Market Becoming Over Bought.

Excerpt from a public post from BeSpoke Investment Group yesterday.

"{Above} we provide our six-month trading range charts of the S&P 500 and its ten sectors. For each chart, the blue shading represents the sector's "normal" trading range, which we consider between one standard deviation above and below the 50-day moving average. The red shading and above is considered "overbought" territory (more than one standard deviation above the 50-DMA), while the green shading and below is considered "oversold" territory (>1 standard deviation below the 50-DMA).

After trading into oversold territory for the first time since last August, the S&P 500 has quickly recovered since its recent low on March 16th. While the index has yet to take out its prior highs and reconfirm the bull market, it is already right back at overbought territory as of this morning....."

I'm going to post an update chart of the S&P 500 tomorrow to show where we stand at the end of Q1. My work does not show us as being quite as overbought as Bespoke's analysis but we are getting there, especially in the shortest time frame that I follow. Accordingly and to reflect what has become Lumen Capital Management's actual trading stance recently, I will move our shortest term market rating down to NET MARKET NEUTRAL. This means that on balance where we have initiated trades we have been equal buyers and sellers of securities in accounts. For the most part we've done very little in the past week or so.

Link: 5 of 10 Market Sectors Overbought.

*Long ETFs related to the S&P 500 in client and in certain personal accounts.

Dollar Comeback?

Interesting SmartMoney article about the buck.  {Excerpt with my highlights}:

 

One of the favorite bets in the market right now is short the U.S. dollar. But could the greenback be in for a turn higher?  The case against the dollar is strong and widely held. Last week, the Commodity Futures Trading Commission's weekly report of currency positions showed that almost all speculators were short the dollar and long the yen, euro, pound, Swiss franc and other currencies.......

......At the heart of the negative greenback story is the shifting short-term interest-rate environment. The U.S. is maintaining a super-easy monetary policy which includes record, rock-bottom short-term rates with a quantitative easing kicker. At the same time, other central banks are starting to make moves to raise short-term rates and exit emergency measures started in the wake of the financial crisis.

Currency speculators tend to favor money that pays better returns, and right now holding the dollar pays you nothing, and will pay less than that if it continues to drift lower. The European Central Bank, citing rising price pressures, has all but promised that it will raise rates at its next meeting April 7. The Bank of England, facing inflation more than double its 2% target, may raise rates as soon as May. At the same time, the Federal Reserve isn't expected to start raising rates until the end of the year and maybe not until 2012.

Compared with so-called commodity currencies, the dollar is faring even worse. Boosted by gains in oil, metals and agricultural commodities, the Canadian dollar and the Australian dollar have surged against the greenback.

Against all those headwinds, how might the dollar start to make a comeback? Here are three things to watch.

The Federal Reserve and QE2. The Fed's QE2 bond-purchasing program is scheduled to end in June. Recent extremely weak housing market data has prompted some debate about a QE3......But a number of Federal Reserve officials have started to sound a more hawkish tone about any possible QE3......If Fed officials keep making such noises, it could start to turn sentiment concerning the dollar.

The euro-zone mess. It's remarkable that the euro has strengthened given all that's happening in the zone. Ireland and Greece are in the rescue ward, and their salvation hardly looks secure. Now Portugal, having failed to pass an austerity budget, looks likely to join them.....Portugal will need funding help in a matter of days, but the Eurocrats, as per usual during this slow-motion sovereign crisis, continue to dither.....and the European ATM – Germany – is facing its own political upheaval, with the ruling party losing recent elections.....

....U.S. economic data. The ace card for dollar bears is the Federal Reserve's easy monetary policy. This will get tougher to maintain if the U.S. economy continues to show strength, something St. Louis Fed President Bullard alluded to in talking about curtailing QE2.....The dollar can't fall forever. And maybe the Fed is starting to espy inflation even as it talks it down. "What might have raised some eyebrows were signs that inflation expectations from the well-regarded University of Michigan survey, are on the rise," said Jim O'Neill, chairman of Goldman Sachs Asset Management, in a research note this week. "This has to be watched carefully, especially as the more reliable coincident and lead sector real economy data remains more buoyant. I still think the dollar could snap back easily in the event of the Fed shifting its stance against both the euro and yen."

Link:  Why The Dollar May Make A Comeback.

My comment:  All this may be true but the charts of the Dollar still look like a bull market death trap.

No Posting Today

Time constraints, a few client meetings and a long weekend means there will be no updates until the middle of next week. I'll break in if events warrent but otherwise come back Wednesday!

*Short Hours in the Day!!

Follow-up

I'm going to respond to a few questions I've had about my posts from the last couple of days.

1. I am not negative on the markets unless you construe a trading range as being negative. As I stated on Tuesday nothing changes my view that we are in a longer term secular bull market or changes my belief that stocks have the potential to be higher in the next 12-18 months. To expand on this a bit, it is my thesis that stocks began a secular bull market back in March of 2009. My guess {and it is nothing more than a guess at this point} is that stocks are somewhere between 30-40% of the way through this run. But it would not be inconceivable that stocks pause and digest the gains we've seen since Labor Day. The most logical time for that to occur would be at a period of statistical weakness for stocks which has historically been March-October.

