Investing Themes

PDP: Breakout-Failure

2007-08-05T09:47:00.000+02:00

The sharp drop in the stock price of Petrolifera Petroleum (TSX: PDP) crushes the promising breakout above its trading range. Since the stock is again trading in its trading range between $16 and $20, I recomend traders to close their positions and cut their losses to a minimum, keep the stock on their watchlist and wait for a confirmed breakout in the near future.

Disclosure: The author has a closed his long position in PDP.

Promising Junior Oil Explorer

2007-07-24T06:00:00.000+02:00

As the price of Oil has been rising steadily since the beginning of the year and is nearing its all time high in the $78 range, there could be some promising profit opportunities in small cap junior oil explorers. A very interesting one is Petrolifera Petroleum (TSX: PDP), a Canada-based company engaged in petroleum and natural gas exploration, development which has production activities in South America. The company, which completed it's IPO in November 2005 and is 26%-owned by Connacher Oil and Gas Limited (TSX: CLL), has operations in Argentina, Peru and Columbia.

Oil Projects
In Argentina Petrolifera currently lifts Oil in the Puesto Morales/Rinconada region, located onshore in the Neuquen Basin some 965 kilometers southwest of the city of Buenos Aires. Currently the management is trying to develop additional exploration opportunities in this region (Salinas Grande I, Vaca Mahuida, Gobernador Ayala II) to use its economics of scale. In Peru, which is relatively underexplored, Petrolifera owns two major licenses over large onshore blocks in two separate basins. Block 106 in the Maranon Basin in northern Peru covers approximately two million acres and is prospective for medium gravity crude oil accumulations. Block 107 in the Ucayali Basin of southern Peru covers over three million acres and is on trend with the giant Camisea natural gas and condensate field. A contract for 2D seismic over the block in the Ucayali Basin was recently awarded and drilling is expected to commence in early 2008. The 2D seismic over the block in the Maranon Basin is planned later this year and drilling in mid-2008. In Colombia, Petrolifera has recently formally received its 100% working interest on the Sierra Nevada and the Turpial TEA and is currently negotiating an additional license in the Sierra Nevada region. The chart below shows that most of Petrolifera’s revenues come from crude oil sales as natural gas sales are negligible small. The chart also reveals that at the current cost structure Petrolifera earns approximately $35 per barrel crude oil sold.

Fundamentals
During the first quarter of 2007 Petrolifera’s progress continued as the company increased year-over-year revenues by 458%, cash flow by 617% and net earnings by 877%. Beside the significant growth the company’s balance sheet remains strong with over $59 million of cash and no debt. The chart below shows the superior financial development of revenues, cash flow and earnings over last eight quarters.

As the company has issued 50 million shares (53.4 million fully diluted) it has currently a market capitalization of $1 billion ($1.07 billion fully diluted). Given the constant cash flow and profit from its current operations, if we take last quarter’s cash flow and earnings as guidance for the coming three quarters we obtain a cash flow per share prediction of $2.24 ($1.96 fully diluted) and an earnings per share prediction of $1.36 ($1.20 fully diluted) for the fiscal year 2007, both on fully dilution. This means Petrolifera is currently trading at a trailing PE of 14.7 (16.6 fully diluted). The stock is currently covered by three analysts, which estimate earnings per share will be at $1.53 (lowest at $1.42 and highest at $1.67) for FY07 and $3.12 for FY08. All three have out performance rating on the stock with a mean price target of $28 (lowest at $25 and highest at $30). However a strong Canadian Dollar could hurt Petrolifera's profits.

Technical
The chart below shows that Petrolifera’s stock recently broke out of its tight trading range between $16 and $19 with a strong rise backed by hefty volume up to $22. The stock is currently pulling back a little bit by testing its support area between $19 and $20. However, from a technical perspective the stock could even dip to $18 for a short time. The test of its support area could provide a good entry point for a long position in the stock.

Disclosure: The author currently has a long position in PDP.

Cotton Pulls Back: Second Entry Point?

2007-07-23T09:18:00.001+02:00

As I recently took a long position in cotton, I want to highlight that cotton is currently falling back after its strong advance above $61. From a technical perspective the support area is around $55 as it can be seen in the weekly chart below. If cotton can bounce off from that level this would be a good point for a late entry on the long side.

Disclosure: The author has a long position in COTN.L.

Bottom in Oilsands Quest

2007-07-13T11:38:00.000+02:00

Oilsands Quest Inc. (AMEX: BQI) (formerly CanWest Petroleum Corporation) is engaged in a variety of projects with an emphasis on oil sands and oil shale exploration in Western Canada. Its lead project is its Axe Lake Discovery, an oil sands deposit the company has identified through exploration drilling success on its permit lands in northwest Saskatchewan. This is the first major oil sands discovery in the province’s history. Yesterday management increased its estimated resource potential of the Axe Lake Discovery (area A in figure below) from 1.5 billion barrels (released early April) up to 2.5 billion barrels. Management also released it's estimate of resource potential for selected areas outside the Axe Lake Discovery area (areas B and C in figure below) and for the adjacent permits in Alberta (area D in figure belwo) which is 3.0 billion barrels and 4.5 billion barrels repsectively.

On a fully-diluted basis the company has currently 250 million shares, of which management owns 19%. If we take the aquisiton price of the former privately held North American Oil Sands Company paid by Statoil on April 27th this year at $0.91 per barrel recoverable reserves and apply it to BQI' 10 billiion of estimated reserves (assuming 50% is recoverable) we get an estimated market value of $4.55 billion for Oilsands Quest or $18 per fully-diluted share. Beside the favorable valuation the company has top notch management with a track record of building an oil sands company (CEO, Chris Hopkins founded Synenco (TSX: SYN)).

The sharp price jump yesterady indicates that BQI could have reached its bottom at the $2.50 level (see chart below) because the move was accompanied by an extremly high turnover.

Disclosure: The author has currently no position in BQI, but intends to buy shares of BQI in the comming weeks.

