERSION OF THE SPEECH AND HAS BEEN EXPANDED UPON ESPECIALLY FOR THIS UPDATE OF "PICTURES OF A STOCK MARKET MANIA." ALTHOUGH THE SPEECH WAS DESIGNED TO COMMENT UPON THE FUTURE OF TECHNICAL ANALYSIS, THERE IS A SUBSTANTIAL AMOUNT OF COMMENTARY WITHIN THAT AFFECTS ALL INVESTORS.
Perhaps the most astonishing development of the last six years is not the scandals that have surfaced and not even the routine acceptance of same by investors. The passing of prior generations and the "sizzle" of new technology have conspired to convince investors and speculators that the environment has changed for the better, for the MUCH better and permanently so. However, the market remains an arena where human frailties can cause the grossest judgments to occur. It is not only the emotional response of the mania that has brought us closer to a fall out from which we will not easily recover - the circumstances are driven as well by mechanical factors such as the U.S. stock market have never experienced before. When I was invited to speak before the I.F.T.A., I immediately knew there was only one direction in which my presentation could go, the metamorphosis of the American stock market.
The nature of sentiment has changed significantly.
The nature of investment has changed dramatically.
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INTRODUCTION
I was 8 years old when I heard about the Roaring Twenties for the first time. My Dad was a stockbroker in 1929 and he told me all the stories of the great rise in prices and the crash that followed. In 1930, the stock market suffered a staggering 51% loss in capitalization, an amount equal to 80% of the gross national product.
And it changed the way Americans viewed the stock market for decades to come. Risk became a four letter word. My Dad did the only thing that made any sense. He placed all of his stock certificates in a safe deposit vault at National City Bank and forgot about them.
Finally, in 1968, after receiving letters from asset tracers for at least 20 years, he caved in. After 39 years, he had to know what he had forgotten about. That is real fear. That is capitulation. My Father's experience was certainly not unique. An entire generation lost respect for the market and avoided risk.
So, what was in the vault? I spent weeks at the Brooklyn Business Library, looking up corporate names in huge dusty Commerce Clearinghouse volumes. He had plenty of wallpaper to be sure, like Lawyer's Title & Guarantee, which went from 400 to zero. He had certificates of every kind and description, spin-offs, takeovers and even some real survivors. One set of certificates read Chase National Bank on the front and on the back, read, "Amerex Corp. attached share-for-share." If anyone thinks they have heard this story before, they have. It appeared in Nelson Demille's book Gold Coast a few years ago [ED NOTE: PAGE 42]. The story is true and originated with my Dad's experience. We finally found out why the asset tracers were trying to hunt him down for a 50% fee. Amerex was the forerunner of American Express and the company had no idea how to get in touch with him for the dividends that had accrued. So, he didn't have to pay the asset tracers a dime, but the happy ending came almost four decades later. The long term had bailed him out, but my father was then 69 years old.
Over the 39 years he waited, the Dow gained an average of 2.6% per year. Dividends averaged 4.7%, a rather large difference from today’s stock market.
[ED NOTE: THE S&P 500 YIELD 1.7%, THE DOW INDUSTRIALS YIELD 2.2%]
Fast forward to the year 2003. Despite a veritable stock market mania, the subsequent collapse of Nasdaq and the eradication of more than 40% of total stock market capitalization, capitulation in the classic sense of the word was nowhere to be found. Newsletter writers never really gave up on the market. For a period of 190 weeks after the Dow peaked in January 2000, bears outnumbered bulls only nine times. Strategists continued to allocate 70% to stocks just as if a bull market had been in effect all along. And although mutual funds did briefly experience net outflows, they were tame by comparison to the fallout of both the 1972 and 1987 tops.