2. Probability dictates that the most likely course of events will be for stocks now to mark time and establish a trading range. If I have to put approximate numbers on where I think that might occur, I would say roughly between 1,350 on the upside and would use 1,250 of the S&P 500 as the bottom of the range. I also think a case could be made at some point for expanding that range to 1,400 on the upside and also using 1,200 in a more extreme case as the bottom of the range. All of these levels should only be used as reference points. There is no law that says they must be met or exceeded.

3. Stocks have rallied so far today. That does not affect my thinking about the probable nature of stocks marking time for some period. I pointed out in yesterday's chart that stocks were by our work over sold. The readings that were reflected in that chart are traditionally signals suggesting that stocks could rally. There are also money flow reasons regarding the end of the month and the end of the first quarter that could put a bid under stocks for the next week or so. So far the rally that we have seen has put us back to about the middle of the trading range that I think is being carved out.

4. No law saying stocks can't rally from here. I ended yesterdays post by saying "Stocks could fool us all, burst through the top end of the range and head higher. That right now seems like a lower probability event, but if it should occur then we will still participate given how we are invested." There is no law saying that after all the ink spilled in my current assessment that I'll be right, Indeed the consigliere's first two lessons were that "Stocks will do what they gotta do to prove the most amount of people wrong, and stocks will move in the direction that causes the most amount of pain." What would likely cause the most pain for the fast money crowd would be a rapid upward thrust in prices. Note that given how we are currently invested in our different strategies we should participate along with the markets if that indeed does occur.

5. Buy weakness, sell strength: The market's recent signals means that the playbook tells us to bring out the defensive pages of the game plan. In our case that has been to raise some cash by making sales in sectors that we think have become somewhat extended. It has also told us to become a bit more aggressive when we recede to the bottom of the range. In that case we repositioned into certain sectors that we think are compelling {financial & dividend paying ETFs} while also instigating certain purchases for our shorter term tactical strategies. Look for us to become less aggressive as markets head higher and for us to possibly make some sales along the way as we get to the higher end of the range. In other words look for us to be buyers of weakness and sellers into strength where appropriate.

Hope all of this helps.

*Long ETFs related to the S&P 500 in client and personal accounts.

Where We May Be Going

This is an update of the chart we posted on March 16th. We discussed then the importance of what we saw as three resistance levels. Here is a synopsis of what we said then: "Line 1 which is roughly where we closed yesterday is a very important tell. Not only is it from the level we broke through in January, it also represents the level from where stocks began their collapse back in late 2008 {and} also represents a level from which stocks broke out to the upside during the last leg of the 1990's bull market.....Lines 2 & 3 are the trading range that we've previously established throughout February and most of March....The reaction to all three of these levels will likely tell us if we are in correction mode or in need of more consolidation."

The updated chart shows that stocks have so far managed to hold our first resistance level {line 1} and subsequently rally. So far stocks have marked time at line 2. I think we have the potential to trade through this level.  I also think that probability is suggesting that stocks are in the process of carving a trading range that could persist into the fall. 

We use statistical evidence derived from our playbook and the study of money flows to form our market observations.  Here is what the weight of that evidence is telling us.

Seasonal Variations: We noted back in Part IV of our series on stock valuation that "{T}here are seasonal variations or patterns that come into play in most years......The study of these bullish and bearish phases means that I accept as a given that stocks at some point this year will experience a sell off between 8-20%. This is simply the normal course of how markets behave in most years. It is part of the seasonal variation of how in a normal investment year stocks will cycle between bullish and bearish phases as measured by money flows."

While market declines can come at any time, statistically stocks are most prone to major sell offs in between the months of March and October. There is not enough space to go into all the theories of why this pattern persists and of course there is also no law that says this has to occur. However we have to add this factor into the equation given the fact these seasonal patterns exist and given where we are in the calendar.

Unexpected Events. In Part V of our series on stocks we gave a list of possible outlying risks that had the potential to undermine markets.  We prefaced that list by saying, "What would likely knock the market off its axis is a major event coming over the transom that is unforeseeable and considered a lasting event with a large economic impact....If such an event should occur though it will likely be one that I haven't thought of here." While we listed the prospect of a natural disaster occurring, we limited our concerns to such an event occurring in the United States and not Japan. We also looked for wars in places not named Libya.  That is of course how it works. Markets position themselves for events that they can foresee a probability of occurring. It is the unknown lurking in the shadows which introduces increased risk. Both Japan and Libya have introduced previously non-discounted economic concern. This is an unknown so far in terms of the effect on the global economy.

