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Posts Tagged ‘bull markets’

0 Aug 5 2010 @ 10:58am by Matt Smith in Capital Markets, Economy, risk management

The Sunny Side of the Street

I am a sucker for Satchmo, so presently we are going to take a walk on the sunny side of the street. Mixed economic data has made it easy to fret about the validity of a global recovery since we exited ‘the great recession’ last year, even though market behavior has indicated there is nothing to worry about (Treasury Secretary Tim Geithner says there still isn’t).

However, now that skepticism is growing that we may double dip (go to Google insights here to see its growing popularity), I find the contrarian in me wanting to look out in the great wide open to find some indicators that illustrate a positive picture. And trust me, it’s not that easy to do. However, here is what you can find if you direct your feet…to the sunny side of the street.

First up, a key barometer of economic activity: manufacturing. After a synchronized swan dive by the manufacturing sector across the world in 2008, activity has rebounded just as stomach-wrenchingly swiftly, like a sudden bout of turbulence. The chart below shows Purchasing Managers Indices for the manufacturing sector across time for major economic regions. It illustrates that manufacturing (the lion’s share of industrial production) across the globe has shown expansion for at least ten consecutive months ( a reading above 50 on the PMI indicates expanding economic activity). And although recent months have shown a slowing across the sector, we remain in positive terrain:

This next data point involves Warren Buffett’s favorite indicator – US weekly rail traffic. The Sage of Omaha follows this with fervor, as railcars are considered the lifeblood of the American economy, shipping goods across the country. The data illustrate that although rail traffic may not be showing stellar improvement (while also being well below pre-recessionary levels), it shows a steady pace of improvement year-over-year, a trend that a number of other economic indicators are illustrating:

We go no less random as we head to our final indicator – the US savings rate. The below chart illustrates how savings rates have bottomed out in the US in the last five years, as the over-leveraged US consumer has realized (or been forced to realize through tighter credit constraints) the need to borrow less and save more. But this rise in the savings rate is not necessarily a cause for concern – China’s savings rate of 38% certainly indicates an economy can grow rapidly even while saving significantly. So while a higher savings rate may mean somewhat less consumer spending, it also provides the fuel for investments in new productive assets in our economy, the ultimate long-term source of growth:

So there we have it; some reasons to be cheerful, 1-2-3. Sometimes it is easy to get swept along in a sea change of market sentiment, and it is good to look at the opposing view, regardless of if you buy into it or not. But if this has left you feeling rather fretful, just remember you can always put on some Satchmo, kick back, relax, and be swept away elsewhere.

0 Jun 3 2010 @ 8:26am by Matt Smith in Capital Markets, Economy, Global Energy

Where The Wild Things Are

This, like many of my posts, is an elaboration on a simple theme, explained through the medium of something easy to relate to. So for this juncture, emerging markets are…. where the wild things are (specifically Brazil, India and China). Furthermore, The US is the self-crowned king of all the wild things (for now), based on its position as the world’s largest country by GDP, and the largest and most voracious consumer of the world’s goods and services. The wild things are labeled as such for good reason; their economies are running wild.

‘And now’, cried Max, ‘let the wild rumpus start!’

The first station on our whistle-stop tour is India. They released their first quarter GDP data on Monday, which showed its economy expanding by 8.6%, at its fastest pace in two years, driven by manufacturing and farming. India, similar to China, holds such great promise due to its size, and the sheer extensiveness of its poverty (which implies tremendous potential for income and asset growth). The current population is estimated at 1.18 billion, and should surpass China (currently 1.33 billion) by 2025, as the country encourages population growth much more than China does with its one-child policy.

And when he came to the place where the wild things are
they roared their terrible roars and gnashed their terrible teeth and rolled their terrible eyes and showed their terrible claws

Next stop, China. I already researched China in a recent post, but have been filling my boots on this stuff recently – including a great piece explaining how China’s manufacturing power is not driven by innovation, but by global demand. A most telling representation of China’s insatiable appetite for growth is illustrated through their demand for coal in the past four years, which has grown by double digits (in percentage terms) for the vast majority of months, even growing at as high a rate as 57.5% in January of this year. This resonates even further when one realizes that approximately 70% of China’s energy consumption comes from coal (approximately 3.5 billion tons per annum):

Our last stop is Brazil, which, although is showing  a strong recovery after last year’s slowdown, is exhibiting the symptoms of the most common disease to fast-growing emerging markets – inflation. The resource-rich country is, however, being proactive in combating this risk; the Central Bank of Brazil hiked interest rates by 0.75% in March to 9.5% – the first rate rise in two years, and are likely to raise again should inflationary concerns continue (and they should). 