Term Structure Hurts Commodity Investors

2007-07-05T16:10:00.000+02:00

As Tom Lydon from ETF Trends recently pointed out more investor education on contango and backwardation - the two forms of the term structure of commodity futures markets - is necessary. As an investor in commodities you have the choice between buying the physical commodity or a derivative (e.g. a futures contract) on a commodity to profit from the price appreciation of the commodity. However, normally investors discard the first choice as they would have to care about warehousing and other costs of carry. Therefore, most investors invest through commodity futures contracts or through exchange traded funds which in turn also normaly hold commodity futures contracts. The return from a collateralized portfolio of commodity futures contracts comes from three main sources:

Total Return = Spot Return + Roll Yield + Collateral Yield

The spot return is simply the price appreciation in the spot price, which is based on immediate delivery, of the commodity. As an investor in futures contracts has to roll contracts he has to deal with contango (longer-dated futures are more expensive than near-month contracts) and backwardation (longer-dated futures are cheaper). If the term structure is in backwardation the roll yield is positive whereas it is negative when the term structure is in contango. The final source of return is the collateral yield which is the return accruing to any margin held against a futures position and which is normally the US T-bill rate.

A look at a long-term chart of the ratio between the S&P GSCI Total Return Index (SPGSCITR), which inclues all return components of a passive commodity investment as mentioned above, and the S&P GSCI Spot Index (SPGSCI), which tracks only the spot price appreciation of the commodities in the GSCI, reveals that the roll yield is negative since the begining of 2004 as the ratio has peaked in 2004 and is currently in a steep decline. Last year Spencer Jakab pointed out that unlike prior commodity price booms, this one is seemingly being driven by an influx of capital seeking out passive, or indexed, commodity exposure. He also addressed the possibility that such a dramatic influx of capital could changed the equation in the futures market thereby negating the roll yield as a major source of returns for fully collateralized commodity futures. However, Jim Rogers - one of the strongest commodity bulls in the markets - seems not to be alarmed by the commodity-wide contango situation.

Deutsche Bank offers a broad-based and several sector-based commodity ETFs, which try to maximise the roll yield by a rules-based formula for replacing an expiring futures contract with a new contract. Lets take a look at the DB Gold Fund (DGL), which in contrast to streetTRACKS Gold Shares (GLD) - that creates exposure to Gold by holding physical Gold - holds futures contracts on Gold, revelas that the roll yield optimization seems to work quite well as the ratio between the DB Gold Fund (DGL) and streetTRACKS Gold Shares (GLD) is quite constant over time, notwithstanding Gold is typically one of the commodities which stays most of the time in contango and has normally a negative roll yield.

However, the investor should never forget that the selection of the constitutes, which make up the commodity index, determines the spot return and is at least as imporant as the optimization of the roll yield. The chart below clearly shows that the underperformance of iShares GSCI Commodity Trust (GSG) against PowerShares DB Commodity Index Fund (DBC) comes from it's overweight in the Energy Sector, as Crude Oil - mostly the biggest position in the Energy Commodity Sector - has been declining over the last eleven months.

To summarize, beside the roll yield, which has been negative for most commodities in the last 3 1/2 years (see the first figure: ratio between S&P GSCI Total Return Index and the S&P GSCI Spot Index) the spot yield, which is exclusively determined by spot price appreciation of the commodities in the index, is of particular importance for the total return of the investment in commodities. Beside PowerShares DB Commodity Index Fund (DBC), which currently is composed of 55% Energy, 22.5% Metals and 22.5% Agriculturals, the investor has the choice between iShares GSCI Commodity Index Trust (GSG or GSP), which holds 69.3% Energy, 12.12% Agricultural, 13.7% Metals and 4.89% Livestock commodities, and iPaths Dow Jones-AIG Commodity Index Fund (DJP), which has the lowest Energy proportion at 34.7% and 28.46% in Agriculturals, 28.29% Metals and 8.54% in Livestock commodities.

Disclosure: The author has a long position in an ETF issued by ABN Amro which tracks the Rogers International Commodity Index.

Jim Rogers and Marc Faber on CNBC World

2007-07-04T10:40:00.000+02:00

Some interesting discussion from investment legend Jim Rogers and Marc Faber, author of GloomBoomDoom.com, on CNBC World on July 2. Watch the videos about the following topics:

U.S. Debt Bubble

In Favor of Agricultural Commodities

China Not a Stock Bubble

Credit Bubble

Investing in China’s Infrastructure

Bullish on Gold

New Blog: The Relative MarketView

2007-06-22T08:17:00.000+02:00

I have lunched a new website called The Relative MarketView. The focus of my new website is on directional market neutral spread trades like a long/short trade in the S&P 500/Citigroup Value and Growth index. The biggest advantage of Relative Value Investing is its promising risk/return profile, as it has high returns relative to its risk, which are normaly significant lower than long only strategies. The Relative MarketView reports and comments on the newsworthy market action with a relative point of view. Its focus on the relative market action provides the reader unique insights into the current market action and helps the investor to get the entire picture about the latest developments in the equity markets. I hope you find my new website interesting and visit it on a regular basis at www.relativemarketview.com.

Commodity Investment: Cotton

2007-06-21T10:21:00.000+02:00

Commodities are still on the run and just under their all-time high as the chart of the Goldman Sachs Commodities Spot Index (GNX) below shows. There are some signs which indicate that the longterm bull-market in commodities is not yet over:

A sustained and strong world economy with China and India as its engines,
Chinas and Indias unsatisfying appetite for natural resources and its result of rising dry freight rates,
inflation fears which recently caused a bond sell-off around the world,
and last but not least, huge capital inflows in passiv commoditiy investments.

A look at its sub-indices - GSCI Energy (GJX) (weight: 69,66%), GSCI Industrial Metal (GYX) 11,61%, GSCI Agricultural (GKX) 11,4%, GSCI Livestock (GVX) 4,94%, GSCI Precious Metal (GPX) 2,37% - reveals that the agricultural index recently broke out with a strong move to new highs.

Inside the agricultural commodities group, Cotton looks the most promising commodity as it may be at the beginning of a sizable upward move as in the last 6 months Corn already exploded by 100% and Soybeans and Wheat each by 50%. Recently Art Samberg in Barron's Midyear Roundtable (2007) (subscription required) pointed out that:

"Despite U.S. inventories are high at more than 10 million bales, inventories get depleted or added to based on Chinese demand and the timing of China's orders, and for several months China didn't place many orders. However, inventories are finally beginning to drop. Additionally, there is currently dry weather in Georgia and Texas, and according to the data 20% less cotton was planted this year."