Earnings Revisions. Markets react to foreword earnings revisions. In general negative revisions impact markets negatively. The same generally works in a positive manner as well. According to BeSpoke Investment Group** Analysts have been revising earnings lower.  "At current levels, net revisions are now at their lowest levels since October, 2010. Higher input prices hurting margins was a big enough concern, but with tensions boiling in the Middle East and crisis in Japan, analysts are becoming less and less positive on the outlook going forward."

I stated in my March 16th post that I felt that 2011 earnings estimates are unlikely to reach some of the more aggressive levels that economists have been projecting. It is likely we will start to see those numbers pulled lower as first quarter 2011 reporting commences. While economic expansion keeps me comfortable with my 1,350-1,400 earnings estimates for the S&P 500 for 2011, I see nothing at this point to make me want to raise our estimates.

Positives:  I balance this with the fact that the global economy is still in growth mode.  US GDP should be around 3% this year.  Our corporate balance sheets are in pretty good shape.  While housing continues to be a damper to growth,  I think that time is beginning to make it less of a factor on the overall economic picture.   Banks are beginning to have their TARP restrictions removed and the unemployment rate, while still unacceptably high, has come down somewhat in recent months. Stocks also are still competitive with other investments at this point.

So we are now in a market where positives and negatives may balance themselves out and stocks could swing back and forth, trading in perhaps a 4-10% range from here until we find further economic clarity. Given the push pull nature of things right now I will reiterate my March 16th stance regarding the most recent market top, "Probability also now suggests that that upper band {line 3} will be a significant resistance level for some time....Stocks reached levels back in early February that largely incorporated all the good news known about the economy up to that point and had not discounted {many of the negatives} mentioned above. The S&P 500 came close to 1,350 back on February 18th. That was near the bottom of my price target for the year. In the face of this uncertainty stocks have retreated. Stocks I think will now need time to see how these headwinds affect economic growth before they can mount a sustained advance that breaches that last level."

We have now opened the defensive pages of the playbook. That does not mean that we are in a sell everything mode. In fact reflecting our short term NET MARKET POSITIVE rating we have actually been net buyers into this sell-off, but we do have more of a defensive mindset in place now, especially if the news should continue to become more negative. In most accounts and strategies that means we have a bit more cash on the books than we did earlier in the year. It does mean we are also in the process of evaluationg postions and sectors.  We have therefore modified the  game plan and have taken into account certain critical market levels that could cause us to raise a bit more cash as well.

Stocks could fool us all, burst through the top end of the range and head higher. That right now seems like a lower probability event, but if it should occur then we will still participate given how we are invested. Prudence and the weight of the evidence suggests we take a more cautious approach until the dust settles. 

*Long ETFs related to the S&P 500 in client accounts.

**BeSpoke Earnings Estimate Revisions, page 1. BeSpoke Investment Group, March 18, 2011.

Where We've Been

Today I want to review what has been our principle investment thesis.  We laid out our thoughts in a series of posts that we ran from December through January on the market's valuation. The series was named "Are Stocks Cheap?" You can link here if you want to see a table of contents with links to those various articles. In Part I we started by discussing our two basic questions:

1. What is the status of the economy? {Improving, stagnant, declining}.

2. What are the end of year earnings projections of the S&P 500?

Being able to answer these two questions gives us a frame of reference for the current market we find ourselves in.

In Part II we used that framework to lay our our rationale for our price targets for year end 2011. We took a look at different earnings estimate numbers from economist and applied standard PE analysis to them. Among other things we said, ".... fair value for next year {2011} on the S&P 500 has the potential to be somewhere in the range of 1,250 {roughly 13.5 times a $93 S&P earnings estimate} and 1,450 {a bit more than 15 times that $96 S&P number}. I will use as a starting point for next year at this time of 1,375 by year end. That is halfway between my own internal 2011 fair value estimate of 1,350 and 1,400. This is a PE of roughly 14.5 times a midpoint estimate of 94.50. I think these numbers have the possibility of moving higher as the new year unfolds...."

The first part of this series was devoted to what could go right. We also tried to balance out the positives by discussing the inherent risk of market volatility in Part IV.  There we went into a brief description of what happens at market tops or at points of market saturation. 
"Typically what happens is that at some point stocks become over bought enough that the supply of buyers is exhausted. Stocks fall under their own weight when that happens. This is true in bull markets as well as bearish trading periods. Statistically stocks are most prone to sell offs in between March and October of the year." We ended that article by noting that stocks were overbought by many of the metrics we use to measure such things.  This was particularly true in the shortest time frames we measure.

We first became concerned about the short term posture of the market back on December 15th when we changed our shortest time period market reading to NET MARKET NEGATIVE. You can click here for a definition of that term. Basically we changed that rating to reflect that on balance in the shortest time frame we follow, for some of our more aggressive investment strategies and our more aggressive portfolio strategies we were net sellers of stocks. That simply means that on balance we have sold more securities than we have bought. We reiterated that stance on January 17th. While the market moved higher after we both of these events, at their lows on March 16, the S&P had only advanced a bit over 1% from that mid-December post and was down over 3% from our January reiteration.