The nature of sentiment has changed significantly. Fear and capitulation are not what they used to be. After the crash in 1987, mutual fund outflows reached 11% of total fund assets. But we had a far worse and just as dramatic price collapse for Nasdaq after March 2000 and even a 50% collapse for the S&P 500, yet mutual outflows only reached 3.6% of total assets. In 2001, the loss in market cap was more than 31% of our GDP. Yet there were only three weeks in the entire year where bearish newsletter writers proliferated over bulls, strategists maintained high allocations to stocks and mutual fund inflows remained positive in seven months and were positive for the year.
Looking at chart #1, one can easily see the impact of wealth losses after the 1929 crash - sufficient to generate the kind of fear and loathing experienced by my father and countless others like him. Incredibly, even with losses of the same magnitude following the collapse of Nasdaq in the current bubble, there was anything but fear and loathing for stocks.
On July 30, 2001, at Dow 10,400, strategist's stock allocations were at 71%. Fourteen months later at Dow 8200, only two weeks from the bottom - strategists STILL had 70% allocations to stocks.
A pattern has developed - a resistance to fear - much of which is based on purely mechanical factors - and as an effect - there is an artificial imbalance in demand. This is the linchpin of a metamorphosis of the financial markets - and the metamorphosis does not augur well for the future of the U.S. stock market, the world markets, or for Technical Analysis.
Stocks have become the biggest business in the world. NOTHING is bigger. When prices peaked in 2000, an average day witnessed the transaction of a little over $27 billion in Gross Domestic Product. On that same day, nearly $90 billion was transacted in stocks. For every dollar transacted in goods and services, $3.28 was transacted in stocks, two-and-a-half times what occurred at the peak in 1929. On one day in February 2001, Cisco Systems alone traded an amount nearly one-third of the value of all goods and services transacted that day. Some critics have complained that the much lower commission structures in place and even better research techniques account for the increase in trading. Nonsense. There's only one way a mania develops. It is driven by persistently higher prices. And in a mania, prices are easily influenced by mechanical forces and frauds. Sentiment eventually becomes a one way street.
SENTIMENT
Technical Analysis is all about interpreting sentiment. Sentiment drives price and it drives volume. Sentiment is the ultimate distillation of supply and demand. BUT sentiment has been evolved significantly by the mania.
At a recent family reunion, I spoke with Michael, an engaging 23-year-old who had become a day trader. He was trading upwards of a million shares per day of Intel. Just Intel. He had recently traded three million shares in one day! By his own admission, he knows nothing about the economy, nor Intel, and simply hopes to ram through a penny of profit at a time, in and out every few seconds of every trading day. Sentiment for Michael is simply the spur of the moment. Are there several hundreds just like him? Think about the math. 300 day traders like Michael? A million shares per day? 300 million shares? So just what portion of daily volume has to do with "real" investing? What portion has to do with players who use no analysis at all, just a gut feel of a one-stock market, a penny at a time, ten seconds at a time? Can we possibly determine what portion of transactional volume actually depends upon corporate prospects any more?
Does sentiment drive Michael to buy or sell? Or is it more like the flow of electrons that nudges him one way or the other? How easy is it for Michael to be swayed in one direction or another? In his book, the Psychology of the Stock Market, David Dreman describes an experiment that demonstrates the "pressures of compliance." Each subject was asked to pick which of three lines on a card was the same size as a single line on a second card. Dreman wrote, "The lines were of such disparate lengths that there should have been no difficulty in immediately choosing the one of the proper length." Of eight people who participated in each group, seven were confederates and one an actual subject. As the experiment progressed, the confederates would go from indicating the correct line to calling out wrong answers. The pressures of group opinion increased the rate of error tenfold as subjects simply "went along" and also responded incorrectly, whether they thought the group was right or wrong!
The natural and human response is to remain a part of the community. Exclusion from the community equates to being "wrong." Thus, "compliance" is a strong element in our behavior.
Did the same "pressure of compliance" coerce Michael and other day traders into doubling Intel's price from last fall?
J. Doyne Farmer, of the Santa Fe Institute in New Mexico, has presented a theoretical model that assumes traders place orders at random rather than on the basis of calculation and observation of economic trends. The model nevertheless reproduces the statistical features and characteristics of financial markets. Modern economics recognizes that traders are not fully informed or rational. How do they cope with imperfect information? Their behavior is interdependent and sometimes irrational and leads to herding, otherwise known as the "pressures of compliance."
