At These Levels

Last three times this trading setup happened (now is the 4th time) bond yields rose a minimum of 75 and maximum of 145 basis points off their lows. That puts the 10-year at 5.15 at a minimum if this setup works out. I am not sure anyone is prepared for that, even the man himself. It is a little early to put him on the Maestro’s throne yet.

 www.stockcharts.com

Jeffrey Saut of Raymond James is very non-comittal in his predictions for 2007. I guess he has been around a long time and has learned his lessons:

1) What is your target for the S&P 500 a year from now?

Answer: Assume the S&P 500 is going nowhere and invest accordingly. Our investment approach has typically centered on trying to invest in “cheap” stocks, since good things tend to happen to “cheap” stocks. That strategy has allowed our Analysts Best Picks to achieve a 38.3% per annum return over the past 10 years. [ note: he was the strategist at RJ during that time, so if he is a bear, we need more bears like that.]

2) How much do you expect S&P earnings to grow in 2007?

Answer: Less than the consensus projections.

3) When the Fed moves again, which direction will it be?

Answer: The “fooler,” in 2007, may just be that the economy re-accelerates and the Fed actually raises interest rates, not lowers them.

4) When will the Fed make its move?

Answer: Who knows?

5) Interest Rates. The Fed funds rate is currently 5.25%. Where will it be a year from now?

Answer: Unchanged.

6) The 10 year T’note is trading just above 4.5%. Where will it be a year from now?

Answer: You might as well “flip” a lucky penny.

7) What is your expectation for economic growth next year?

Answer: The current economic environment is rendering “mixed” signals. While the headline figures suggest slower economic growth, many of the numbers we look at are actually accelerating. Consequently, we are confused and accordingly cautious.

What do you expect to see as the high, low, and average prices for oil in 2007?

Answer: We have been energy “bulls” for the past five years and remain so. With 5 billion new entrants joining the world’s economy the demand for energy can only increase. Therefore, we continue to think the era of cheap oil is over. As for how high oil prices go, hereto you might as well “flip” a lucky penny.

9) What will the best performing stock sector be next year?

Answer: Large-cap growth is cheaper than large-cap value for the first time in more than 30 years. This is why we have tilted portfolios toward large-cap growth since the beginning of 2006.

10) Best stocks for 2007?

Answer: Cheap stocks, preferably with dividends.

11) Worst stocks?

Answer: Stocks that go down in price, which is why we continue to embrace our mantra since the Dow Theory “sell signal” of September 1999 – Don’t let ANYTHING go more than 15 – 20% against you!

12) Will the boom in private equity deals continue?

Answer: As long as there is excess money in private equity funds chasing returns, the M&A activity will continue driven by the Jessica Simpson investment style, “I totally don’t know what it is, but I want it!”

13) Will hedge funds outperform or underperform or match the returns of the S&P 500?

Answer: There are currently more hedge funds than there are stocks. By definition then, most hedge funds will probably underperform over the long-term.

Jeffrey also mentions an interesting chart on housing that no one cares about right now:

The call for this week: Just about every major index we monitor was lower in price last week except for the grains (corn, wheat, soybeans, etc.). Particularly troubling was the D-J Transportation Average’s (DJTA) break below its 200-day moving average (DMA), leaving the Transports bearishly configured. Combining the Transport’s breakdown with economically-sensitive copper’s similar slide caused one Wall Street wag to lament, “Can you spell recession?!” While we are still not in the recession camp, we do think the odds of a recession have risen, especially when one studies the nearby housing chart from the good folks at www.stockcharts.com. As for this week, “If Santa fails to call the bears will roam on Broad and Wall.”

Source: RJ

I know that the last two weeks of the year are generally very positive for the stock market. But seasonality has flipped this year--historically weak, September was a good month--so the decline last week shouldn't have been that surprising given the newsflow and the lack of corrections on the rally. But everyone wants to end the year on high note, not two weeks of declines. I'm sure an up week, even marginally so, can be arranged in this light-volume environment given the help from oil that could serve as a good excuse. Now, what would happen though if market participants begin to think a little more about why the oil price is declining? Nahh, that's too much work. They'll leave the thinking for next year.