To reflect certain actions taken in client portfolios we reported to you that we had changed our shortest term stance back to NET Market Positive in a post dated March 16th.  Please also note that these readings only reflect our shortest term view of these things.  Nothing that we have seen so far changes our believe that we are in a longer term secular bull market or changes our belief that stocks have the potential to be higher in the next 12-18 months.

We were active towards the end of last week, buying financial and dividend oriented ETFs and executing short term plans in our most aggressive investment strategy. We also made certain purchases in some under invested accounts. Irrespective of what we transacted last week, I think think that the market has been trying to send us a message about what we can expect in the next several months. Tomorrow I'll discuss what I believe stocks are trying to tell us.

*Long ETFs related to the S&P 500 in client and personal accounts.

A Review of Our Thoughts.

Over the next two days look for a couple of longer posts from me.  I'm going to address where we've been so far this year and where I think we might be going for the next six months or so.  Today we'll discuss where we've been.  We'll address what the future might be telling us tomorrow.

an tSionna {The Dollar}

BeSpoke Investment Group discussed the decline of the dollar today, remarking on the fact that even though stocks advanced yesterday, the dollar hit new lows.

"Somewhat lost in the shuffle amidst {yesterday's} big rally in stocks was the dollar's move to new lows. In fact, {yesterday} the US Dollar index broke below its lows from last November, putting it at levels last seen in late 2009. As shown in the first chart below, the dollar has been in a pretty severe downtrend since June 2010.

A chart of the US Dollar index going back to 2007 shows the wide range that the currency has traded in over the past few years. After making its multi-decade low of 71.33 in 2008, the Dollar index rallied up towards 90 as equities declined. Once the financial crisis ended, investors fled the dollar and the index traded down to 74.26. Another rally in 2010 put the Dollar index back at the top of its range near 90, and it has been declining ever since....."

Link:  Dollar Decline.

an tSionna {03.18.11}

Stocks managed to reclaim that first restistance level we discussed earlier this week.    Postive reasons for this were the calming of the situation in Japan, the news regarding Libya and some better economic news at the end of the week.  We had also become over sold enough in the short term that some kind of bounce was to be expected.  We'll have to see how markets respond next week.  I was a buyer of certain finanacial ETFs and dividend oriented ETFs at the end of this week in certain client accounts and certain risk strategies.  For the time being we will leave our shortest term indicator at NET MARKET POSITIVE.

There are a few other sectors of the market that I believe have become cheap enough to seriously consider for purchase in some of our investment strategies.  However, I think the proper posture right now is to wait a bit and see how these sectors respond next week and how the market reacts to news events before I add to any of these positions.  

*Long ETFs related to the S&P 500 in client and personal accounts.  Long certain financial and dividend paying ETFs in client and personal accounts.

Pre-Election Year Cycle

We took a look back in January at some Chart of the Day data regarding the year just prior to our presidential elections and how markets have traded during that time.  See this post here.  Today these folks have taken another look at the same data, comparing how we've traded so far in 2011 with their market averages.  Note the drop off with the exogenous events out of Japan and most likely Libya.

"Today's chart illustrates how the stock market has performed during the average pre-election year. Since 1900, the stock market has tended to perform well during the first seven to eight months of the average pre-election year. For the remainder of the year, pre-election performance has tended to be more flat/choppy. This pre-election year has followed the path of the average pre-election year rather closely with a rally up until mid-February and a correction into mid-March with the aftermath of the devastating Japanese earthquake and tsunami weighing heavily on the market over the past few days."

My thoughts:  I don't know if those returns percentages shown in the chart are accurate but if they are then it implys that on average stocks have returned something like 15% in that pre-election year.  A 15% return on par with what is shown on the chart above whould imply about 1,450 on the S&P 500 by year end.  That would equate to about a 13% return from where we trade right now.  I'll stick to my 1,350-1,400 numbers by year's end right now.  That is still price appreciation potential from where we stand right now of between 6-10%. 

Link:  http://www.chartoftheday.com/20110318.htm?T

*Long ETFs related to the S&P 500 in client and personal accounts. 

Lá Fhéile Pádraig

St. Patrick's Day   A posting blast from the past!

Beannachtaí na Féile Pádraig!

Market Update {Continued From Last Night}

Today I'm continuing our discussion about the current state of the markets. I'm also republishing yesterday's chart. Again you can double-click on it to make it larger. Below are my thoughts.

1. In our inter-connected world with instantaneous access to information, markets react much quicker in real-time to natural disasters, wars and economic dislocations. Part of the new normal to events such as this is the so called "risk off" trade. That is everybody heads for the exits at one time and market volatility increases. We've seen this in 2008 with the financial crisis, concerns over the H1N1 virus in 2009, last years fears of sovereign debt default in certain European countries and now the double problem of crisis in the mid-east and the earthquake. This reflex selling during times like this seems to be what me must now live with regardless of how far away the event seems and how tangential the impact to our economy may actually be.