Have the same "pressures of compliance" coerced active managers to lower cash-to-assets ratios of mutual funds? Emphatically, yes!
GREENSPAN "PUT"
Much of the "pressures of compliance" that are visible today have to do with what has become widely known as the "Greenspan Put." Can we deny that the Federal Reserve comprehends just how important the stock market has become? Can anyone fight against a central bank policy that is designed to promote stocks as an asset class? Of course, this is another controversial subject and none of us would like to admit that the market can be manipulated in any way, shape or form.....but it can....and it is.
Consider Tuesday, October 20, 1987. The stock market had crashed the day before. Specialists opened the Dow 11.5% higher on Tuesday morning. The gains faded rapidly as self preservation took over and specialists sold. There is no stronger emotion in the marketplace than self preservation. The downside accelerated and fears rose that another crash was possible. Prices fell below Monday's close of 1738 until 12:30 pm, when the Dow printed as low as 1708. All options had ceased trading. All futures other than the XMI Major Market Index had ceased trading. At the time, I remember wondering how the illiquid XMI contract could remain open while the vastly more liquid S&P pit needed to be closed. Then quite suddenly, the XMI exploded. Within five minutes, the December futures contract rose from a deep discount to a huge premium, a swing equal to 24% of the Dow's value. The arbitrage window opened and program traders roared in to take advantage by buying stocks. The crash had ended. The mysterious rally was triggered by only 808 contracts. Eyewitness reports later claimed that the ring was completely deserted as liquidity dried up, then ONE MAN entered the pit and bid for everything he could buy at 12:30 pm. The man just as suddenly disappeared. The person that saved the market has never stepped forward to claim our thanks, let alone his 15 minutes of fame, and has never been identified! Perhaps the Plunge Protection Team really does exist? Certainly, the Federal Reserve has already told us on several occasions that they possess the tools to adjust the markets to their particular reality and that they will use these tools if necessary.
Remember, stocks are the biggest business there is. If stocks suffer, the economy suffers. And so, we have the Greenspan "Put." And with it, we have an environment that promotes optimism and denigrates pessimism. This environment is necessarily accompanied by the "pressures of compliance" on all levels, from day traders to newsletter writers to strategists and to the public.
The nature of sentiment is metamorphosing.
INDEXING
How does this impact TA? If Technical Analysis requires interpreting sentiment, how does TA measure the "pressures of compliance" or the influence of mechanical factors? Could it be that TA might not work or might work less effectively in such an environment? Could there actually be threats to our craft?
Yes, there might.
The most emphatic threat to TA is indexing, an idea that belongs on the garbage heap along with portfolio insurance. It's called "passive investing," and is part of modern portfolio theory. MPT works on the principle that the stock market is efficient because all possible information is already priced into stocks. Hence, one can only beat the market by taking greater-than-market risks. Thus, the best course of action is to simply BUY THE ENTIRE MARKET. Ironically, the Nobel Prize winners who gave us the theory now feel the S&P 500 is no longer the perfect benchmark. What is disturbing is how their sentiments have simply shifted to wider benchmarks, such as the Wilshire 5000. What is even more disturbing is how many have now been taken in by a theory that cannot possibly work, to the point that better than one in every ten dollars invested in the U.S. is now indexed to one or another benchmark - a trend that is now in place worldwide.
What is the problem with indexing? Suppose there were only three stocks to invest in. Let’s further suppose company A's valuation is twice B's and is triple C's. Since the index is capitalization weighted, a brand new index fund formed with $6 million would need to buy $3 million worth of stock A, $2 million worth of stock B and only $1 million worth of stock C. And as new money rolls in, half must go into stock A, one-third into stock B and one-sixth into stock C PERFORCE. Over time, stock A's prospects might deteriorate and stock C's prospects might improve and the two capitalizations might tend to converge - BUT at any particular point in time, large must necessarily equate to even larger. With each new index fund that is formed and with each new dollar invested in indexing, stock A MUST receive more sponsorship in the form of an artificial demand, a demand that exists only because of the company's present capitalization relative to other constituents and having nothing at all to do with the company's prospects.
