Timing & trends
Looking out to 2016, our hunch remains that the CDN$ could perform a counter-trend rally à la 1999 (Figure 2) and take the CDN$ back to PPP as global crude oil markets rebalance. That being said, long-term investors may not want to hedge their foreign currency exposure just yet. Figure 3 shows that the CDN$ is unlikely to reach a secular bottom until Canada’s current account turns into a surplus. We are years away from this turnaround.
Signs of The Times
“Emerging-market debt has grown $28 trillion since 2009.”
– Bloomberg, November 9.
“Goldman says U.S. Economic recovery has about 4 years before it ends.”
– Market Research, November 11.
“London homes valued at 5 million pounds or more fell 11.5% on a square foot basis from the third quarter of 2014.”
– Bloomberg, November 12.
“Barclay’s: Liquidity in credit markets remain challenging.”
– Bloomberg, November 12.
“Wall Street banks are struggling to sell billions of dollars of loans they made to finance the corporate buyout boom.”
– Bloomberg, November 13
Great Headlines.
Over the centuries the markets have provided some outstanding observations.
One of the great bubbles blew out in 1873 and in classic fashion crashed in the fall. At the worst of the crash, The Economist wrote:
“While the panic may be over, the results of the panic are not over.”
That post-bubble contraction prevailed from 1873 to 1895.
In 1986 Brian Marber, a London market commentator, observed:
“Life is a bear market, interrupted by progressively weaker rallies.”
On November 13th, Luke Bartholomew at Aberdeen Asset Management in Scotland observed:
“The real worry about liquidity is that it behaves like a bad friend – it is there when you don’t especially need it, but as soon as you do need it, it disappears.”
Great Contractions
The features of the lengthy post-bubble contractions include a firm senior currency and the US dollar has been in an uptrend since 2008. Another is generally weakening commodities and the big high was set in 2008. New lows have been set this week.
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Commodities
Despite radical central bank policies commodities have weakened. It seems that such recklessness no longer drives commodities, including precious metals, up. Our case has been that the problem is that most consider that “inflation” means only rising commodities and wages. The classic definition was that it meant an “inordinate expansion of credit”.
This works whether the action is in soaring financial assets or in tangible assets.
The point to be made is that the public, not policymakers choose the game. In the 1970s the “discovery” was that expanding money supply “caused” commodities to soar. This pushed up the rate of CPI inflation. Prior to that “inflation” was driven by the utter nonsense of “cost- push” or “wage-pull”.
Then as in 1921, the action shifted to the inflation of financial assets. It continues with the regular business cycle providing brief commodity rallies. The “super-cycle” for commodities remains a theory in search of the event.
However, there are the possibilities of seasonal trades. One was for copper declining into November () and crude oil into December ().
Copper has plunged from 2.96 in May (our last exit) to 2.07. The Daily RSI has plunged from overbought at 70 to very oversold at 19. There has been no headlines about the theft of copper wire for a couple of years.
Base metals (GYX) have plunged from 346 in May to 244. That was from very overbought to now very oversold.
Another “Rotation” is being set up. Once turned, the rally could run well into the first quarter.
Crude oil declined from 62.58 in May to 37.75 in the August hit. The rebound made it to 50.92 in October and the low has been 40.50 this week. A little more “down” could set up the rebound.
Grains (GKX) rallied out of the August-September pressures, but need to complete a significant test of the low.
Overall, commodities (DBC) set the last cyclical peak at 32 in 2011. The low with the August slam was 14.33 and the rebound made it to 15.86 in early October. The low has been yesterday’s 14.05.
The Daily RSI is down to 28 and it could get a little more oversold before we can look for the turn around.
The technical “model” we used in 2011 is attached.
Stock Markets
Poised seems to be the condition of the stock market. For what?
The rebound by the DJIA made it to 17797, which was beyond our high-side target of 17870. This was accomplished with momentum as well as a Sequential (9) Sell, which is pattern. On top of this the “VIX” model gave a warning.
Linking the S&P to a “real” series, we came across a chart and published it on November 5th. This was the Sales Tax Receipts, which turndown has occurred close to important stock market highs. It is one of those “thick line” bars that puts the top to an accuracy of a month or so. Looks like June was the peak and May recorded the high on the S&P.
The next key could be the slump in the retail sector, highlighted by the pre-opening 20 percent slump for retailer Nordstrom (JWN). That was on November 16. The overall retail index (XRT) fell from 47 to 42 in only 7 days, finding support at the August 24th low.
The high was 51 in April and taking out the 50-Week ma and then failing to get back above it sets the downtrend. Similar to the cyclical peak in 2007.
The retail sector topped in April and Sales Tax Receipts in June. These have now joined the extended slump in global commodities.
An update on the Broker-Dealers (XBD) notes that the high was 203 in the middle of July and the drop was to 161 on Black Monday and to 159 on October 2nd. The rebound was turned back by the 200-Day ma at 187. The next low was 178 on Monday and the bounce is testing the 200-Day from the underside.
Various technical conditions are precarious, Sales Taxes and the retail sector are weak, but markets are buoyant this week. Resources and materials can outperform into February.
