Trading strategies around earning announcements- from Damodaran
IMF looks for Chinese GDP growth to moderate into an 8% rate
PBOC lets Yuan drop against the dollar
The Fed may move sooner rather than later... is the article this go around's Jackson Hole speech?
A few days old and probably already digested but it is still good to look at... Fed President Williams suggests and open ended, MBS focused QE3..... or is this
Some interesting thoughts on QE3
Refis continue to run strong... for those that can get them.... will MBS purchases help
Legendary investor Jim Rogers on Stock, bonds, commodities, and other investments
Biderman at TrimTabs is 100% bearish on stocks
The NOAA predicts that above normal temperatures will persist for most of the country in August..... more energy production, higher gas/coal burn rates, and further drought conditions.
Mind Hack- how your brain short circuits your goals
Feel like you are a fake?
Make Friends not contacts.
Proper running technique in 30 seconds
Wednesday, July 25, 2012
Traders edge 7/25/12- Coal and Watch the $132 level on the SPY
Futures are mixed this morning with the Dow Jones and S&P 500 futures pointing to a higher open while the NASDAQ futures, dragged down by Apple's less-than-expected results, point lower. Although we are insulated, to a degree, from negative market moves, our portfolios were hurt by the poor results in coal stocks. This follows Peabody Energy's (ticker BTU) second quarter earnings announcement. BTU's second quarter earnings were ahead of estimates, but third quarter guidance was light. It is our opinion the BTU's management have historically been conservative in their guidance, probably more so now considering the current operating environment.
If you can take the volatility, we would take the contrary position and continue to add to coal stocks, which we have been doing to own sort-term detriment. That said, we are long-term investors and our thesis is that many of the problems faced by the industry are short-term and are being exacerbated by transitory events, namely the weather. Unlike other industries, the weather can have an out-sized effect on coal demand and thus coal stocks. Our analysis shows that weather can affect coal demand by up to 50% of total demand. This should be taken into context that the warm winter last year put significant pressure on utilities' coal burn rates and helped create the back-up in coal supplies we currently witness. That said, the one thing you can expect concerning weather is that it will change.
The situation in the natural gas market did not help matters either, as the warm winter dragged down energy demand. In addition, natural gas supplies ramped up with increased shale gas drilling. We continue to see natural gas storage levels that remain higher than the five-year average as the industry works through the high storage levels. That said, we think these levels will normalize as the year progresses. First off, increased natural gas burn rates from both increased market share and an overall increase in energy demand, a result of hot summer temperatures, will reduce natural gas supplies. In addition, a decrease in natural gas rigs and lower capital spending by gas drillers show that the industry is rationalizing its operations. The market also seems to be anticipating a more rationalized market in natural gas, as the price per Mbtu is approaching $3.20.
Longer-term, we remain positive on coal stocks. For one, the group appears in a buy-range on our long-term technical indicator, shown below.
The above chart shows the average price for coal stocks since 2003. (Note- we would typically use the coal ETF- ticker KOL- to represent the group but KOL has a short trading history and cannot be used appropriately in this context), and a low indicator suggests a buying opportunity. More short-term, we are also seeing positive divergences in the RSI, MACD, and stochastic versus the price chart of the KOL ETF.
Fundamentally, we think that a continued build out of infrastructure in the developing world will lead to increased coal demand. In addition, we see India and China being large drivers of the marginal demand, as both countries coal supplies are inferior to higher quality supplies elsewhere and both lack the infrastructure to mine enough coal to meet demand, especially India. We also see the beginning of natural gas exportation, estimated to begin in 2015, as being a positive long-term catalyst for coal demand in the U.S. Right now, natural gas supplies are essentially locked in to the country, thus creating a large discrepancy between U.S. based natural gas prices and world prices.
It is also our belief that many investors do not understand the dynamics of shale gas or fracking and equate these processes to conventional gas rigs. They forget that fracking is higher cost relative to conventional gas drilling and that the production schedules for fracking wells peak two or three years after the production begins, again adding to production costs.
Finally two items of note. First, coal stocks generally react positively to inflation expectations, as one would expect being leveraged to price fluctuation in a traded commodity. It is our belief that an increase in monetary supply and subsequent gain in inflation expectations would have an out-sized positive effect on coal stocks. Lastly, higher quality coal supplies are dwindling world-wide. In fact, the U.S. coal supplies have already passed peak energy content some years ago. We think that as the availability of higher quality coals diminish, the price of the commodity will react positively.
