Ander's Market Theories

[AnderL]

Hands Off The Windfall

Hands Off The Windfall
http://www.blogginwallstreet.com/

As for refineries, the industry spends billions of dollars a year to upgrade and expand existing plants. They don't build new ones because it's a bad use of capital. When mega-refiner Valero (nyse: VLO - news - people ) bought Premcor this year, it paid $8 billion for refineries that would cost at least $11 billion to build from scratch. Until the cost of building new is less than the cost of buying old assets, there's no incentive to build new refineries.

The plus side of the idiotic windfall proposal is that it's bringing out the truth about refiners. When you start seeing people saying these things in the mainstream media, traders get nervous about being long, fearing sentiment will shift against them. We may be witnessing the bursting of a bubble.

posted by Mark at 4:04 PM 0 comments
Thursday, October 27, 2005
The Wave

We got a preponderance of economic data this morning. What do you need to know about the GDP data? The numbers were good. Investors like what they saw. Moving on…

I sometimes like to step back and reflect on previous posts. It’s interesting, reflective, and sometimes painful to have your thoughts archived potentially in perpetuity. But you can look back and see how far you’ve come and how naïve you once were.

Even jumping back a month can be telling. Have I been cool handed, over reactive to the news of the day, complacent, logical, sufficiently quantitative? It’s a balancing act.

In What really moves the markets… I made some very specific forecasts for the way I thought the earnings season would play out. It was a logic-based opinion on market action as opposed to quantitative. But this was something that could, and should, have been tested. It wouldn’t have been overly difficult to do so. I’m selective about what I choose to quantify because doing so can be very time consuming and carries with it opportunity costs. In this case the logic seems reasonable, but could have been tested and proven. The approach I would have used would be to first identify various important market shocks, then relate that to earnings data of say S&P stocks, and then relate the earnings season to changes in the indices and specific key earnings announcements to daily changes.

I’ve put this on my white board list of things to test. Significant market shocks like the hurricanes come fairly regularly. In recent years there’s also been specific dates associated with terrorism, corporate scandal, mutual fund scandal, war, Y2K, LTCM, etc… Having an understanding of what might typically happen after such events adds to the toolbox. Over time you’ll start to collect a lot of tools so that you’ll have one for a variety of situations and be able to call on them frequently. The majority of people just forget. So having such tools at your disposal can be a profitable advantage.

And I believe that events that happen seldom can often be the most predictable in terms of market action, because traders are less apt to jump all over them thinking they know what to do in advance. For example, how tradable is the January effect? It’s become very untradable.

But on the other hand there seems to be a direct correlation between the disenfranchisement with stocks over the last five years and the level of interest in commodities. When you look back at the 70s the pattern was similar. I like to pick up old trading and investing books whenever I happen on them. I recently realized that I have a lot of commodities books from the 70s and the newer ones were mostly new editions of books also first published in the 70s. When you compare the CRB to the S&P and Dow during the 70s and from 2000 through today, there appears to be an inverse correlation that fits well with history, logic, and reason.

It might not happen again until I’m an old man, but the next time people become severely disenfranchised with stocks I’ll be getting long commodities in as big a way as possible. I’ll put that in my toolbox of market lessons. What’s interesting is that it is a uniquely insightful observation, but unfortunately as is typical one made in hindsight. Rogers was calling for a rally in commodities in 2003. Maybe he saw it coming for the reasons I’ve cited. But if he did, it wasn’t among the reasons he has provided the public with. So I think his recent success and now accidental failure in the commodities market may have been nothing more than coincidental timing, because the demand related reasons like the one involving refiners that I’ve cited aren’t very well grounded from an economics standpoint. My friends Niederhoffer and Kenner pointed a number of these economic inconsistencies out back in 2003, and did so far more eloquently and deeply than I am capable of in their article Adventures with a globetrotting investor.

I’m always spouting off about how markets regress to the truth. But what is the truth. Clearly in this case economic logic hasn’t prevailed for quite some time. In 2001 through 2003 the truth was that money managers would take the path of least resistance. If they couldn’t sell a domestic equities growth story, they had to present a different growth pitch. That turned out to be an international equities and commodities story. They’re both bogus stories for reasons I’ve set pen to paper on many times in the past. But one truth of the markets was that people were positioned to be taken in by such bogus pitches. A bigger and broader truth is that in time investors wake up to bogus stories. It’s looking like we may have reached that point in time with commodities. But it’s very hard to say for sure.

The inflation scenario will probably be a major determining factor. If inflation starts to creep into core prices in a significant way, then commodities will likely remain hot, which scarily to say will further exacerbate the core problem. Then we do have a 70s situation again. If the Fed and other market forces manage to keep prices out of the core then the pressures will likely reverse course and producers will push back on commodity providers. In which case commodities will fall back out of favor. I really do think the latter is the most likely course, because it’s the path of least resistance. The consumer is taxed, so the producer has difficulty passing on costs. But many commodities providers are experiencing record margins. So whom are the producers going to push on? They’re going to push commodities suppliers for better prices. If the system is a wave consumers are the trough, producers are in the middle, and commodities suppliers are the peak. As the wave regresses toward equilibrium the consumer has to be pushed up, and commodities down. But for the time being the markets are experiencing a hurricane of their own.

posted by Mark at 6:15 PM 0 comments