So I draw this story to a close. We should be grateful to know where the wild things are, and should hope that their wild rumpus continues apace. After all, dealing with an overheating economy seems a much more preferable rumpus than that of facing potential deflationary pressures (your majesty). And if you can’t be grateful, BE STILL!

0 Apr 15 2010 @ 10:55am by Matt Smith in Capital Markets, Crude Oil, Global Energy, Random

Goldbugs and Black Gold.

Obligatory picture of The Clampetts

Alrightee, it’s time to dig into a couple of well-coined terms, take a look at two of the more currently favored investments in commodityworld(tm), and explain why the movement in one (gold) may help our view on another (black gold).  

So first up, gold. Gold prices have hit a new high for the year in the last week, and are building a charge towards a new all-time high. As for a goldbug, it is a fictional character, a supervillain who appears in Marvel comics an investor who is bullish on gold prices. Goldbugs can be, but are not always, rather pessimistic on the world or alarmist (= hoarding gold, cans of Spam, and shotgun shells).  

Come and listen to a story about a man named Jed, 
A poor mountaineer, barely kept his family fed,

Secondly, crude oil – aka black gold, Texas tea. ‘Black gold’ was coined as gold rush prospectors in the late 19th and early 20th century struck oil instead. Current crude prices also reached a new high for the year in the past few weeks (but are a long way off their record of $147 from July 2008). The reason for comparing and contrasting crude and gold is because at times they travel similar price paths, despite their obvious differences (ie my car can’t run on gold).  

Crude (red line), Gold (blue line), 2001 - present

Then one day he was shootin at some food,
And up through the ground came a bubblin’ crude.

So, what are the similarities? Both gold and crude currently have an inverse relationship to the US dollar (gold up, dollar down). Gold has held this trend for a good deal longer than crude, for which it has strengthened in the last few years as a weak dollar has been a symptom of a flight into riskier assets (a cheaper dollar has also fueled this flight into riskier assets). Both gold and crude are also seen as an inflation hedge. However, crude is likely to get much more beaten up in a deflationary (or disinflationary) environment, as it is tied to so many parts of the economy. Another shared trait is their high fund flows – investments du jour syndrome.  Nymex crude futures – the world’s most actively traded commodity contract – reached a record volume this week (April 13th), while the gold market is currently being scrutinized as to whether it is being manipulated, a classic signal of a hot market. 

Oil that is, black gold, Texas tea.  

Marvel-ous Goldbug!

As for their differences, investment in gold is known as a flight to safety, whereas crude oil (at least currently) is viewed as the complete opposite. Crude oil is consumed, unable to be traded again, while its demand is very much driven by economic strength. Gold’s availability (or lack thereof) is also a key differentiator; buying physical gold (eg, coins) commands a 7% scarcity premium over a paper trade. This also serves to illustrate that the gold market is a much smaller market than crude. In the cold light of day, the two commodities have very different supply and demand dynamics. 

So they loaded up the truck and moved to Beverly.
Hills, that is.Swimmin pools, movie stars. The Beverly Hillbillies!

So what can we learn from all of this? While gold is likely to remain supported in most eventualities – a recovery leads to inflationary pressures, renewed concerns encourage a flight to safety – crude will likely only benefit from the former of these two outcomes, and only if the US can rebalance away from debt-fueled consumption. But should forces conspire, it seems most likely these two may well finish the year scaling to new heights, leaving the vision of a poor mountaineer well in the past. Thanks for visiting.

Y’all come back now, y’hear?

1 Apr 6 2010 @ 9:55am by Matt Smith in Random, risk management

Bulls! Bears! Boll Weevils?!

Markets that make you go 'uh oh'.