One quick market update, we think investors should watch around the $132 level on the SPY. This appears to be an important swing point and that a lot of information on the future direction of the market will be released at this price level.
If you can take the volatility, we would take the contrary position and continue to add to coal stocks, which we have been doing to own sort-term detriment. That said, we are long-term investors and our thesis is that many of the problems faced by the industry are short-term and are being exacerbated by transitory events, namely the weather. Unlike other industries, the weather can have an out-sized effect on coal demand and thus coal stocks. Our analysis shows that weather can affect coal demand by up to 50% of total demand. This should be taken into context that the warm winter last year put significant pressure on utilities' coal burn rates and helped create the back-up in coal supplies we currently witness. That said, the one thing you can expect concerning weather is that it will change.
The situation in the natural gas market did not help matters either, as the warm winter dragged down energy demand. In addition, natural gas supplies ramped up with increased shale gas drilling. We continue to see natural gas storage levels that remain higher than the five-year average as the industry works through the high storage levels. That said, we think these levels will normalize as the year progresses. First off, increased natural gas burn rates from both increased market share and an overall increase in energy demand, a result of hot summer temperatures, will reduce natural gas supplies. In addition, a decrease in natural gas rigs and lower capital spending by gas drillers show that the industry is rationalizing its operations. The market also seems to be anticipating a more rationalized market in natural gas, as the price per Mbtu is approaching $3.20.
Longer-term, we remain positive on coal stocks. For one, the group appears in a buy-range on our long-term technical indicator, shown below.
Fundamentally, we think that a continued build out of infrastructure in the developing world will lead to increased coal demand. In addition, we see India and China being large drivers of the marginal demand, as both countries coal supplies are inferior to higher quality supplies elsewhere and both lack the infrastructure to mine enough coal to meet demand, especially India. We also see the beginning of natural gas exportation, estimated to begin in 2015, as being a positive long-term catalyst for coal demand in the U.S. Right now, natural gas supplies are essentially locked in to the country, thus creating a large discrepancy between U.S. based natural gas prices and world prices.
It is also our belief that many investors do not understand the dynamics of shale gas or fracking and equate these processes to conventional gas rigs. They forget that fracking is higher cost relative to conventional gas drilling and that the production schedules for fracking wells peak two or three years after the production begins, again adding to production costs.
Finally two items of note. First, coal stocks generally react positively to inflation expectations, as one would expect being leveraged to price fluctuation in a traded commodity. It is our belief that an increase in monetary supply and subsequent gain in inflation expectations would have an out-sized positive effect on coal stocks. Lastly, higher quality coal supplies are dwindling world-wide. In fact, the U.S. coal supplies have already passed peak energy content some years ago. We think that as the availability of higher quality coals diminish, the price of the commodity will react positively.
One quick market update, we think investors should watch around the $132 level on the SPY. This appears to be an important swing point and that a lot of information on the future direction of the market will be released at this price level.
Tuesday, July 24, 2012
The abbreviated "What we are reading today 7-24-12" or Housing is at a bottom
We got bogged in a number of items today, including earnings and the steep sell of of coal names, and our links post is abbreviated today.
Chinese flash PMI improved but still below the 50 level indicating growth
More here
Why you are just unlucky and other are careless
U.S. housing is recovering according to Zillow
We think the Zillow report suggesting that U.S. housing is recovering is very important. It has been our contention that U.S. housing is in a bottoming process. For instance, look at the chart of the Dow Jone U.S. Select Home Construction Index.
The above chart shows that housing construction stocks have been discounting a bottom in the market since around the end of 2011. The group continues to outperform in 2012 and is refuses to correct to any great degree in spite of general market uncertainty.
More importantly, we think the below chart from CSFB really describes a large reason why the housing market is recovering.
This is an older chart showing CSFB's estimates of the wave of mortgage resets that were to occur over the period from 2007 through 2016. What is obvious is that the large wave of mortgage resets are behind us. We believe that this implies that, despite a large shadow inventory and too many foreclosures, at the margin, the number of homes that will be forced upon the market and sold at discount prices will wane- if not falling already. A reduction in the number of homes being forced on the market reduces the pressure on home pricing.
One of the most important indicators, in our opinion, is the discrepancy between what one could get in rent payments for a particular housing unit vs. the expected mortgage on the same or similar properties. In many areas of the country (and we have to admit that we have not done an exhaustive search but it appears to hold for most of the regions we looked at) rental prices are above estimated mortgage costs, thus making these properties cash flow positive from an investor's point off view. In fact, we have read many articles in the last few months that state hedge funds and other investors are buying properties to get the rental income. This creates a natural floor under housing.