Incidentally, natural gas is again the biggest CRB mover as today is the last day to trade January futures, which broke the $6/MMBtu threshold. The decline in oil yesterday was attributed to the warm weather, but that seems naïve given the saber-rattling. Maybe the energy markets simply don't believe Iran…

I find it very peculiar that in the first day the market has to respond to Iran threatening to use oil as weapon against the UN vote, this news hit the tape. "See, their oil is not that important as it will run out anyway." This is funny. That said, man, those oil futures need to hold $60 if there will be any more rally attempts (which is what I have been looking for since mid-November, breakeven on that call). I'm still looking…

This is what March natural gas futures look like, and this is what the experts say. I know many natural gas producers make a lot of money with gas at $6, but the stock market is always about rising earnings in the year ahead, not falling earnings, which is what seems to be developing as an outlook in that field. I must be missing something in Friday's post.

The copper angle by Kasriel and a typical Marc Faber outburst. I must say, I regret the fact that Marc no longer shares his monthly market comments with the world. But you can subscribe if you want to.

... in the markets, try feng shui.

From the December 14 issue of my new subscription service, Vital Resource Investor:

The situation with natural gas--which only looks cheap relative to its post-Hurricane Katrina spike--is interesting. Natural gas is too expensive at current levels for the production of electricity, one of the main drivers that permanently took it out of its $2-to-$4 per million British Thermal Units range. Because natural gas is a localized market due to the limited number of storage facilities, prices can decline sharply in such an environment, much like they did last spring.

This hasn’t hurt major natural gas producers because the average prices they receive for their output are well above the cash price, given the large amount of forward selling that’s done in the industry. Falling natural gas prices did, however, cause the biggest-ever hedge fund blowup in September.

There’s another global warming effect (completely unrelated to El Niño) that may not be traceable to human activity but is related to long-term weather cycles. We know little about such cycles because of a lack of reliable historical data. I recently spoke with two physics doctors who are actively researching the subject: one at NASA and the other at the US Dept of Agriculture. Both confirmed that, during the last four years, average recorded temperatures have been the highest since such measures have been taken, and both expressed doubt that this was due entirely to burning fossil fuels.

No one can reliably predict the weather, but there’s clearly a risk that natural gas prices could decline a lot further from current levels, irrespective of where oil’s headed. We had the bizarre situation last winter where natural gas supplies in storage rose during the last week of December, an unprecedented occurrence. If that happens again, and January turns out to be as mild as this month has been, it’s not difficult to imagine a selloff similar to the one we saw in early 2006.

That was eight days ago and the comments were made where the mark is on the chart below.

www.bloomberg.com

Now, what I didn't elaborate on then: Both those experts have received their hard sciences education in Moscow on merit-based scholarships paid for the government of their country (which were very hard to get at the time), they are not Russian, as far as I know have centrist political views, but don't completely agree with former V.P. Gore's new documentary about the environment. Basically, they're not hacks for the current administration. One of them I know on a first name basis and I can say that with a high degree of certainly that this political profile is correct. The other I spoke with for over an hour and he shrikes me as the same type of guy, a man of science, not politics.

A quote from this Bloomberg story on natural gas: ``There's no demand for heating fuel, and this market looks ready to go over the falls.''

I don't recommend futures in Vital Resource Investor, but if I did, my futures short would have been right where that arrow is at the time of my comments. It might already be over those falls. The energy stock longs (with natural gas exposure) in my model portfolio are very conservative for a reason.

... but not enough rigs to drill?

I was quite busy today and that's why I'm checking in late. But when I saw this story yesterday an inconsistency jumped out. Transocean, the deep sea driller, has made little progress in 2006 with great volatility during the year; it was down for the year up until six weeks ago. Is the market irrational here or forward looking?

www.stockcharts.com

The oil price can't rally above $64 to save its life, with an OPEC cut. True, we haven't taken out the lows, but I was expecting to see some progress here and not sideways meandering. Does that tie in with the prior inconsistency?