Furthermore, as indexing grows, so does the tendency of indexing to beat active money management. Ironically, the reason for this development is that money is blindly thrown at the largest stocks regardless of prospects. In essence, active money management is punished for making rational and intelligent choices.
The fund manager who believes a conservative route is best cannot afford his own opinion. Index funds are always fully invested. If prices are rising, any fund with cash reserves must choose better performing stocks or must under perform the index. If an active manager carries a cash reserve equal to 5% of assets and the market rises 15%, he will lose on average, 75 basis points to an index fund. 75 basis points of under performance can mean one’s job. This is the principal reason why the cash-to-assets ratio has declined significantly since indexing began taking a huge hold on investors' assets. This is why the cash-to-assets ratio continued to decline even as prices were declining into the March 2003 low.
It was one thing when the cash ratio bottomed at the end of 1999 and the beginning of 2000 as prices soared. You could see some sentiment at work then. It was quite another thing when the ratio bottomed in February 2003, coincident with the bottom in price. Since when is a major market bottom associated with a low point in the level of cash reserves?! Since indexing, when active managers realize they cannot compete otherwise. Sentiment has been corrupted by the mania.
Incredibly, as the index performs even better versus active managers because more money is thrown at it, still MORE money is thrown at it. Indexing has become a cycle of moronic simplicity. The technology of economics has given the world the perfect answer to the decision making process. There is now no need for decisions and therefore, there is no human error. After the crash in 1987, Professor Joseph Wiezenbaum of MIT concluded that "People tend to rely on technology to escape the burden of acting as independent agent." We saw this conclusion operating in real life as portfolio insurance "protected" investor assets in 1987. The result, as technology did the thinking instead of human beings, was a stock market crash. The Professor's conclusion has surfaced again as fiduciaries have elected to separate themselves from the decision making process. They have wrongly accepted the easy route, that the market cannot be beaten and thus, believe they have escaped the burden of being wrong. However, when "average" market performance is championed, no one wins.
As the mania shifted into high gear and Nasdaq was touted as the "stock market for the next hundred years," perhaps S&P feared for their franchise and felt compelled to compete by including stocks like JDS Uniphase and Yahoo. Ironic, isn't it? Although indexing supposedly represents passive management, in reality, the index IS actively managed by a "selection committee." Although JDSU had "as reported" losses in each of the four prior quarters, the stock was included in the index and an artificial demand for the shares was created. At its peak valuation, JDSU was one of the largest companies in the country, worth as much as $225 billion.
Selection criteria have far less to do with corporate prospects than we would care to admit. In July 2002, the selection committee announced the dumping of seven foreign issues in favor of seven domestic companies in order to align the index as a pure US play. The seven new constituents arrived with a collective 67.5 P/E and 0.26% yield.
Amazingly, the impetus was that the move would provide buying power for US stocks as the additions were a smaller total market cap than those leaving. As explained by David Blitzer, the chairman of S.& P.'s index committee, "This is a net buy. When the dust settles, the index funds will buy a little bit more of the other 493 companies." However, the presumption of billions more invested in the other S&P constituents necessarily meant billions more invested with zero regard to corporate prospects.
The 30 largest stock losses after the bubble burst amounted to $3.8 trillion in market cap, as the group fell more than 72%. So much for the efficiency of the stock market and MPT. If the theory were correct, such relative overvaluations could not have been possible and declines of this magnitude could not have occurred.