As Chinese demand could be the catalyst, both factors could drive the price for cotton higher. The monthly chart of the cash price of Cotton below shows that Cotton has been trading in a tight trading range between $0.44 and $0.55 per pound for the last 3 1/2 years. However, the sharpe increase in the last two weeks indicate, that Cotton might by ready for a strong move to the upside, which should lift cotton to at leat $0.70 per pound.

As an investor the investment possibilities in Cotton are limited. You can by futures contracts on the NYBOT or you can by the Exchange Traded Fund issued by ETF Securities, which is listed on the LSE under the symbol COTN.L and is designed to track the Dow Jones AIG Cotton Sub-Index, a total return index. However, both investments will be influenced by the roll yield embedded in the term structure of futures contracts of Cotton. A comparison of the GSCI Spot Index (GNX) and the GSCI Total Return Index (GTX) reveals that the roll yield had been negative since the beginning of 2006 as most of the commodities are in contango and therefore the GTX has been lagging behind the GNX.

As Spencer Jakab recently pointed out in a comment in Barron's, given the huge sum of money which has entered the commodities market in the recent years, there could be a shift in the contango/backwardation situation of the commodities markets, which could influence future returns of passive commodity investments.

Disclosure: The author has a long position in COTN.L.

Investment Managers Foresee Soft Landing

2006-09-28T14:23:00.000+02:00

Slower growth lies ahead for the United States, say investment managers who responded to Russell Investment Group's September quarterly survey, as none of the managers believes that a recession is likely in the U.S. and half believe the U.S. will experience slower growth in the next six months compared to the annaul growth rate of 2.9% in the second quarter 2006. However, 10% of the managers believe the U.S. will grow at a stronger rate whereas a little more than 40% of the managers believe the U.S. will grow at a similar rate to the 2.9% at which it grew in the last quarter.
At the same time, more managers view the market as undervalued than at any time since the survey began, although that number still trails those who see it as fairly valued. Those who believe the market to be overvalued has risen slightly, from 8% to 10%.

Although managers have raised their outlook U.S. Treasuries and corporate bonds to their highest levels since the survey began. This view, combined with moderate bullishness toward equities, seems to indicate that some managers are expecting that stocks may move sideways for a while before turning upward once more when it becomes apparent that recession fears have dissipated and that favorable earnings reports from many companies are ready to be rewarded in increased stock prices. However, large-cap stocks are still favored over small-cap stocks.

Although managers have raised their outlook for bonds, they have lowered it even further for real estate investment trusts, which now occupy last place in terms of bullishness. The outlook for the energy sectors, too, is the lowest since the survey began. Clearly managers believe that oil prices have peaked, at least for now, with tensions lessening in the Middle East and the 2006 hurricane season appearing to be mild. Their outlook for high-yield bonds remains low, as the managers appear to be anticipating defaults on bonds will grow.

Most managers remain convinced — as they have over the last two years — that it is only a matter of time before large-cap growth stocks take off. Managers continue to be more bullish on this asset class than any other. They point, too, to relatively low valuations among growth stocks as an indication that they are good buys at these levels. But even the outlook for large-cap growth stocks — which has held the top spot on the list of bullishness since the survey began — has slumped from a high of 80 percent in the last quarter of 2005 to 58 percent now. However, as the monthly chart below shows, large-cap growth stocks have underperformed large-cap value stocks for the last seven years.

Crude Oil Seems to be Oversold

2006-09-26T13:36:00.000+02:00

Oil has dropped under $60 on Monday morning, to reach a 6 month low at $59.59 per barrel. Prices have dropped more than 23% since hitting a record $78.40 in mid-July. Yesterday, Barry Ritholtz pointed out that he finds the mainstream explanations for the sharp correction of crude oil unsatisfying and concluded:

"Oil is in the midst of a major correction, and by the traditional measure of 20%, can be defined as in a Bear market. The mainstream explanations are greatly over-simplified."

A look at the long-term chart below reveals that the recent sell off was the fastest one in the last 3 1/2 years whithout a noteworthy interruption. Thus curde oil is currently trading $9 below ist 50 day moving average.
As crude oil traded in the last four days in a somewhat tight trading range between $60 and $62, after falling below its downward sloping trend channel, it seems that crude could have found support at the $60-level and could be ready for a mean reverting correction. A significant break to the upside of the $62-level could signal a short-term correction-rally out of the oversold condition, which could lift crude oil to $67-$69 per barrel.

Disclosure: The author is long in Crude Oil.

Update on Gold

2006-09-20T10:13:00.000+02:00

As Gold could have touched its upward sloping trendline and is near its key-support at the 570-level, I suggest to take profits on half of the position. The possibility of a short-term up-swing, which could bring Gold back almost to the the 600 mark, seems to have risen in the last days, as Gold still seems to be oversold. However, the target zone between $540-$560 per ounce remains valid and could be reached in mid October.

Disclosure: The author is short in Gold.

Confirmation From The Dow Theory?

2006-09-19T12:33:00.000+02:00

The divergence between the Dow Jones Industrial and the Dow Jones Transportation indexes began in mid-July, as the Industrials continued to climb higher and the Transports slided steadily lower. The dispute pver the outlook of the economy and earnings growth began in mid-June, with the Industrials taking the optimistic view, and the Transports becoming decidedly negative.
However, the sudden and un-expected plunge in crude oil prices, below the upward sloping trend-line at $66 per barrel, triggered a fast run-up in the Transports up to their resistance around the 4,450-level backed by high volume. The Transports seem to have formed a "double-bottom" at the 4,150-level. However, with the fast up-move to the 4,450-level, they have reached a critical technical level as they touched their resistance at the 4,450-level and their upward-sloping 200 day moving average.

In the last three days, the Transports have been trading in a tight trading range between 4,400 and 4,475. A breakout to the upside backed by higher volume can be interpreted as confirmation by the Dow Theory.

However, the seasonal threat to the Dow Jones Industrial and Transports could still strike in the second half of September. Any possible setback in the Industrials should go no lower than the 11,250-levle, while the Transports should not fall below 4,150.

Tankers in Need for Near-term Support

2006-09-14T09:57:00.000+02:00

Shipping stocks took a hit in the last five days, with Frontline (FRO) losing 7%, Nordic American Tanker (NAT) weakening by 9.8% and O M I Corp (OMM) closing 8.7% lower. Even though Bank America raised its six-month oil tanker forecasts by 40% and its targets by 5% supported by steady transport volume, a global trend to maintain high oil storage, and extended interruptions in Alaskan oil production on September 1st:

"We believe a 25% increase in tanker equity values since early June versus essentially no change in the Standard & Poor's 500 index reflects shipping strength to date, but has not fully priced in further upside over the next six months."