2. I think that on an economic basis US stocks have likely discounted the worst of this disaster. There will no doubt be some economic fall out to our economy. Some supply components for example to US manufacturers may be delayed. Apple Computer announced yesterday that it would delay the launch of the I-pad II in Japan until March 25 because of this crisis. Also some exports may not be shipped over to Japan as planned. In my opinion this will likely trim the most aggressive earnings estimates for 2011 GDP growth and with it those really extreme S&P price estimates for this year. We should also not forget that the rise in the price of oil that we have experienced in the past month may have started to bring those numbers down anyway.

The issue with oil has likely been the culprit that caused the stall in price appreciation these past few weeks. So far I see nothing to change my view that stocks could end the year trading between 1,350-1,400 on the S&P 500. I do think that given what we know today I'd be unlikely to take those price estimates much higher by the end of 2011 right now.

The reason I say this because the tragic events in Japan {taken on their own} are unlikely to influence economic behavior here. People didn't stop going out to eat here over the weekend because of the events over there. The Federal Reserve confirmed yesterday that economic growth was continuing. That should ultimately put a floor under stocks.

3. Our playbook is the situational analysis of markets based on historical results. We study how money flows into and out of securities along with the disciplines of fundamental and valuation analysis to see how markets have responded to historical events. The playbook helps by giving us different market scenarios to current trading activity and helps us formulate a game plan for current market events.


The game plan is a tactical and strategic allocation of clients assets based on what the playbook tells us has historically occurred. It gives us a direction for our various investment strategies and is further refined to the specific risk/reward parameters of our various client groups and our investment strategies. Often the game plan can be implemented across the board in all client accounts or in a specific investment strategy. At other times portions of the game plan will be specifically implemented in individual client accounts or certain investment strategies where events may warrant such action.

Both the playbook and game plan tell us that yesterday was not in my opinion a day to sell. In fact for reasons and criteria we'll discuss below we were buyers in small size in certain investment strategies today. In the words of Barry Riholtz in a posting called Black Swans, 100 Year Floods, "The time to look for the emergency aisles and where the exits are located is before takeoff, not after the wings fall off the plane. You must have a plan in place to deal with unanticipated events, a just-in-case things head south scenario. Ideally, you put this plan together when you are objective and unemotional and calmly contemplative — not when things are figuratively and literally melting down."

We had already raised a certain amount of cash per client mandates and strategies over the course of the past few weeks. Yesterday was not the time to add more.

4. We will garner clues about how the markets will behave in the coming weeks by paying attention to three important levels on the chart shown above. Line 1 which is roughly where we closed yesterday is a very important tell. Not only is it from the level we broke through in January, it also represents the level from where stocks began their collapse back in late 2008. It also represents a level from which stocks broke out to the upside during the last leg of the 1990's bull market. That was back in late 1998. Price has memory and stocks have nor sort of pivoted around this level for over a decade. Probability suggest that a market that fails to hold this level on a sustained basis could be in danger of further price declines. Lines 2 & 3 are the trading range that we've previously established throughout February and most of March. We will need to see how stocks react to both of these lines on any subsequent rally. The reaction to all three of these levels will likely tell us if we are in correction mode or in need of more consolidation.

5. Probability also now suggests that that upper band {line 3} will be a significant resistance level for some time. If I had to guess I think that line will be hard to breach for at least several months. Here's why. Uncertainty with the situation in the middle-east, a flair-up of the European debt crisis and now Japan's problems have all been injected into the investment system. Markets hate uncertainty. Stocks reached levels back in early February that largely incorporated all the good news known about the economy up to that point and had not discounted any of the events mentioned above. The S&P 500 came close to 1,350 back on February 18th. That was near the bottom of my price target for the year. In the face of this uncertainty stocks have retreated. Stocks I think will now need time to see how these headwinds affect economic growth before they can mount a sustained advance that breaches that last level. Time of course will tell.

6. We have been in our shortest time frame measurement of money flows NET MARKET NEGATIVE since back in December. You can click here for a definition of what that term means. Basically it says that on balance we have been net sellers of stocks or ETFs per our client mandates and strategies. Today for our most aggressive investment strategy and for a few under invested accounts we went to NET MARKET POSITIVE. That is we were buyers of certain securities today. We could change this rating in a week or maybe tomorrow depending on how stocks react. Longer term this sort of activity brings us back to levels of attractive valuation where we might be tempted to put more money to work if the markets show evidence of stabilizing so we will leave our longer and intermediate term ratings intact.

As always we will let our indicators be our guide.

*Long ETFs related to the S&P 500 in client and personal accounts.

Market Update.

This is a chart of the S&P Spyder ETF {SPY}. You can double click on it to make it larger.The chart was generated around 1:45 PM Chicago time. The actual market close looks just slightly different. The conclusions are the same. Stocks experienced a massive world-wide sell off in the past 24 hours based on a third explosion at the stricken Japanese reactors outside of Sendai and subsequent fears of further radiation release and a possible meltdown of the reactor cores. Japanese stocks have now experienced their worst two day drubbing since 1987.

