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Archive for July, 2008|Monthly archive page

BLACK SWAN, COMMODITIES FALL, ENERGY STOCKS DROP, DOW THEORY SELL SIGNAL STILL VALID

In dow theory, OIL on July 25, 2008 at 5:45 pm
BLACK SWAN…. Naseem Taleb’s new book is entitled “Black Swans”. It depicts the role of chance in life and in the financial markets. Last week the SEC changed the rules on “naked shorting”. This has been one of Wall Street’s dirty little secrets for years, now illuminated by the SEC’s revelations. This was an arrow aimed squarely at the short-sellers of the bank stocks in the US. These people would sell the shares of the banks without owning them, hoping to buy them back at lower prices and thus reap a profit. The SEC essentially dropped a “match” on a very over-sold “gasoline” type situation. The result was the US Financial sector rose 13% by the close of the market on Thursday — a Black Swan. Rarely seen, this event was a 11 standard deviation event. To put this in perspective, a four standard deviation event is supposed to happen once every 31,000 years. (On a bigger scale this is exactly why I have a problem with Modern Portfolio Theory and CAPM….but that is for another day). Major turns in the market are normally marked by such events. I am not turning bullish completely on US bank stocks, however, my bullish antennae are raised.

COMMODITY PRICES FALL… DB Commodities Tracking Index (DBC) which represents a basket of commodities (including crude oil, heating oil, gold, aluminum, corn, and wheat). Chart 2 shows it having broken its 50-day moving average. Another reader asked if the downturn included agricultural markets. Chart 3 shows the DB Agricultural ETF (DBA) already threatening its 200-day average after failing a retest of its March high. Better weather conditions in the Midwest have caused profit-taking in grain markets [DBA includes corn, wheat, soybeans, and sugar].

Chart 2

Chart 3

ENERGY STOCKS DECLINE… As I wrote in my June 4th and June 17th Market Letters, oil prices and energy stocks were due for a pullback. The momentum indicators flashed SELL a the new high in oil, as they did not follow suit. Support should come in around this level at the 200d Moving Average. Moreover, even if oil prices drop to $100 and gas drops to $8, this level represents good value. One stock of note is Petrobank Energy and Resources. At $93 oil, the company will cash flow $640M next year on it’s Bakken property alone. The stock has become a darling of the mutual fund arena and is severely oversold. A bounce back to $50 is not out of the question.

Chart 4

DOW THEORY SELL SIGNAL IS STILL VALID… According to Dow Theory, the Dow Industrials and Dow Transports can give buy and sell signals if they act in unison. Recall I’ve equated this to watching the tide on two shores of the same body of water. Chart 5 shows how the Transports stubbornly refused to make a new lower low when the Industrials broke down from their May high and made a new low.

Chart 5

The Dow subsequently moved to new lows for the year and the Dow Theory sell signal remains in place. The Dow Transports must move above its June 2008 high and the Dow Industrials must move above its May 2008 high to trigger a Dow Theory buy signal.

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STANDING ON THE SHOULDERS OF GIANTS, GOLD RISING AS US$ FALLS, US STOCKS HAVE WORST JUNE SINCE DEPRESSION

In Uncategorized on July 3, 2008 at 6:01 pm

Bill Clinton said that a good president must have a “synthesizing intelligence”. I take this to mean that he has to have to wisdom to listen to all of his aides and advisors and then distill this information into a usable form. I think a good stock market analyst must have the same skill. Most of my clients would not know or care that Canada’s GDP shrunk by 0.3 per cent in the first quarter. Nor would you know or care that our chief economist changed some forecast by a tenth of a per cent. What you are most concerned about is “where do I put my money”. For the answer to that, we must turn to the markets:

I’ve been writing for weeks that the Dow Jones Industrial Average is in a primary bear market. The Dow Transportation average made a new high on June 5th that was not confirmed by the Industrials. The Industrials make the stuff we use and the Transports get it to us. If they don’t move in concert, the

economy is out of whack and caution is urged. Right now is one such time.


Let’s take a look at what some of the most famous Dow Theorists have had to say on this topic:

Robert Rhea – “The most useful part of the Dow theory, and the part that must never be forgotten for even a day, is the fact that no price movement is worthy of consideration unless the movement is confirmed by both averages.”

Robert Rhea – “When the averages disagree they are shouting ‘be careful’.”

William Peter Hamilton – “When one breaks through an old low level without the other, or when one establishes a new high for the short swing, unsupported, the inference is almost invariably deceptive.”

SCG COMMENT: I gave Robert Rhea top billing here because he is the man who has done the most work advancing Charles Dow’s 106 year old theory. The bottom line is that caution is still warranted with respect to US Stocks.

GOLD RISING, AS IS THE EURO… The European central bank raised interest rates Thursday. This is good for the EURO and bad for the US dollar. John Murphy had an interesting thought this week: “the ECB is raising rates to combat rising fuel and food costs, which pushes the Euro higher and the dollar lower, which pushes fuel and food costs higher”. The point is that the strategy is not likely to work until the US Fed decides to raise rates. All of this is good for gold, which is shown below breaking out to new short-term highs:


STOCKS HAVE WORST JUNE SINCE DEPRESSION… You may have heard me use the refrain “In a bear market, everyone loses, and the winner is the one who loses the least.” That has never been more evident than in the last few weeks. Europe’s largest economy, Germany (DAX) is off slightly more than 20% this year. France is down 22%. The Euro Stoxx 50, a gauge for the 15-nation euro zone, has declined about 24%. How about those “hot” emerging markets? The Hang Seng in Hong Kong is down nearly 21%. The Shanghai Composite has lost nearly half its US value. The Indian Bombay index is down 38%. Our conservative strategy does not shoot the lights out when things are hot (which is why your account does not hit a new high simply because the TSX is at a new high). However, when things get bad, we tend to outperform the losers. This enables you to “sleep at night”.