Link to November 21 Bob Hoye interview on TalkDigitalNetwork.com
http://talkdigitalnetwork.com/2015/11/commodities-take-it-on-the-chin/
Listen to the Bob Hoye Podcast every Friday afternoon at TalkDigitalNetwork.com
BOB HOYE, INSTITUTIONAL ADVISORS
E-MAIL bhoye.institutionaladvisors@telus.net
WEBSITE: www.institutionaladvisors.com
1.2. Todd Market Forecast: “Last week was the best one this year”
3. Mid-East Change: Oil and Gold Rally Catalyst
- The case for gold ownership is not any weaker or stronger now, than it was a thousand years ago. Gold is the world’s ultimate asset, and that’s irrespective of whether the price is currently rising or falling.
- Currently, most commodity indexes are dominated by oil, and game-changing events in the mid-East region are poised to occur in 2016.
….continue reading 3 – 24 HERE
Nope it is not interest rates, nope it is not Donald Trump, it is!
It is the CRUDE OIL crash, simple!
Jim Willie has good comments in the first 40 min of this pod cast.
Energy company …
– Debt is blowing up (See energy element of HYG).
– Hedging at oil $100 is coming to an end.
– Iran coming back to the market, more supply.
– Saudi still providing massive supply.
– Oil tankers holding oil parked in the ocean are coming in to harbor to unload
– US dollar strength supports lower oil prices
– World wide DEMAND slump for energy or deflation.
– More oil being sold outside the US Dollar
– The Oil futures can not be manipulated easily as folks actually request and get delivery
What Does History Say About Weak Commodities And Bull Markets?
You have probably heard the following argument somewhere in recent weeks:
Weakness in commodities, especially copper, is telling us the global economy is weak and another horrible bear market in stocks is just around the corner.
The argument seems rational; commodity prices are falling because demand is weak, which is a reflection of economic weakness. That may be true, but the price of any commodity is determined by supply and demand. Therefore, if there is a supply glut in a commodity, prices can fall even in non-recessionary periods.
The other bearish argument is also rational:
Weakness in commodities, especially copper, is telling us the global economy is weak and commodity producers are in big trouble.
There are always two sides to every story. According to the Rubber Manufacturers Association, it takes approximately seven gallons of oil to produce a tire. Do you think falling oil prices are hurting tire manufacturers, such as Goodyear? When input costs fall, profit margins go up. Thus, while commodity producers are not happy about weak commodity prices, there are countless businesses that benefit when raw material prices drop.
What Does History Have To Say?
Our purpose here is not to say weakness in commodities is bullish for stocks, but rather to demonstrate with facts that weakness in commodities is not a showstopper for stocks. Said another way, is it possible for stocks to “kill it” for many years when commodity prices are dropping significantly? The chart below shows the S&P 500 gaining 68% during a period when the CRB Index dropped 32%. Was the economy in the gutter during the period when commodities dropped 32%? No, the average annual increase in GDP for 1984, 1985, and 1986 was 5.0%.
The CRB Index
The CRB Index is a basket of commodities comprised of the nineteen components listed in the table below.
1988-1993: Positive GDP And Gains In Stocks
During the period highlighted below (1988-1993), commodity prices dropped 28%. Over the same period, the S&P 500 gained 66%. The average annual increase in GDP for 1988, 1989, 1990, 1991, 1992, and 1993 was 2.7%.
1996-1999: Commodities Drop And Stocks Skyrocket
During the period highlighted below (1996-1999), commodity prices dropped 31%. Over the same period, the S&P 500 gained 118%. The average annual increase in GDP for 1996, 1997, 1998, 1999 was 4.4%.
How About Dr. Copper?
On Wall Street you often hear the term “Dr. Copper” and that “copper has a PhD in economics since weak copper prices mean the economy and stock markets are about to roll over into a period of recessionary/bear market misery.”
Dr. Copper is another myth. In fact, after the period below, Dr. Copper was stripped of his tenure and asked to clean out his desk. In the period shown (1985-1993) copper prices tanked 52%. Over the same period, the S&P 500 gained 63%. The average annual increase in GDP for 1989, 1990, 1991, 1992, 1993 was 2.4%.
Dr. Copper Didn’t Win A Nobel Prize
In the period shown below (1995-1999) copper prices plummeted 58%. Over the same period, the S&P 500 gained 183%. The average annual increase in GDP for 1995, 1996, 1997, 1998, and 1999 was 4.0%, rather than the economic contraction forecasted by the “nutty professor” Dr. Copper.
How Long Can Stocks And Copper Move In Opposite Directions?
If you were told from date A to date B copper prices dropped 59% and you subscribed to Dr. Copper’s stock market newsletter, you would have expected the S&P 500 to have a rough time. In the ten-year period below, copper dropped 59% from point to point; over the same period the S&P 500 gained an eye-popping 351%.
A Singular Takeaway
The purpose of this analysis is not to compare any of the periods shown to 2015, nor is it meant to make any commentary on 2015 (bullish or bearish). This analysis helps us answer one question and one question only:
Is it possible for the S&P 500 to post significant gains over a number of years during a period of weakness in copper and/or the CRB Index?
The answer, based on the facts above, is an indisputable and undebatable “yes, it is very possible for stocks to do very well when commodities are weak.” You may argue, “but 2015 is different!”. That argument applies to every historical reference made in the history of mankind regarding the economy and markets. Yes, today is different. That is not a new concept. Today is always different.
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