US stocks plunged on the open today in sympathy with the rest of the world but pared the worst of their losses on more evenhanded analysis about the worst case scenario with the reactors news that technicians were making progress in stabilizing the reactors and a Federal Reserve announcement coming out of their latest meeting that economic conditions here were improving.

I will take a guess here that unless the news out of Japan tonight continues to worsen, then in the very short term stocks should experience some sort of reflex rally. How high and for what length of time I don't pretend to know. However it strikes me that we came down too quick on news of an exogenous event that doesn't materially impact our economy except for some very short term dislocations. The question is going to be how do stocks react in the longer frame. I'd hoped to be able to put all this together today but time and the markets conspired against me. I'll publish my thoughts on markets going forward in the morning.

*Long ETFs related to the S&P 500 in client and personal accounts.

Suggested Reading

If you want a technical view of what's going on with Japan's nuclear reactors go to this blog:  http://bravenewclimate.com/ .  Jim Cramer mentioned this on CNBC this am.

Markets Set To Plunge

Stocks are set to plunge at the open in response to the worsening news out of Japan.  A few quick thoughts and I will try to be back at some point later today with something more complete.

1.  I am doing nothing at the open.  That may change during the course of the day.  On balance I would more likely be a buyer than a seller.

2.  I may change the market rating later today.

3.  Markets with this plunge are likely discounting the worst of the economic fallout to us here. 

Hopefully back later......

Earnings Estimates

BeSpoke Investment Group published this table about year end S&P 500 numbers last week.  What I find interest {and perhaps a bit disconcerning} is the group's year end average.  You'll note that it is pretty close to our own 1375 year end forecast.  Below is BeSpoke's take.

"Each week, Bloomberg surveys the head equity strategists at the major Wall Street firms for their year-end S&P 500 price targets. At the start of 2011, the average S&P 500 year-end price target for these strategists was 1,371. This would have resulted in a 2011 gain of 9.02% for the market.

Since the start of the year, five strategists have increased their year-end targets. Goldman Sachs hiked its target from 1,450 to 1,500, Barclays went from 1,420 to 1,450, Bank of Montreal and HSBC both increased their targets to 1,430, and UBS upped its target 100 points to 1,425. These five increases put the current average year-end price target at 1,401, which would result in a 2011 gain of 11.40%. With a YTD gain of more than 5% already, the S&P 500 is nearly halfway there.

Economic Costs of Disasters.

News of The earthquake in Japan last night is pretty much trumping everything else today.  CNBC took a look at how recent disasters have affected markets and economies.  Please note we are discussing the economic costs not the human toll which is of course tragic.  {Excerpt}

CNBC: How Recent Disasters Affected Markets and Economies

Published: Friday, 11 Mar 2011

9:02 AM ET Text Size By: Jessica Hartogs and Antonia Oprita, CNBC.com

The biggest earthquake on record to hit Japan in 140 years sent stock markets across the globe sharply lower, while the yen and oil prices also fell.....The quake was followed closely by a 10-metre tsunami that killed hundreds of people and swept away everything in its path. The death toll is expected to rise.   Auto plants, electronics factories and oil refineries were shut across large parts of the country. Several airports, including Tokyo's Narita, were closed and rail services halted. All of the country's ports were closed.

While it is still very early to tell what the impact of the Japanese earthquake will be, it is likely that the events will not derail the country's stock market over the longer term, Olgerd Eichler, co-head of asset management at MainFirst Asset Management, told CNBC Friday.  The disaster is another challenge to Japan's recovery, but it may provide a jolt to the economy over the short term, Lawrence Summers, president emeritus of Harvard University and former director of the White House National Economic Council, told CNBC.

Historically, big disasters have rarely caused big drops in stock markets immediately after they happened, but their consequences on the economies and markets were felt long after.  Following the Asian Tsunami of 2004, which killed more than 230,000 people in 14 countries, markets in Indonesia and India ended the trading week after the tsunami over 1 percent higher, while the Thai and Malaysian markets were little changed......The greatest sector hit in Asia in 2004 hit was tourism. The tsunami had far less economic impact because of the extreme poverty of the region, according to the Associated Press.

Hurricane Katrina

Another major disaster, Hurricane Katrina, that hit New Orleans in August 2005 and killed more than 1,300 people, was not only one of the most deadly hurricanes in history, but also one of the costliest.  It is estimated that the cost to the US economy of Hurricane Katrina was $45.15 billion, according to the Insurance Information Institute.  Around 400,000 jobs were lost, economic growth for the second half of the year was trimmed by a full percentage and oil supplies were severely affected. But Hurricane Katrina had little effect on the performance of the New York Stock Exchange in the two months following....