"We believe the forward six-month outlook could exceed consensus by 40% and support further equity value increases from 10% to 20%."

"September hurricane activity will likely help shape the direction of shipping rates over the near term since the appearance or absence of hurricanes affects not only shipping traffic but also the continuing trend for U.S. oil refiners to carry high oil inventories and demand more oil from overseas."

On September 2nd Elliott Gue, Editor of The Energy Letter, highlighted that tankers have been one of the best-performing groups in the energy space this summer and finds out that the tanker industry is this year doing better than last year, as tanker rates are running much higher this year than last year (see chart below).

The seasonality in tanker rates is obvious. Note, in particular, the spikes, which occur at the end of each year and the beginning of the year. These spikes represent the seasonal effect. Demand for tankers is highest in the first and fourth quarters. Therefore, spot tanker rates are also highest in these quarters. During the summer months, day-rates reach their lows. Tanker firms often use this seasonally slow period to repair their ships or perform upgrades. After all, it makes sense to take your ships offline when there's little demand.

On the demand side, China has currently the biggest impact on charter rates, as China is a huge oil importer, and hauling all that oil from the Middle East means hiring out more tankers. Accroding to the International Energy Agency (IEA), Chinese oil demand grew by 2.6 percent in 2005 and will grow by 6.1 percent in 2006 and 5.5 percent in 2007. The chart below reveals that in July Chinese oil imports unexpectedly fell by 3.9%, but rebounded strongly in August with a year over year (yoy) increase of 34.9%.

On the supply side, one factor overhanging the tanker group last year was the idea that a big chunk of new ships being built would be delivered during the next few years, leading to a glut of tankers. But other factors are mitigating this effect. Older tankers are being scrapped and retired; all single-hull tankers are being phased out. Notably, BP has decided to only lease out the most modern tankers (double hulls) going forward; this decision was made years ahead of the official deadline for phasing out single hulls.
Moreover, tankers have been pressed into other duties. Some are being refitted as floating production platforms, and others are being used as temporary storage facilities in the Middle East and Asia where storage capacity is lacking. If a tanker becomes a production platform, it's no longer a part of the global tanker supply.

The weekly chart below shows that the leading shipping stocks, Frontline (FRO), General Maritime (GMR), Nordic Amer. Tanker (NAT), OMI Corp. (OMM), Overseas Shipholding (OSG), Tsakos Energy Navigation (TNP) and Knightsbridge Tankers (VLCCF) have on average lost 12.5% since their 52 week high in August.

If tanker stocks are getting support at their 100 day moving average at around 36, and shipping rates will be above average in the coming months, tanker stocks should rebound strongly and make new 52 week highs until the end of the year.

Disclosure: The author has currently long positions in FRO, GMR OMM, OSG, TNP and VLCCF.

Gold Fundamentals and Technicals Are Weakening

2006-09-10T12:51:00.000+02:00

Accoring to the latest data from the producer-funded World Gold Council (WGC) total end-user demand fell in the second quarter by 16% to 801.6 metric tonnes from 959.8 tonnes a year earlier. That was the third straight quarterly decline, and the lowest level of demand since the third quarter of 2004. Jewellery demand, which accounts for 70% of the total end-user demand, showed also it's third straight quarterly decline and fell even by 24% to 562.5 tonne, a three-year low. Gold consumers from India, which account roughly for 30% of the total jewellery demand, reduced their purchases in the second quarter by 43% after a reduction of 38% in the first quarter. Investment demand rose only by 19% in the second quarter and only by 3% in the first half of the year 2006. Nevertheless, spending on Gold hit record levels due to the strong price increase of Gold in the first half year. The spending on Gold increased in the second quarter by 23% to 16.1 billion dollars and by 16% in first half of 2006.

On the supply side, the total supply increased in the second quarter by 2% to 989 metric tonnes after falling by 9% year over year in the first quarter. However, hedging activity of producers has dramatically increased in the last two quarters. It more than doubled to 157 metric tonnes in the second quarter after a sixfold increase in the first quarter.

As of September 1, the 15 central banks within the European Gold Agreement (EGA) have reportedly sold roughly 340 tonnes. In order to hit the maximum amount of gold permitted by the agreement, the banks would have to sell about 160 tonnes in just under a month to hit the yearly quota of 500 tonnes by the September 26 deadline. The European Central Bank’s (ECB) weekly financial statements have been showing weekly sales of less than 5 tonnes for the past month or so. As Jon Nones highlights, there are currently a lot of rumours surrounding the central bankes sales activities in the market, but nothing is concrete. Tuesday September 12th is the next day for publication of the ECB weekly financial statement.

From the technical perspective, Gold is currently trading in a descending triangle, which is a bearish formation that usually forms during a downtrend as a continuation pattern. An indeed, as the chart below reveals, Gold is currently in a downtrend. As such a pattern develops, volume usually contracts. And this is currently happening in Gold, both the volume in the futures market an the volume of the biggest EFT, which tracks Gold (AMEX: GLD), has considerably declined in the last six weeks.

Additionally to the bearish action in the price of Gold, the Amex Gold BUGS Index (AMEX: HUI), which is a modified equal dollar weighted index of companies involved in gold mining that do not hedge their gold production beyond 1.5 years, tried to break out of an ascending triangle, which normally is a bullish formation, but sharply reversed it's course and fell back to the lower trendline. To speak in technical terms, the break out attempt last week seems to be a bull trap.

Given the weakening demand for Gold and the recent bearish action in Gold and the HUI, if Gold breaks below it's key support zone between $600-$607 per ounce and the HUI breaks below it's trendline, both Gold and gold mining stocks should head lower.
Components of the HUI are as follows: GFI, NEM, FCX, GLG, KGC, HL, AEM, IAG, GOLD, CDE, GSS, EGO, MDG, GG, HMY.

Disclosure: The author is short in Gold.

For a detailed chart analysis with an estimated price target of Gold, look at my Weekly Chart Book.