We think these are important signs that housing is in a bottoming process. However, this is not to say that there is only blue skies from here on out. Many structural issues remain. For one, economic volatility due to systematic leverage will likely make the ebb and flow of the housing recovery uneven. Another important point to remember is that there is likely a large pool of potential housing inventory. Both the actual housing inventory and the talked about shadow inventory levels are what we describe as the kinetic or near-kinetic, or more active, inventory. Potential inventory levels are a nebulous concept but is largely made up of those home owners that have tried to sell or would like to sell their homes but are unable to due to market conditions. Any substantial rise in housing prices may result in the potential inventory becoming kinetic, thus increasing the supply of homes and putting a ceiling on the rise in home prices.
Chinese flash PMI improved but still below the 50 level indicating growth
More here
Why you are just unlucky and other are careless
U.S. housing is recovering according to Zillow
We think the Zillow report suggesting that U.S. housing is recovering is very important. It has been our contention that U.S. housing is in a bottoming process. For instance, look at the chart of the Dow Jone U.S. Select Home Construction Index.
The above chart shows that housing construction stocks have been discounting a bottom in the market since around the end of 2011. The group continues to outperform in 2012 and is refuses to correct to any great degree in spite of general market uncertainty.
More importantly, we think the below chart from CSFB really describes a large reason why the housing market is recovering.
One of the most important indicators, in our opinion, is the discrepancy between what one could get in rent payments for a particular housing unit vs. the expected mortgage on the same or similar properties. In many areas of the country (and we have to admit that we have not done an exhaustive search but it appears to hold for most of the regions we looked at) rental prices are above estimated mortgage costs, thus making these properties cash flow positive from an investor's point off view. In fact, we have read many articles in the last few months that state hedge funds and other investors are buying properties to get the rental income. This creates a natural floor under housing.
We think these are important signs that housing is in a bottoming process. However, this is not to say that there is only blue skies from here on out. Many structural issues remain. For one, economic volatility due to systematic leverage will likely make the ebb and flow of the housing recovery uneven. Another important point to remember is that there is likely a large pool of potential housing inventory. Both the actual housing inventory and the talked about shadow inventory levels are what we describe as the kinetic or near-kinetic, or more active, inventory. Potential inventory levels are a nebulous concept but is largely made up of those home owners that have tried to sell or would like to sell their homes but are unable to due to market conditions. Any substantial rise in housing prices may result in the potential inventory becoming kinetic, thus increasing the supply of homes and putting a ceiling on the rise in home prices.
Traders Edge 7-24-12- all that glitters
The S&P 500 took a drubbing (down more than 12 points or nearly 90 points) and so did our portfolios, due to our exposure to gold stocks. Precious metal stocks took a beating, as the Phily Gold/Silver Silver sector (ticker XAU) fell more than 2.7%. We expect the volatility in the precious metals and precious metals stocks to continue. However, we also think that silver and gold are tracing out a bottom.
The charts above are for the Spider Gold Trust (ticker GLD) and the Ishares Silver Trust (ticker SLV). What we see in the price action for both, since the beginning of May, is investor indecision following the profit taking that began in February. Although we are unsure of the timing, we think that Federal Reserve and other central banks in the developing world will embark on further monetary easing actions, culminating in money printing to pay down sovereign debts and the debasement of all fiat currencies. This would be a positive catalyst for the price of gold.
Looking at gold stocks, we updated our analysis of the of the price of the XAU index vs. the standard deviation of the gold prices relative to money supply.
Superior long-term entry points in gold stocks occur when the standard deviation of gold prices relative to money supply is less than -1 and improve with lower observed standard deviations. For instance, the average one year, buy-n-hold performance in the XAU since the end of 1980 is about 14.6%. This compares to an average one year return of 31.2% when an observed standard deviation is less than negative one. As for periods following a standard deviation less than negative two, the average one year return on the XAU is 37.3%, almost 2400 basis points better than the base case. The current standard deviation of gold prices relative to money supply is -1.3 and we think investors would benefit from building positions in gold stocks.
Looking at gold stocks, we updated our analysis of the of the price of the XAU index vs. the standard deviation of the gold prices relative to money supply.
Monday, July 23, 2012
What we are reading and watching...
Will Karzai step down to take up head of mining... Rupert Murdoch seems to think so.