Now that the focus is shifting towards wider benchmarks such as the Russell 3000 and Wilshire 5000, the problem worsens since the new proxies are also capitalization weighted. The same inefficiencies are present! The top 25 stocks still account for an enormous share of each index; 41% of the S&P, 35% of the Russell and 33% of the Wilshire. If indexing continues to grow, more money will be thrown at stocks regardless of their prospects, and more money will be thrown at the largest issues, no matter how potentially overvalued. The efficient market hypothesis is bunk. Information is nowhere nearly priced into stocks. Enron at $70 and Worldcom at $60 were perfect proof.
And since the only way to beat indexing is to take larger risks, this is precisely what you see happening today. This is why Nasdaq is up 50% from the bottom. It's not corporate prospects that drives the price of these stocks - it is the survival instincts of the active managers who buy them! It is - in every single aspect of what David Dreman wrote about - the "pressures of compliance."
And here's the punch line. Picture two markets. One totally without indexing. Stocks trade based solely on their prospects. Technicians gauge these prospects with their analysis of sentiment, of supply and demand. Picture another market that is totally indexed. No one buys on the basis of prospects. Stocks are only bought in proportion to their capitalization. If sentiment for company prospects is not an issue, how can one analyze supply and demand? How can TA function in such an environment?
In scientific terms, we could call indexing ENTROPY. Entropy is defined as the degradation of the matter and energy in the universe to an ultimate state of inert uniformity. The more indexing is utilized, the less meaning sentiment has in determining price. Eventually, price has nothing to do with sentiment.
PROGRAM TRADING
Another threat to TA is program trading. Programs are defined as orders for the purchase or sale of at least 15 different stocks with a total value of $1 million or more. This includes but is not limited to stock-index arbitrage.
In just a few years, programs have expanded from a small fraction to more than 41% of all volume on the New York Exchange. Because of the "pressures of compliance," the chances are increasingly likely that programs take place because of an indexer or because of an active manager competing with indexing. Additionally, some institutions are now selling the benefits of packaged programs to hedge funds that are buying puts and calls and immediately taking the other side of the trades by selling and buying stocks. One colleague who has been offered such programs has privately confided to me, "None of this trading has anything to do with where the market is going or what the economy is doing." It is no wonder that frauds have been perpetrated upon investors. The individual investor is simply disappearing as a factor in the stock market and has become an all too easy mark. This is an environment where sentiment can lose its meaning entirely.
EXTRAPOLATING THE FUTURE
The U. S. stock market has metamorphosed into something quite grotesque. Since stocks have become such an important business and are so essential to the survival of our economy, the Federal Reserve must endeavor to keep the wealth status quo and must accommodate investors. Investors know this and are emboldened to take risks. Thus, the nature of sentiment has changed so markedly that one's best course would be to impart a positive bias to whatever techniques they use. The situation is exacerbated by active money managers in their quest to compete with index funds. In order to compete, they buy riskier issues. In order to compete, cash reserves are spent down and represent an additional source of demand having not to do with sentiment, but survival. Ironic and amazing - the strongest emotion is self preservation. Look how that has changed - from selling stock to establish high cash reserves to buying more stock to accomplish lower cash reserves. Sentiments are now corrupt.
How does TA cope with the threats posed by corrupted sentiments? By evolving, along with the mania.
My own preference is to use "extrapolation." Extrapolation techniques can be predictive because one extrapolates possible trends to construct an image of the future - this is otherwise known as "inductive logic." My last charts today will provide an example of an extrapolation technique.
First, let's examine a chart of 20-year annualized returns for the Dow Industrials.
The picture you see is ex-dividends. The Dow has returned only 4.7% annualized over all rolling 20-year periods. This is even with the benefit of survival bias. Over the life of this chart, the Dow's selection committee has excised the garbage and added new superstars on a total of 29 separate occasions. Yet remove the mania years of 1995 to the present day and 20-year annualized returns fall to only 4%. Even if you keep the manic returns in, over the 86 years shown, 20-year annualized returns have been under 4% fully half the time.
Question. I need a show of hands. How many of you believe we are in a bull market? How many of you believe we are in a cyclical bull market within a secular bear market? How many of you believe the correct answer is neither - that we are STILL immersed in the greatest stock market mania of all time?