Weekly Technical Review

2006-09-09T20:52:00.000+02:00

Last week all U.S. stock indices lost ground with the Dow Jones Industrial losing -0.6%, the S&P 500 -0.9% and the Nasdaq 100 -0.9%. The S&P 100, which made on Tuesday a new 52-week high, lost till Friday -0.8% over the week. Two interesting points about last weeks trading action in the equity markets are worth mentioning:

The small cap indices, which last week broke out of their intermediate downtrends, lost more than the large cap indices, as the S&P 600 lost 1.5% and the Russell 2000 lost even 1.8%.
The volume on the down-days was for all indices higher than the volume on up-days. Especially the volume on Friday, which was the first up-day following the 3 down-days in a row, was for some indices the lowest one in the week.

Both the Dow Jones Industrial and the S&P 100 broke their steep upward trendlines to the downside and found support at their somewhat more flat trendlines.
There are also news from the Dow Theory perspective, as the Dow Jones Transportation Index was losing ground on all four trading days. Till Friday the loss summarized to 2.7% under the heaviest volume compared to the last three weeks. The index couldn't climbe above the 4,300-level and fell back to it's short-term support at the 4,200-level.
As the small cap indices lost more than the large cape indices, the rotation out of small cap stocks into large cap stocks is still going on and the ratio between the S&P 500 and the Russell 2000 found support at it's trendline.
And last but not least - the VIX broke it's intermediate down-trend by jumping 20% till Thrusday and closing at 13.13 on Friday with a weekly gain of 10%.

Gold lost in the last three days over 4% after touching the upper trendline of it's descending triangle on Tuesday and reached it's support zone between $600 and $607 per ounce on Friday. Crude Oil fell below it's 200 day moving average at 67.90 after losing almost $3 ber barrel or 4.3% in the last week. As Gold and Crude Oil were falling, the CRB Index reached it's key support at the 320-level.

For the coming week there are several key levels to watch:

Dow Jones Industrial: 12,600-13,000 (key support zone)
Nasdaq 100: 1,550 (short-term support level)
S&P 100: 598 (short-term support level)
S&P 500: 1,290 (key support level)
Russell 2000: 700-710 (key support zone)
VIX: 14 (key resistance level)
CRB: 320 (key support level)
Gold: 600-607 (key support level)

The interested reader can have a look at all the mendtioned charts in my Weekly Chart Book at Stockcharts.com.

Technical Look at EUR/USD: Trading Opportunity?

2006-09-07T15:47:00.000+02:00

The Euro has gained roughly 8.5 percent against the U.S. Dollar in 2006, mainly due to the differences in the interest rate cylces. The FED already began raising rates in June 2004 by 0.25 basis points and stopped after it's 17th rate hike in August 2006. However, the EZB began raising rates not until December 2005 and has since then increased it's key interest rates on 4 sessions by 0.25 basis points. Some market participants belief that the FED is done and the EZB will further raise rates in the coming months. On this outlook the Euro should be strong against the U.S. Dollar.

A look at the daily chart of the Euro Currency Trust (FXE) reveals, that since May the Euro is trying to break above it's resistance at 1.29 against the U.S. Dollar and is recently trading in a tight trading range between 1.29 and 1.27 since the beginning of August.

The data from the Commitments of Traders Report (COT) from the Commodity Futures Trading Commission (CFTC) reveals, that speculators' long positions are extremly high compared to the last 52 weeks, whereas commercial buying remains low. Both signs suggest, that the Euro is topping out against the U.S. Dollar.

However, sometimes large positions of speculators indicate a continuation of the prevailing trend. Therefore, it could be wise to wait for an break out above the 1.29-level or below the 1.27-level before taking a position.

Housing Crisis: Housing Bubble or Lending Bubble?

2006-09-06T09:58:00.000+02:00

The increase in home prices cannot be explained by fundamental factors, such as rising incomes and population growth. The growth in income over this period has not been especially rapid. The rate of income growth is considerably slower than in the years from 1950 to 1973, when the rise in home prices just kept pace with the overall rate of inflation. The growth in population over this period has not been especially rapid. The most rapid growth in the number of new households actually took place in the 1970s and early 1980s, when the huge baby boom cohort was first forming their own households.

Most importantly, there has been no significant increase in rents, which would be expected if the run-up in house prices were explained by the fundamentals of the housing market. Rents and home sale prices have always moved closely together, since families can freely switch between renting and owning depending on the relative prices, and landlords can sell off rental property if home sale prices rise substantially relative to rents. Rents had increased somewhat more rapidly than the overall rate of inflation from 1998 to 2002, and are currently rising again. However, these small increases in rents compared to the large increases in home prices, could indicate that the run-up in house prices is not being driven by fundamental factors in the housing market.

Lon Witter, founding partner at Witter & Westlake Investments, recently pointed out that

"by any traditional valuation, housing prices at the end of 2005 were 30 percent to 50 percent too high."

The biggest difference between the recent rup-up in home prices and the one in the 70s is the financing of these home purchases. In the 70s home owners owned roughly 68 percent of their homes, whereas today they only own 57 percent of their homes.

However, as the chart below shows, only the strong price increases in the recent years prevented that home owners lost more of their homes.

In the recent years home owners seem to have used their homes for financing their consumption needs as they have extracted large amounts from their home equity.

The strong increases in house prices and historical lows in mortgage rates have definetely fuel this evolution. The result is, that 73 percent of houesholds total liabilities are currently mortgages.

If substantial price decreases in the coming months cause a free fall in housing prices, which would be the direct consequence of a housing bubble, the data above would suggest, that there could be a big problem in outstandig mortgages as borrowers will get in financial difficulties.

A Portfolio of Small Australian Mining Stocks

2006-09-04T14:37:00.000+02:00

As Steve Towns recently pointed to an interesting article about investing in small Australian mining stocks from the Wall Street Journal, here is a list of some promising mining stocks in the "land down under".