Dealer inventories in the bond markets are shrinking, pushing up prices. Is this a result of monetary policy.
The Euro short trade may be getting crowded....
..... Ditto for the QE3 trade
The effects of high food prices may creep into inflation at a faster rate.... look to Brazil
Despite the growing anxiety towards global growth, the Aussie dollar has been rising
In addition, labor conditions in China remain fairly tight
Miles driven by U.S. drivers increased in May, but trend still is down
The downside of Chinese debt deleveraging
Interesting concept, having stage fright is selfish.
Dealer inventories in the bond markets are shrinking, pushing up prices. Is this a result of monetary policy.
The Euro short trade may be getting crowded....
..... Ditto for the QE3 trade
The effects of high food prices may creep into inflation at a faster rate.... look to Brazil
Despite the growing anxiety towards global growth, the Aussie dollar has been rising
In addition, labor conditions in China remain fairly tight
Miles driven by U.S. drivers increased in May, but trend still is down
The downside of Chinese debt deleveraging
Interesting concept, having stage fright is selfish.
Traders Journal 7-23-12- Risk Off
The U.S. markets are set to get, in the words of a friend, crushed. The futures markets are pointing to a triple digit decline on the Dow Jones Industrial Average and a fall of more than 1% on the S&P 500, at the open. This follows world markets that are sharply lower. In Europe, the best performing index is the Swiss market, down more than 1% as of this writing. Both the Spanish and Italian equity markets are getting, well crushed. The IBEX 35 is sporting a decline a 3.8% while the FTSE MIB index has fallen a whopping 4.2%.
The above charts show the Ishares ETF's for both Italy (Ticker EWI) and Spain (ticker EWP), respectively, as of last Friday's close. However unlikely, we shall see if both can hold near supports levels. If the supports levels do not hold, there is no historic downside support for the EWI, swing point around $18 or $19 on the EWP. Provided that the Spanish and Italy equity indexes will continue ti move in tandem, our shot-in-the-dark guess where the EWI could find support is around the $8.5 level.
The culprit in today's decline appears to be the a negative shift in investor sentiment, as the risk-off trade is most definitely on. Yields on the Spanish 10-year bond are well over the 7% level and are trading up more than 20 basis points to nearly 7.5%. The Italian 10-year paper is trading up a similar amount (up 18 basis points) and is yielding 6.3%.
In contrast, the risk-off trade again appears to be pushing traders into U.S.-based assets. The yield on the 10-year treasury is trading at all-time lows of 1.41%, a five-basis point decline in yields. One would think that the dollar-index would benefit from this, and you would be right. The UUP (the Powershares dolalr bull index) caught a bid last Friday and traded up 70 basis points. The gains appear set to continue, and the UUP is up slightly in the pre-open, trading around $23. The $23 level looks to be an important inflection point on the UUP, and should be watched carefully for how traders react around this level.
On Friday, we further reduced our long market exposure and moved some positions into cash. It continues to be our belief that the equity markets will see correction of uncertain magnitude. We laid out our case in a previous post here- http://tradingjournalstockjunky.blogspot.com/2012/07/traders-edge-7-20-12-down-she-goes.html
The above charts show the Ishares ETF's for both Italy (Ticker EWI) and Spain (ticker EWP), respectively, as of last Friday's close. However unlikely, we shall see if both can hold near supports levels. If the supports levels do not hold, there is no historic downside support for the EWI, swing point around $18 or $19 on the EWP. Provided that the Spanish and Italy equity indexes will continue ti move in tandem, our shot-in-the-dark guess where the EWI could find support is around the $8.5 level.
The culprit in today's decline appears to be the a negative shift in investor sentiment, as the risk-off trade is most definitely on. Yields on the Spanish 10-year bond are well over the 7% level and are trading up more than 20 basis points to nearly 7.5%. The Italian 10-year paper is trading up a similar amount (up 18 basis points) and is yielding 6.3%.
In contrast, the risk-off trade again appears to be pushing traders into U.S.-based assets. The yield on the 10-year treasury is trading at all-time lows of 1.41%, a five-basis point decline in yields. One would think that the dollar-index would benefit from this, and you would be right. The UUP (the Powershares dolalr bull index) caught a bid last Friday and traded up 70 basis points. The gains appear set to continue, and the UUP is up slightly in the pre-open, trading around $23. The $23 level looks to be an important inflection point on the UUP, and should be watched carefully for how traders react around this level.