You are more than likely aware of the terms ‘bull’ and ‘bear’ markets. However, there are many lesser-known terms used to describe market conditions; consider this somewhat of a glossary:     

Bear Market – it is a general decline over a period of time. It is a transition from optimism among investors, to general fear and pessimism.    

Bull Market – is the opposite of a bear market; it is a prolonged period characterized by rising prices.      

Groundhog Market – is a market phenomenon where a day’s trading has a certain familiar feel about it, like exactly the same trading pattern happened the day before.       

market watching, meerkat stylee

Jellyfish Market – is scary, but essentially lacks any backbone. Like a jellyfish, this market is only for those participants with no brain or no nerves.      

Boll Weevil Market – much like its namesake, a boll weevil market is one which is brought to prominence in early spring, and runs through to midsummer, when it dies. It has a prolific existence, before dying off as abruptly as it started.      

Bull Shark Market – is the same as a bull market, except the price move higher is much more vicious, and is coming from a position well under water. This market is also likely to chew you up and spit you out, all to a scary soundtrack.    

Meerkat Market – a barren and twitchy market, it makes you sit up and pay attention, keeping you constantly on your toes. Watch out!     

Koala Market – similar to a bear market, except it is more more stealthy in duping you. It steals your money, yet you can’t help being engaged with it. (and feeding it eucalyptus leaves).      

...prone to spikes.

Chimpanzee Market – is a market where all isn’t quite as it seems. This type of market may seem harmless, but is smarter than it looks, ready to manipulate, deceive, or just play with you. 

Groundhog Market – didn’t we do this one already?     

Puffer fish Market – looks like a very attractive market, but in reality, it is just all hot air (or, err, water).     

Porcupine Puffer fish Market – is worse than a standard puffer fish market, as it is prone to spikes (in price). 

Please feel free to add any market conditions that you are aware of (or have made up) – any good ones will merit a prize.

3 Feb 10 2010 @ 10:38am by Matt Smith in Crude Oil

Crude oil is Keyser Söze

usual_suspectsIf you haven’t seen the 1995 film ‘The Usual Suspects’, reading this post is going to be like hearing a hilarious catchphrase from a comedy series you have never seen;- not that good out of context. So, if you have seen it, good deal – read on. If you haven’t seen it, I recommend:

a) you watch the film then read this post, or
b) you watch the film anyway.

Do not read this post, thinking you will watch the film at a later date, because I am only going to ruin it for you. Sorry.

When I lived in London, some rather mean-spirited person decided to graffiti the best bit of the film – the shocking twist at the end – on the wall of a London Underground station. With about 100,000 people passing through Piccadilly Circus each day, out of all the things they could spray-paint, I always thought it was pretty lousy for someone to write ‘Kevin Spacey is Keyser Söze’. (I have just ruined it for you if you haven’t seen it – I told you not to read on).

Kevin Spacey is Verbal Kint.

Kevin Spacey is Verbal Kint.

Ok, after all that, my point today (there was one, I promise) was to highlight how crude oil is in fact, Keyser Söze. And here is why: after all the shenanigans of 2008 when oil hit a warlording $147, it had an equally crazy journey in 2009, bouncing from a beaten-down and limping level of $32 to a high of $80 by year-end.

Now 2010 has started with a flourish-turned-flop, and crude is looking like Verbal Kint once again. But here’s the thing; it is all a ruse. Crude is borrowing from the first page of Keyser Söze’s playbook – ‘The greatest trick the Devil ever pulled was convincing the world that he didn’t exist.’  The spotlight shines so brightly on the US dollar and equities to explain away the moves in crude oil, that the dreadfully weak (yet recovering) fundamentals of the oil market remain waiting in the wings. 

And what’s more, crude is more than happy to play out the role of Verbal Kint (‘a man can convince anyone he’s somebody else, except himself’), with Keyser Söze orchestrating moves at stage left, ready for the underlying fundamentals to once again lead an unsuspecting market. Just see the below chart; the signs are all there. By the time the relationship wanes between crude and the current drivers du jour, prices will have gotten away. Demand will be back at pre-recessionary levels, with supply constraints from resource nationalism moving back to center stage once more.  And like that….the opportunity is gone. oil demand nb. dotted line on OECD oil demand is estimated by IEA.