Zinifex Limited (ASX: ZFX)
Marketcap: 5,794.2 Mio. AUD (4,426.2 Mio. USD)
Metals: Zinc, Lead, Silver, Gold and Copper
PE 2006: 3.9
PE 2007: 6.2

Oxiana Limited (ASX: OXR)
Marketcap: 3,864.7 Mio. AUD (2,952.2 Mio. USD)
Metals: Zinc, Lead, Silver, Gold and Copper
PE 2006: 7.4
PE 2007: 9.3

Minara Resources (ASX: MRE)
Marketcap: 1,637.1 Mio. AUD (1,250.6 Mio USD)
Metals: Nickel and Cobalt
PE 2006: 7.7
PE 2007: 10.9

Kagara Zinc Ltd (ASX: KZL)
Marketcap: 1,051.5 Mio. AUD (803.2 Mio. USD)
Metals: Copper, Zinc, Lead, Silver and Gold
PE 2006: 8.6
PE 2007: 9.2

Unfortunatelly, Minara Resources (ASX: MRE) has recently broken out and skyrocket almost 40% in the last four weeks.
However, Kagara Zinc (ASX: KZL), which recently got above it´s all time high of 4.50 AUD, has been consolidating in the last week and could be a buy at this point, except it falls again below the key-support at the 4.50AUD-level.
Zinifex (ASX: ZFX) and Oxiana (ASX: OXR) are still inside their consoliation patterns. As Zinifex recently got above it´s resistance at the 11.20AUD-level, a breakout above the resistance at the 12AUD-level would be a bullish sign.

Microcap Pick in the Pollution Control Industry

2006-09-03T17:38:00.000+02:00

CECO Environmental Corp. is a leading vertically integrated provider of systems and parts to the air pollution control industry. The Company focuses on engineering, designing, building, installing and monitoring systems that eliminate airborne contaminants and control emissions from a variety of industrial facilities. The Company operates through seven subsidiaries which together have in excess of 1,500 active customers in industries including automotive, pharmaceuticals, metal working, foundries, paper, food, and chemicals.

Although the company has incurred a net loss over the past seven years, now it seems to be the right time to invest in this company. In the last 6 months, CECO Environmental experienced an extraordinary demand of its products and services. Year over year, it´s revenues increased in Q1 by 62% and in by Q2 59%. The strong demand and improvements in it´s operating margin pushed the company into profitability, as it reported a net income of 0.12 cents a share in Q2.

Management holds more than 50% of the outstanding common stock of 12,8 Mio. shares and various hedge funds hold over 70% of the free float of 4.8 Mio. stocks.

Management:

Phillip DeZwirek (CEO): 2.6 Mio.
Jason DeZwirek: 3.9 Mio.

Hedge funds:

Sandler Capital Management: 1.55 Mio.
Tontine Associates: 0.9 Mio.
Dynamis Advisors: 0.47 Mio
Stark Asset Management: 0.44 Mio.

As the company`s backlog, which was at the end of Q2 $43.7 Mio. (an increase of 66% over its backlog of $26.3 Mio. at the end of Q205), and it´s bookings, which were at the end of Q2 $87 Mio. (an increase of 64% over its bookings of $53 Mio. at the end of Q205), are still growing at a remarkable high rate, the earnings should improve hopefully at a higher rate if the latest improvements in the operating margin will sustain. Higher margined international contracts, which made up 3% of sales over the last two years (or roughly $2.5 Mio. in 2005), have increased significantly in fiscal 2006, comprising over 10% of bookings to date.

However, the biggest risk seems to be the high leverage (189% long-term debt/equity) with its loans secured by substantially all of its assets, which may make it difficult to obtain additional debt financing on acceptable terms. Admittedly, accoring to William Gregozeski, a analyst at Capstone Investments, the company is working to pay off its debt by the end of the year and has received a new credit line, which includes interest rates 175 basis points below its previous rate and less restrictive covenants.
Due to the nature of its contract-specific business, the latest cash flows from operating activities were negative (Q1: -2.0 Mio., Q2: -2.4 Mio). Sluggish cash flows from operating activities in the coming quarters will be a warning sign, that the managament is unable to transfer revenues into earnings.

The stock is currently rated by only one analyst from Capstone Investments who has issued a Strong Buy rating with an price target of $17. William Gregozeski estimates that CECO Environmental will earn $0.37 in 2006 and $0.70 in 2007.

From a technical perspective, the stock seems to be quite strong:

It had a strong run-up from $2 in May 2005 to nearly $13 in April 2006.
The consolidation was a little bit to hefty as it lost almost 50% from it´s high in April. However, the stock found a very strong support at the 200 day moving average, which is a positive sign.
The stock consolidated 3 months in a trading range between $7 and $9.
The breakout on Friday, which was backed by a strong increase in trading volume, above the key-resistance at the $9-level and it´s 100 day moving average, could signal that the stock will climb to it´s recent high at $13.

However, given the strong constitution from a technical perspective an investor should watch closely the improvements in the cash flows from operating activities and possible sales of the mentioned hedge funds.

Disclosure: The author has a long position in CECE.

RAB Capital Increases Stake in African Copper Plc to 10.7%

2006-09-01T16:45:00.000+02:00

The hedge fund manager RAB Capital increased it´s stake in African Copper Plc, a UK incorporated copper prospector with projects in eastern Botswana. African Copper trades on London´s AIM under the symbol ACU and has currently a marketcap of 90.9 Mio. £ (173.2 Mio. $). Recently, Merrill Lynch bought 6.3% and Goldman Sachs increased it´s stake from 2.3% to 8.45%. David Jones, the CEO of the company, holds 1.2%.

RAB Capital Increases Stake in Delling Group to 14%

2006-09-01T16:04:00.000+02:00

The hedge fund manager RAB Capital increased it´s stake in Delling Group Plc, a leading supplier of marketing support services for marketing and communication departments throughout The Nordic countries. Delling Group trades on London´s AIM under the symbol DLG and has currently a marketcap of 15.2 Mio. £ (29 Mio. $). Geir Lolleng, the CEO of the company, holds 24.10% and Mr. Bjart Dysthe holds 26.7% of the outstanding shares.

Housing Boom´s Full Impact on GDP

2006-09-01T01:45:00.000+02:00

Residential construction has been a significant source of jobs and growth for the past four years. In the last four years residential construction contributed about a sixth of the annual average real GDP growth of 2.8 percent, compared to a twentieth over the previous six years.As the housing market is weakening, so is the economy slowing. The direct influence of the slowing residential construction activity should not be a big concern for the overall economic perspectives.