On Friday, we further reduced our long market exposure and moved some positions into cash. It continues to be our belief that the equity markets will see correction of uncertain magnitude. We laid out our case in a previous post here- http://tradingjournalstockjunky.blogspot.com/2012/07/traders-edge-7-20-12-down-she-goes.html
Sunday, July 22, 2012
Sunday Links
Chinese financial system is about to change....
http://www.ft.com/intl/cms/s/0/66f2a4b4-d17f-11e1-bb82-00144feabdc0.html?ftcamp=published_links%2Frss%2Fmarkets%2Ffeed%2F%2Fproduct#axzz214Uj37ys
....and the Chinese are talking about an interbank gold trading platform
http://www.ft.com/intl/cms/s/0/9d707c16-d191-11e1-bb82-00144feabdc0.html?ftcamp=published_links%2Frss%2Fworld_asia-pacific_china%2Ffeed%2F%2Fproduct#axzz214Uj37ys
Jobless claims rise- a few more of these (directionally) and the odds of QE will rise
http://www.reuters.com/article/2012/07/19/us-jobless-idUSBRE86I0NI20120719?feedType=RSS&feedName=topNews&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+reuters%2FtopNews+%28News+%2F+US+%2F+Top+News%29&utm_content=Google+Reader
M&A to pick up- this is a positive, if it comes to pass
http://www.cnbc.com/id/48226740
http://blogs.wsj.com/privateequity/2012/07/18/data-buffet-after-slow-1h-pwc-expects-ma-may-actually-start-happening-in-2h/
Spanish yields/spreads rise- will anything save Europe?
http://soberlook.com/2012/07/spanish-spreads-hit-record.html
Nickel market in oversupply- could mean that the steel end market is slowing.
http://www.commodityonline.com/news/global-nickel-market-in-surplus-of-27000-tons-during-jan-may-insg-49305-3-49306.html
The Algos affects in the markets
http://www.thetrader.se/2012/07/20/algomania-is-back/
Be more creative, effectively
http://lifehacker.com/5927434/when-doing-creative-work-be-sure-youre-bringing-the-right-side-of-yourself-to-the-table
Pitch any idea in 15 seconds
http://lifehacker.com/5927672/pitch-any-idea-in-15-seconds
Creative Ideas born of rich networks
http://www.bakadesuyo.com/does-networking-make-you-more-creative?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+bakadesuyo+%28Barking+up+the+wrong+tree%29&utm_content=Google+Reader
http://www.ft.com/intl/cms/s/0/66f2a4b4-d17f-11e1-bb82-00144feabdc0.html?ftcamp=published_links%2Frss%2Fmarkets%2Ffeed%2F%2Fproduct#axzz214Uj37ys
....and the Chinese are talking about an interbank gold trading platform
http://www.ft.com/intl/cms/s/0/9d707c16-d191-11e1-bb82-00144feabdc0.html?ftcamp=published_links%2Frss%2Fworld_asia-pacific_china%2Ffeed%2F%2Fproduct#axzz214Uj37ys
Jobless claims rise- a few more of these (directionally) and the odds of QE will rise
http://www.reuters.com/article/2012/07/19/us-jobless-idUSBRE86I0NI20120719?feedType=RSS&feedName=topNews&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+reuters%2FtopNews+%28News+%2F+US+%2F+Top+News%29&utm_content=Google+Reader
M&A to pick up- this is a positive, if it comes to pass
http://www.cnbc.com/id/48226740
http://blogs.wsj.com/privateequity/2012/07/18/data-buffet-after-slow-1h-pwc-expects-ma-may-actually-start-happening-in-2h/
Spanish yields/spreads rise- will anything save Europe?
http://soberlook.com/2012/07/spanish-spreads-hit-record.html
Nickel market in oversupply- could mean that the steel end market is slowing.
http://www.commodityonline.com/news/global-nickel-market-in-surplus-of-27000-tons-during-jan-may-insg-49305-3-49306.html
The Algos affects in the markets
http://www.thetrader.se/2012/07/20/algomania-is-back/
Be more creative, effectively
http://lifehacker.com/5927434/when-doing-creative-work-be-sure-youre-bringing-the-right-side-of-yourself-to-the-table
Pitch any idea in 15 seconds
http://lifehacker.com/5927672/pitch-any-idea-in-15-seconds
Creative Ideas born of rich networks
http://www.bakadesuyo.com/does-networking-make-you-more-creative?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+bakadesuyo+%28Barking+up+the+wrong+tree%29&utm_content=Google+Reader
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