New Zealand, Australia

Another country hard hit by earthquakes recently is New Zealand.....The country is just recovering from its own devastating earthquake that hit at the end of last month, killing at least 75 people.  The country's NZX 50 stock index fell 0.7 percent and the New Zealand dollar plunged by nearly 2 percent against the greenback after the quake in February.  But its effects are still felt throughout the economy and earlier this week the New Zealand central bank cut its main rate by 50 basis points to 2.5 percent to a record low to deal with them.  Insurers are still calculating the costs of that quake.....

 

Australia was also hit by disastrous floods at the beginning of the year, and markets were not immediately affected, with Australian stocks – except for insurers - rising in the days after the floors.  But stocks and the Australian dollar were hit later in January by the government's announcement that it wants to raise $1.8 billion from taxes to help foot the estimated $5.6 billion reconstruction bill.

In January 2010, Haiti was hit by its worst earthquake in 200 years, which killed 316,000 people.  An Inter-American Development Bank study estimated that the total cost of the disaster was up to $14 billion, but global markets did not take a big hit on the day of the quake. The Dow actually finished the day slightly higher.....

Link:  Economic Costs of Disasters

*Long ETFS related to certain foreign exchanges in client accounts.

Seven Investment Laws

Interesting and very short post over at the Big Picture yesterday.  They quoted investment manager James Montier Seven Immutable Laws of Investing:  I'm going to list them below.  I don't have time to go into these in much detail right now.  I have though added my short thoughts where appropriate after  each item. Hopefully I can circle back to this at some point in the future.

1. Always insist on a margin of safety  {Cash may pay nothing but it doesn't go down with the stock market.  Pros always have some cash}

2. This time is never different

3. Be patient and wait for the fat pitch  {Wait for your indicators to get to oversold levels-marry that with fundamentals and valuation analysis to find better values.}

4. Be contrarian

5. Risk is the permanent loss of capital, never a number

6. Be leery of leverage  {Leverage is usually the killer of not only investment portfolios but also often of businesses.  Remember whether it's a business loan, mortgage or margin interest, the house-meaning the bankers-always gets paid!}

7. Never invest in something you don’t understand.

Link:  Seven Laws

2 Year Anniversary

Three year weekly chart of the S&P 500 showing 2008's market collapse and our subsequent rally off of the lows printed two years ago. Since these lows we've seen guru's, pundits, print writers, speakers on CNBC, the financial press and many investors speaking out every time the market has paused or corrected.  Most of the time they proclaim that the end is nigh for stocks.  This time with the events in Libya and the spike in oil prices is no different. While each time these folks may have been at best right for a very short period of time. Investors who have sold out in each rally have left significant money on the table.

Think about this. During the past two years the market has shrugged off concerns among other things  government finances at every level, mounting national debts both here and overseas, an ongoing housing crisis, rising commodity prices with the subsequent threat of inflation, a General Motors bankruptcy, concerns about the financial industry, higher oil, health care reform, financial crisis in many small European countries, as well as the current unrest in the middle-east.

Why with all this gloom have stock prices continued to go up? I think for two reasons: 1) The economy has been improving for over a year on its own and 2) the Federal Government's commitment to do what it has to do {regardless of ultimate cost} in order to stimulate that same economy. At some point the stimulus will go away. That in my mind will actually be a good thing because it will come at a time when the economy is strong enough to stand on its own.

Right now markets are correcting by time {trading range} as concerns over the sudden rise in the price of oil are being factored in. So far there is scant evidence that what we are seeing at the pump is acting as a break on the economy. If that happens then stocks could give some of their gains back.

Guess what though! Stocks might sell off anyway in order to absorb the monster returns we've seen since last September. Nobody knows the answer to that. We've recently published our views as to where some of the tripwires are to both the downside and where we could break out from here. We've also chronicled how we've become a bit more defensive in the past few months.

Let me say though here that I think as long as this situation in the middle-east is contained and as long as no other unexpected event washes on the shores, than I think that any correction of time, correction of time or a correction of both will set up for a buy opportunity at some point later on. Stocks may ultimately go to sleep for some period of time. By that I mean they may just meander around in a 5-10% range for a while as the market digests these gains. That sort of basing correction could end tomorrow or it may go on for a longer period of time. Last year stocks topped out in April and basically went nowhere until the fall. In 1994 when the Federal Reserve started raising interest rates, stocks basically traded flat for a year. But when they took off they never looked back for the rest of the decade.

Based on what I currently see I think that ultimate resolution would be a move to the upside at some point albeit perhaps after a correction. All that money on the sidelines I think will want an excuse to come back into the market. In that regard I'll refer you back to the shortest research report ever written:  The guys printing the money want you to buy stocks!  Someday they won't care so much if you do.  But for now that's where they want your money to go.  Remember that.

*Long ETFs related to the S&P 500 in client and personal accounts.

Ash Wednesday

The picture says it all.

an tSionna {03.08.11}

You can double click on this chart to make it larger.

*Long ETFs related to the S&P 500 in client and personal accounts.

an tSionna {03.07.11} Oil

Chart of the Day looks today at oil.