However, there is another direct influnce of the housing boom on the economy, which seems to have had a much larger impact on the econmic growth in the last five years. As pointed out by Lynne Montgomery in the latest FDIC Outlook homeowners have been substituting mortgage debt for consumer debt in the last 5 years, as the growth for mortgage debt has clearly outpaced that of consumer debt (see figure below).
Source: Northern Trust

In recent years, the combination of low interest rates and rapidly appreciating housing values resulted in a surge of mortgage equity withdrawals (MEW), which also called Home Equity Withdrawal (HEW). Mortgage debt grew by nearly $4 trillion from year-end 2000 to yearend 2005, with an estimated one-half of this growth resulting from the refinancing of existing mortgages. Many homeowners who refinanced were able to take advantage of the low mortgage interest rates, taking cash out and still reducing their monthly payments. William Gross, managing director at PIMCO, commentated these changes in PIMCO´s October 2005 Investment Outlook:

"Houses were then turned into ATM machines as refinancing, equity extraction, and a plethora of funny money mortgage innovations placed cash in the hands of consumers."

Dean Baker, co-director of the Center for Economic and Policy Research (CEPR) commented on the latest GDP numbers:

"The weak consumption growth is directly related to the weakness in the housing market. Consumers have borrowed heavily against the growing equity in their homes over the last four years, as the savings rate declined from 2.9 percent in the first quarter of 2002 to -1.5 percent in the second quarter of 2006."

Using Goldman Sachs estimate of about 2/3 of MEW flowing through to personal consumption expenditures, it is possible to estimate the impact of MEW on GDP. The graph below clearly shows the importance of MEW over the last few years.
Source: Calculated Risk

Bill Gross summarized his "sequence for house bubble popping or froth skimming" in PIMCO´s October 2005 Investment Outlook as:

1) Housing prices will cool/stop going up very much/even go down in some cities, WHEN...

a. Interest rates rise to a high enough level to make the purchase of a new home a burden instead of a boon for first time buyers.

b. Mild regulatory pressure begins to reduce the amount of funny-money lending.

c. Speculators sniff the beginning of the end.

2) Home equitization should retreat shortly thereafter.

3) Consumption/the U.S. economy will then weaken when the house ATM starts running out of fresh new $25,000/$50,000/$100,000 home equity loan dollar bills.

4) The Fed will cut interest rates in order to start the game all over again.

Let me state categorically that the above sequence is barely questionable, almost inevitable, 99% unavoidable, and in modern parlance - "slam-dunk."

Now lets see what has happen in the housing and credit market in the past 9 months since Bill Gross stated his predicition.

As the figure below clearly shows housing prices have truly colled/stoped going up.Source: Northern Trust

Econ 101 tells us that when supply exceeds demand ex ante, the price will weaken. The existing home market exemplifies this tenet.
Mortgage rates have been rising so strong, that mortgage loan applications for purchase have decreased by 16 percent from their all-time high in August 2005.
Source: Northern Trust

Regulatory pressure seems to begin to reduce the amount of funny-money lending, as on December 20th Federal Financial Regulatory Agencies proposed Guidance on Nontraditional Mortgage Products. Already in May 2005 they had released a Credit Risk Management Guidance for Home Equity Lending to commercial banks, thrifts and credit unions.

Robert Toll, chief executive of luxury home builder Toll Brothers (NYSE: TOL), told the Wall Street Journal, that speculative buyers, who accounted for about 10 percent of demand one year ago, are now sellers.

Unfortunately, to verify whether the retreat in home equitization has already started, we have to wait until to September 14th when the FED's flow of funds report will be published and the latest MEW figures can be calculated. However, the recent noticeable reduction in home equity loans could be a indication that the retreat in home equitization has already started.

Source: Northern Trust

Additionally the meager gain of 2.5% in consumer spending during the second quarter suggests that the house ATM starts to run out of fresh cash.

So Bill Gross´s sequence for house bubble popping has come true. And he predicted:

"If real housing prices decline in the U.S. in 2006 or 2007, a recession is nearly inevitable."

Data from the National Association of Realtors (NAR) shows that the median sales price of existing 1-family homes is already falling.

Source: Northern Trust

Thus, the question will be:

"When will the Fed start to cut interest rates?"

Hedge Fund Manager Trading Below Value

2006-08-31T15:27:00.000+02:00

Absolute Capital Management is a hedge fund management company focused on delivering investment returns through the management of absolute return funds. On March 3rd 2006 Absolute Capital Management Holdings had a successful float on the London Stock Exchange (AIM) under the symbol ACMH and has currnetly a marketcap of 112 Mio. £ (213.5 Mio $). It´s main shareholders are:

CSI Asset Management Establishment: 54.2%
Doyne Investments: 12.1%
Troy International Investments: 5.7%
Dierk Siewert: 4.9%

Assets under management currently exceed 1.2 billion € and are allotted in the following funds:

447.2 Mio. Absolute Return Europe Fund (Launch: March 2002) CAGR: 17.6%
218.2 Mio. European Catalyst Fund (Launch: October 2003) CAGR: 22.3%
199.2 Mio. Absolute Germany Fund (Launch: January 2004) CAGR: 22.7%
94.1 Mio. Absolute East West Fund (Launch: July 2005) CAGR: 28.7%
215.4 Mio. Absolute Octane Fund (Launch: July 2005) CAGR: 70.9%
53.1 Mio. Absolute Large Cap Fund (Launch: February 2006) CAGR: 37.9%

On July 1st, they launched 2 new Funds, the Absolute India Fund and the Absolute Activist Fund.

On August 21th, Absolute Capital Management announced spectacular earnings after it has been awarded 'Best Hedge Fund Group 2006' at this year's Hedge Fund Review European Awards:

Assets under management up 125% since 30 June 2005, and up 46% since 1 January 2006
Pre-tax profit up 142% (compared to 6 months to 30 June 2005)
Industry leading margin of 56% (excluding share-based payments)
Basic EPS excluding non-cash items up 153% (compared to 6 months to 30 June 2005)
Combined management and performance fee income up by 137% (compared to 6 months to 30 June 2005)

With an actual price of 2.03 £ and the estimated earnings for 2006 at 0.31 £ the hedge fund manager trades at a PE of 6.5 and the forward PE based on 2007 earnings is currently at 4.8. Compared to its competitor RAB Capital which trades at a 2006-PE of 16.5 and a 2007-PE of 13.2 the stock of Absolute Capital Management is currently quite cheap.

After its fast run up of 128% in the first three days of its trading, the stock traded lower and reached 1.40 £. The latest action suggests that the stock seems to have bottomed out at around 1.60 £ and is starting to rise after breaking above its key-resistance at the 1.80-level. Given the good fundamentals and the recent strength in it´s stock price Absolute Capital Management seems to be cheap buy at the current levels.