Here’s how some of the best minds in the investment business have done so far this year:

All data is as of June 27, 2008:

Manager…………………. 6-months ……………….. 12-months

Marty Whitman ……….. ( – 43.38% ) ………………( – 34.61% )

Mohnish Pabrai ………… (- 41.20% ) ………………( – 36.88% )

Bill Miller ……………… ( – 37.05% ) ……………… ( – 40.90% )

Joel Greenblatt ………… ( – 37.00% ) ……………… ( – 37.00% )

Eddie Lampert ………… ( – 28.95% ) ……………… ( -33.94% )

Robert Bruce ………….. ( – 25.00% ) ………………. ( – 19.16% )

Bruce Sherman ………… ( – 24.68% ) ……………… ( – 30.55% )

Charles Brandes ……….. ( – 24.58% ) ……………… ( – 29.51% )

Robert Rodriguez ……… ( – 22.20% ) ……………… ( – 17.75% )

Mark Hillman ………….. ( – 21.53% ) ……………… ( – 25.40% )

Carl Icahn ……………… ( -21.00% ) ………………. ( – 3.98%)

Edward Owens ………… ( -20.94% ) ………………. ( – 16.74%)

Irving Kahn ……………. ( – 20.75% ) ………………. ( – 24.68% )

Brian Rodgers …………. ( -20.48% ) ……………….. ( – 24.68% )

Arnold Schneider ……… ( -20.39% ) ……………….. ( – 27.25% )

Bill Ackman …………… ( – 19.38% ) ………………. ( – 23.06% )

Chris Davis ……………. ( – 19.17% ) ………………. ( – 19.75%)

Bill Nygren ……………. ( – 17.80% ) ………………. ( – 27.96% )

Richard Snow …………. ( – 17.68% ) ………………. ( – 19.77% )

Hotchkis & Wiley …….. ( – 17.28% ) ………………. ( – 25.02% )

Richard Pzena ………… ( – 16.27% ) ………………. ( – 25.22% )

David Dreman ………… ( – 15.82% ) ……………… ( – 11.87% )

Tweedy Browne ………. ( -14.73% ) ………………. ( – 17.23% )

Arnold Van Den Berg … ( – 14.67% ) ……………… ( – 22.32% )

Robert Olstein ………… ( – 14.46% ) ……………… ( – 21.05% )

Wally Weitz …………… ( – 14.31% ) ……………… ( – 23.00% )

Third Ave. Mgt. ………. ( – 13.84% ) ………………. ( – 11.83% )

John Rodgers …………. ( – 13.57% ) ………………. ( – 21.47% )

Mason Hawkins ………. ( – 13.51% ) ……………… ( – 20.88% )

Dodge and Cox ……….. ( – 13.17% ) ……………… ( – 15.01% )

Bruce Berkowitz ……… ( – 12.26% ) ……………… ( – 3.68% )

David Swensen ……….. ( – 12.19% ) ……………… ( – 12.23% )

Ron Baron …………….. ( – 11.70% ) ……………… ( – 12.80% )

Ian Cumming ………….. ( – 11.05% ) ……………… ( – 11.68% )

David Tepper ………….. ( – 10.68% ) ……………… ( – 14.87% )

Jean-Marie Eveillard ….. ( – 10.62% ) …………….… ( – 7.23% )

NWQ Managers ………. ( – 10.46% ) ………………. ( – 13.39% )

Ron Muhlenkamp …….. ( – 9.58% ) ………………… ( – 13.39%)

Glenn Greenberg ……… ( – 9.45% ) ………………… ( – 15.22% )

Michael Price …………. ( – 9.26% ) ………………… ( – 13.87% )

Tom Gayner ………….. ( – 9.19% ) …………………. ( – 17.50% )

Richard Aster ………… ( – 6.73% ) …………………. ( – 5.00% )

George Soros …………. ( – 6.56% ) ………………… ( – 9.43% )

Ruanne Cunniff ………. ( – 6.40% ) ………………… ( – 10.61% )

David Einhorn ………… ( – 5.91% ) ………………… + 3.18%

Chuck Akre …………… ( – 4.00% ) ………………… ( – 11.08% )

Warren Buffett ……….. ( – 4.00% ) …………………. ( – 3.60% )

SECTOR ROTATION MODEL … One of our clients asked where we are in the Sector Compound Growth Plan (SCG TOP 5). That model shows the normal sector rotation that takes place at various stages in the business cycle. The chart shows that basic materials and energy are market leaders at a market peak. As the economy starts to slow, money starts to rotate out of those two inflation-sensitive groups. Basic materials peak first and energy last. This week’s downturn in basic material stocks suggests that the topping process is moving even further along. Energy may be the next to roll over. As the economy slows, money flows into consumer staples, healthcare services, and utilities. That’s where we appear to be right now. One way we can tell that a bottom is near is when money starts to flow into financial and consumer discretionary stocks. So far, there’s no sign of that happening. That leaves us in the midst of a bear market with money flowing toward staples, healthcare, and utilities.