[ED NOTE: THE MAJORITY OF THE AUDIENCE "VOTED" FOR A BULL MARKET,
AND ALMOST THE REMAINDER OF THE AUDIENCE VOTED FOR THE CYCLICAL BULL WITHIN THE SECULAR BEAR.
ONLY ONE PERSON IN THE AUDIENCE OF PERHAPS 100 VOTED FOR A MANIA STILL IN PROGRESS.]
If you're in the bull market group, you are certainly not looking for the Dow to trade below the October 2002 lows. If you're in the secular bear group, you're not completely sure. Like the period from 1966 to 1982, you might think we have already suffered the equivalent of the 1974 low and stocks will simply remain in a wide trading range until the next secular bull market arrives.
However, if you believe we're still in a mania, then you're dead certain that the answer is that the Dow will eventually take out the October 2002 lows.
Using extrapolation techniques, we can see why.
First, let's use Professor Jeremy Siegel's bullish views as a guide. Siegel claims that stocks should have a real return of 4%-5%, translating into nominal returns of 7%-9% a year. Using Siegel's mid-point of 8%, our next chart takes us to Dow 13,685 without suffering even one week on the downside. The absolute low point for 20-year annualized returns falls in July 2007 at 7.95%. Spectacular, if you ask me.
Over the life of the chart, a 7.95% or better return for rolling 20-year periods is in view less than 26% of the time. Can we fairly extrapolate returns that are still so unlikely from a historical perspective? Worse yet, if you consider the 77-year history before June 1994, the last time 20-year annualized returns traded under 7.95%, returns above 7.95% occurred only 12% of the time. The mania has done an astonishing job of convincing participants that returns will be permanently high.
All I have done in our final chart is to plug in a 7196 number for the Dow for each week over the next five years - this is one point below the Dow's print low achieved on October 10, 2002. As you can easily see, the low point in the next five years is achieved in July 2007 at a 20-year annualized return of 5.01% - this is still well above the historical average.
The argument for using extrapolation techniques; although stocks do not always follow a predictable course for 20-year returns over the short term, they must offer some predictive value over the long term since there are competing asset classes. For most of us, the choice is either stocks or bonds, although commodities and real estate are clearly alternatives. Stocks cannot possibly continue to earn returns approaching 8%. If they did, there would eventually be no reason for anyone with a long term horizon to ever buy bonds yielding less. But if no one is going to buy corporate bonds, corporations would have to sell more stock. And if corporations issued more stock, that would water down everyone else's holding, lowering overall returns. And what about governments? In order to compete - governments would have to offer much higher coupons and yields. Once they were able to compete, investors would then have the choice to buy bonds instead of stocks, and thus lower the returns for stocks. One way or another, the two asset classes must co-exist or one must die. To co-exist, they must compete.
The odds appear to indicate that Dow 7196 or much worse is somewhere in our future. Using extrapolation techniques like this might clear the way for asset allocators to make changes they might not otherwise consider.
CONCLUSIONS
The stock market has metamorphosed before our eyes. We live in a unique period, driven by the biggest industry the world has ever known. An industry that is now driven by many purely mechanical factors. These factors have aided the corruption of sentiment, not only allowing a mania to emerge but maintaining the mania. The Fed has also impacted sentiment by maintaining the "Greenspan Put."
If price is a function of supply and demand, and the supply/demand equation has been impacted by mechanical factors and corrupted sentiment, what is the future for TA, which attempts to predict prices via the analysis of sentiment?
Technical Analysis MUST evolve. Extrapolation techniques are one methodology that should be worth examining. These techniques should work - with imaginative perspectives - on all time frames.
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Although the above speech was prepared for an audience of technical analysts, the primary objective was to provide proof that the metamorphosis of the U.S. stock market threatens all participants, not just the methodology of technical analysts. This writer feels the U.S. capital markets have changed so significantly that inertia alone may be able to provide a continuation to the mania. Of course, prices cannot rise forever and March 2000 was the prefect example of how rapidly and emphatically excesses can be unwound. Regarding the point that the momentum or inertia of the market can continue, witness how overt and excessive bullishness has yet to end the rally.