Jeff Matthews hits a lot of valid points on the economy and one very important sector in particular. I know no one cares since the Dow hit new highs again yesterday, but not much of this has changed. Now, 13 of the 30 Dow components are in positive territory, but the extra three have annualized returns of 0.48, 0.28 and 0.07 since January 2000. Those are nominal returns not adjusted for inflation.

Speaking of soft commodities, I was not aware of the size of this cash crop. Now, do you have an idea how many countries have smaller GDP than $200 billion (a official estimate mentioned in that report)? Here is the list.

This week Jeffrey Saut is hiding his market comment all the way at the bottom of his weekly commentary (no archives, it will be gone next week). Jeffrey (as has yours truly) has been too cautions in the October-November period and has been scratching his head the whole time:

As for the here and now, last week saw the DJIA track-out to new all-time highs. Not so, however, the D-J Transportation Average (DJTA), which continues to be a MAJOR “Dow Theory” upside non-confirmation. Speaking to the Transports, trucker YRC Worldwide’s [formerly Yellow Freight; (YRCW/$37.38/ Underperform)] reduced guidance last week. As well, overall truck tonnage for the month of October was down 4% year-over-year, registering its largest decline since February 2001 and taking the “truckers” into recessionary mode along with housing and the autos. Nevertheless, as repeatedly stated, “We have learned the hard way that it is difficult to break the major-market averages down during the ebullient month of December.” Moreover, we have opined that if the S&P 500 breaks out above 1415 (SPX/1427.09) it would probably lead to a “dash” into our 1440-1445 price objective. We continue to trade and invest accordingly.

www.stockcharts.com

I've mentioned this Dow Theory situation before (there's a link in the old post with an explanation of the theory). Then Jeffrey quotes the man who's seen it all:

All eyes were focused on last Friday’s laughable CPI report (+2.0% year-over-year). As Richard Russell states, “No inflation . . . does Bernanke have any kids who are heading for college? Do you have any doctor visits coming up? This month-to-month gauge of inflation is a fraud. How about year-to-year inflation? The Fed's whole strategy – continue inflating while publishing phony statistics showing that there's little or no inflation.” While we are not as cynical as Dick Russell, it is worth considering that the Cleveland Fed’s measure of the median CPI is up 3.7% year-over-year and that there was NO relief in “rents” (+0.3%) and/or “homeowners equivalents” (+0.4%) in Friday’s CPI report. When we combine our sense that inflation is higher than the government’s figures suggest with double-digit tax-receipt growth (read: strong economic growth), a stronger than expected Empire State Manufacturing Index (23.1 versus the estimated 20.5), and the “New Orders” component of said report rising from 22.4 to 25.1, we are left with a feeling that the Fed may be on “hold” a lot longer the participants currently expect.

If Russell is correct, bond yields won't be able to stay as low as they are right now. The magic number on the 10-year note is 4.85 percent, past which point the risks tilt for a move toward 5.25 percent. There's been a lot of selling of bonds into strength during the past two weeks, but, so far, it hasn't been detrimental.

When I posted the link to yesterday's presentation, I wasn't aware that Dr. Faber had a presentation on the same site done on behalf of US Global Investors. His presentation is for people with open minds (viewer controlled slides, so you have to work a little).

US Global Investors is a very aggressive fund manager that bet big on resources and emerging markets and subsequently won big. See what I mean?

www.bloomberg.com

Yours truly giving this 20 minute presentation today.

I don't know where Kass comes up with some of these things, but here is the second part of his predictions.

Our local Richmond guy really doesn't like this FOMC policy as he keeps voting to hike interest rates. I don't remember a more muted response to an FOMC decision. I guess that wasn't much of a decision after all, as it was all priced in. The only difference between this FOMC statement and the one before was in the second paragraph.

It now reads: "Economic growth has slowed over the course of the year, partly reflecting a substantial cooling of the housing market. Although recent indicators have been mixed, the economy seems likely to expand at a moderate pace on balance over coming quarters." [my emphasis on the understatement]

Back in October it read: "Economic growth has slowed over the course of the year, partly reflecting a cooling of the housing market. Going forward, the economy seems likely to expand at a moderate pace."

Bernanke has found the winning formula and doesn't like to deviate much, does he?