"The decline in crude oil prices that began in mid-2008 was historic -- plunging over $90 per barrel in just eight months. Over the past two years, however, crude oil prices have increased by over $60 per barrel. Today's chart provides some perspective on the historic decline and recent spike with a long-term view of inflation-adjusted West Texas Intermediate Crude. Today's chart illustrates that most oil price spikes were a result of Middle East crises and often preceded or coincided with a US recession. It is also interesting to note that the recent spike in oil prices has brought the price of oil back to a historically high level -- a level that was surpassed only briefly during the tail-end of the major price spikes of 1980 and 2008."

Comment:  I said in the past that I believe that oil is headed higher over the next few years.  Think about this.  During the long economic boom of the 1980's and 1990's oil traded in a roughly 20 dollar range between $25 and $45.  At one point oil even dipped below $20.  During the mostly flattish economic growth 2000's  {at least in the US} oil prices shot through the sky.  This was largely due to increased world demand as economies over seas did much better than we did here.  Thad demand, while having slackened during the current economic downturn, has not gone away.

During one of the worst worldwide recessions we've seen since the Great Depression the price of oil only briefly went below $40 a barrell, has traded most of the time above $60 and has averaged at a higher rate than it ever saw during the 1990's long boom.  So as the world gets back on its economic track it stands to reason that it has to move higher.

My take is that oil becomes a political problem here when it cracks the $5.00 a gallon level.  My guess is that we don't see that this year but could get there in a couple of summers.

As for me instead of buying a third car last year {too many drivers around here now} I bought this instead for most of my shorter trips.  It gets almost 70 miles to the gallon.

*Long energy ETFs in certain client accounts.  Long leveraged oil ETFs in certain client accounts.

Link:  Chart of the Day: Oil

an tSionna {03.03.11} A Correction of Both Price & Time?

*Long ETFs related to the S&P 500 in both client and personal accounts.

Out Today

I am out visiting clients today so there will be no posting.

Take Advantage Of These Before They Go Away

New York Times Article on Tax Breaks.  {Excerpt with my highlights}

Part of what lies at the heart of the heated debate in state capitals and Washington over the last couple of weeks is a legitimate concern about a pretty simple question: have governments made too many promises about what they should provide without collecting enough money to fulfill them all?

Joseph Hurley, founder of a Web site that offers information about college savings plans, says state tax deductions for educational savings amount to “free money” for higher-income families.  The discussion of this question often leads to a look at income tax rates. Not enough of it, however, focuses on income tax breaks....

....At the federal level, the money from 529 savings accounts can come out tax-free as long as they are used for education expenses. Then there’s the $5,000 or $10,000 you might have managed to shield from the tax man in health care, dependent care and commuter accounts, if you’re lucky enough to work for an employer that offers them. And if President Obama gets his way, the income tax deduction for mortgage interest and charitable contributions for people in the highest tax brackets may get smaller.....

.....Take those 529 plans, for example, because the tax breaks exist on the federal level and in many states......Federal taxes on the growth in money that people deposited into these accounts were simply deferred at first; years later, the rules changed and families suddenly did not have to pay any taxes on the gains as long as they used the money for qualified educational expenses.....

As of June 30, 2010, 529 plans contained about $135 billion, according to the College Savings Plans Network, with just $21 billion or so in prepaid plans. And according to the Joint Committee on Taxation, which took a careful look at the plans when it last addressed the rules governing them in 2006, the federal tax waiver on the gains was going to cause a nearly $1 billion annual hit to the federal budget by the middle of this decade. That number may end up being lower because of the roller-coaster stock market of the last four years. But the amazing thing about 529 accounts is that they often offer tax benefits on the way in as well as on the way out.

How does this work? As of today, most of the states that levy an income tax offer a deduction or credit of varying size to families when they make deposits in their own state’s (and sometimes any state’s) 529 plan. While the deduction generally has an annual dollar cap, you can almost always take advantage of it no matter how much money you make.....

...The more you make — or the more a kind grandparent has given to you for your child — the more you can save. That means more opportunities to max out the state tax deductions. Moreover, wealthier people who can save more money earlier in their children’s lives benefit from the compounding of earnings over 15 or 20 years before tuition bills come due. (And by the way, the 15 percent capital gains rate they don’t have to pay upon withdrawal today will probably be higher before too long.)....

.....This is just one front in the larger battle, though. There has already been plenty of discussion about the possibility of reducing the amount of deductions that higher-income people can claim for charitable contributions and mortgage interest. This is where many of the big budget opportunities lie. In fact, the changes are already coming. One new one is in health care flexible spending accounts, where people can set aside money free of income taxes to pay for expenses that insurance does not. Starting in 2013, you’ll only be able to put $2,500 in those accounts each year. This will hurt middle-class people with chronic conditions; an income cap on who could participate would have made the change more progressive.

But at least this is one sign that legislators are taking government debt seriously. And until more changes arrive, I’d take advantage of every last break and max it out if you’re affluent enough to do so. Because pretty soon, many of them may no longer be available to you.

Link:   Tax Breaks to Take Before They Go.