On June 18, 2003, the Investor's Intelligence reading for newsletter writers showed 60.2% bulls and only 16.1% bears, a ratio of 3.7 bulls for every bear and the most one-sided survey since shortly before the Dow peaked in 1987. We do not have to remind you of the consequences that suddenly appeared in October 1987.
Contrarian stances typically work and they work well!
But in a mania, we have learned that just about anything can (and will) happen. Although bulls and bears have both consistently remained at levels that in normal times would be a clarion call for a significant price correction, nothing of the sort has occurred. In fact, as of this writing the Dow has tacked on another 8.3% and the Nasdaq Composite has gained an additional 21.6%!
NOTE: THE TWO LINES ARE CORRECTLY LABELED. WHEN BULLS ARE AS HIGH AS THE TOP "BEARISH" LINE AND/OR BEARS ARE AS LOW AS THE BOTTOM "BEARISH" LINE, SENTIMENT IS DECIDEDLY NEGATIVE.
We believe this is the first time in stock market history that such a one-sided sentiment reading has not catalyzed a price correction. And without any doubt, this is also the longest period in stock market history that bullish sentiment has prevailed to this degree.
Just how bullish are investors and speculators?
Probably a LOT more bullish than they were at the top in March 2000. How do we come up with that assumption? Easy.
In the last seven months, net inflows into stock mutual funds have totaled over $134 billion, even while the stock market has suffered some of its worst scandals, including the managements of the very mutual fund companies to which investors were sending their money!
Of course, some of the inflows are being funneled in via corporate and government pension managers who believe there is no place else they can invest. Despite valuations that they must recognize are historically "off the charts," they are nevertheless, content to buy stocks at quite literally any price. In the case of indexed dollars, the money is thrown at many stocks regardless of their prospects, regardless of how insanely valued the company's shares may be and of course, this only makes the shares even more expensive and thus, larger components requiring even more index dollars! This is a cycle of unbelievable stupidity and atrocious judgment is being shown by any and all managers who are tied to any cap weighted index.
Lest we forget about speculators, they have gone completely off the deep end and are generating activity as never before, well beyond even the manic peak in March 2000. Bear in mind that Nasdaq's Bulletin Board is comprised of the riskiest issues, an arena where listing requirements are nearly non-existent; in the words found on the Investor Information page of the OTCBB site, "There are no minimum quantitative standards which must be met by an issuer for its securities to be quoted on the OTCBB (bold italics ours)." NO minimum quantitative standards yet trading is off the wall in a blowoff that is likely to be twice the level achieved in the manic year of 2000!
Finally, we must admit that we are most heavily influenced by persons whose wisdom and experience far outweighs our own. Warren Buffett, 73, Richard Russell, 79, Seth Glickenhaus, 88, and Sir John Templeton, 92, have all made their fortunes by buying stock. They have completely sworn off the current environment. In the cases of Buffett and Glickenhaus, they cannot find anything worthy of purchase. In the case of Russell, he foresees a massive bear market still ahead. In the case of Sir John Templeton, he sees the market as "broken," [CLICK HERE FOR ARTICLE] an assessment we clearly agree with, and perhaps an even better appellation than "metamorphosis" for a market that is no longer recognizable from the one we grew up with.
Could they all be so wrong.....?
Zeev, FWIW, the Naz BP reversed on the P&F chart as of yesterday's close. This BP has been on the money for the last 8 months and I am taking it as a signal to scale out of my long positions on any strength and get defensive. There are still a lot of individual stock charts that look good so I will maintain some exposure to the long side but if the markets continue their trend of doing the opposite of expectations then I would imagine we go down sharply into January...
http://stockcharts.com/webcgi/Pnf.asp?s=$BPCOMPQ
REgards
I think the indexes belie what is happening to the small caps today. A real massacre going on in some issues over the last few days...