Biggest Emerging Market: Russia

2006-08-30T12:31:00.000+02:00

Russian stocks are approaching $1 trillion in value, an emerging-market record, mostly because of the country's oil and gas industry. The Russian Trading System Index (RTSI) has surged 88 percent over the past 12 months. Russia's market capitalization on Aug. 16 reached a record $946.2 billion, 15 percent larger than South Korea, the next biggest emerging market, at its peak in May, according to data compiled by Bloomberg.

Russia´s biggest company, OAO Gazprom, ranks as the world's third-largest company at $276.9 billion, behind Exxon Mobil (NYSE: XOM). and General Electric (NYSE: GE) and ahead of Microsoft (NASDAQ: MSFT) and Citigroup (NYSE: C). Shares of Moscow-based Gazprom, the world's largest natural-gas producer, have jumped 60 percent this year. The country's biggest companies outside the oil and gas industry include OAO Sberbank, Russia's biggest lender; OAO Unified Energy System, the national power utility; OAO GMK Norilsk Nickel, the world's largest nickel miner; OAO Cherkizovo Group, Russia's largest meat producer; and OAO Mobile TeleSystems, eastern Europe's No. 1 mobile-phone operator.

Unfortunately, there are only some Russian comapnies listed on U.S. exchanges:
Mechel Steel Group (NYSE: MTL)
Mobile Telesystems (NYSE: MBT)
Rostelecom (NYSE: ROS)
Tatneft (NYSE: TNT)
Vimpel Communications (NYSE: VIP)
Wimm-Bill-Dann Foods (NYSE: WBD)

Additionally, there are some companies traded on the London Stock Exchange (LSE):
Amtel - Vredestein (LSE: AMV)
Comstar United Telesystem (LSE: CMST)
Evraz Group (LSE: EVR)
Lukoil (LSE: LKOD)
Novatek (LSE: NVKT)
Rosneft (LSE: ROSN)

However, a lot of Russian ADRs are traded OTC in the U.S. Bank of New York provides a detailed list.

Decoupling of Stock Markets and Commodities?

2006-08-28T12:02:00.000+02:00

For the past few years, Reuters´s Commodity Index (CRB index) has tracked Morgan Stanley's World Index (ex USA). But does its latest 6 percent decline signal a global economic downturn, or just the unwinding of over-extended speculative positions? Right now the economic outlook is mixed. The Japanese and US economies shifted into lower gears in Q2, but China expanded 11.3 precent, it's fastest in a decade, and the Euro zone economy grew at a 2.4 precent annual rate, its best in six years. Furthermore, Gary Dorsch recently pointed out that global monetary conditions still remain super-easy despite the recent round of global rate hikes.

Last week however, the CRB index and the MSCI World (ex USA) went separate ways, threatening the tight relationship between the two markets. Global stock markets rose, celebrating a 10 percent slide in crude oil prices towards $70 per barrel, while the CRB index was hammered due to its 45 precent weighting in energy and gold. Such divergences have popped-up from time to time however, but over the long-term, the close relationship hasn't ruptured into a full divorce.

A similar divergence developed in March 2006, when the CRB index fell 8 percent, while the MSCI World (ex USA) index was left relatively unscathed. Two weeks later, the CRB index rebounded strongly and caught-up with elevated global stock markets. Another divergence occured in the 4th quarter 2004, when the the MSCI World (ex USA) index rose 15 percent, while the CRB index traded sideways. Two months later, the CRB index shot up 15 percent. In both instances the CRB index held up above it´s key support levels, before catching up with elevated stock markets.

If global stock markets stay elevated, projecting a strong global economy, and the CRB index stays above it´s current key support at the 330-level, then the CRB index could easily reclimb it´s latest highs at the 360-level. However, if the CRB index breaks significantly below the 330-level it should find some support at the 320-level. As the chart below shows, a break of the 330-level jeopardises it´s long-term uptrend.

The Bull Trap at Risk

2006-08-24T11:57:00.000+02:00

Yesterday the S&P 500 Index, which closed at 1,292.99 points, lost 0.45% and the S&P 600 Small Cap Index, which closed at 360.92 points, lost 1.41%. A look at the headlines of the financial press shows that again the housing market seems to be the catalyst for this drop, as the Bloomberg reported "Stocks in U.S. Retreat as Home Sales Trail Forecast" and the Wall Street Journal refered "Stocks Fall on Weak Housing Data".
Sales of previously owned homes fell 4.1 percent in July to the lowest level since 2004, which was below Wall Street expectations, and the inventory of unsold homes climbed to a new record high. An article in the Wall Street Journal highlights that home owners´ pain of the housing slump seems to be just kicking in, as a recent research paper from the FED suggests, that housing prices may become more volatile in the coming years. Lon Witter, founding partner at Witter & Westlake Investments, recently pointed out, that the stock market and many analysts are ignoring the full consequences of the bad housing news, as not a single money manager ranked problems in the housing market among the factors likely to lead to a sharp selloff in stocks in the next 12 months according to Barron's Big Money Poll of institutional investors in May 2006.

The sector performance in the recent weeks shows some interesting points about the change of the investors´ mood. As the chart below shows, the latest up-move in the S&P 500 Index, which started on August the 10th and could be a bull trap, was led by Technology, Industrial and Consumer Discretionary sectors. This sector performance suggests, that investors anticipated a softlanding at that time.

However, as the next chart shows, the picture has clearly change since the S&P 500 began its consolidation on August the 18th.

In the last four days investors prefered the Healthcare Services, Consumer Staples and Utilities sector, which indicates an anticipation of an economic slowdown.

Given the recent change in investors´ preferences towards defensive sectors and the drop in stock prices the end of the bull trap could be near. The hourly chart of the S&P 500 Index below shows that the index is reaching its support zone between 1,290 - 1,280. A break of the key support at the 1,280-level would be the end of the bull trap and the market should resume its downtrend.

However, if the market does not fall significantly below the key support at the 1,280-level and the small and mid cap indices will also break out of their downtrends, this rally could be real and the S&P 500 should reach it´s recent high at 1,326 in the coming months.

U.S. Large Cap Revival: Confirmation?

2006-08-23T13:51:00.000+02:00

The current rotation into large cap stocks seems to have reached a critical point. The two charts below clearly show that large cap stocks, measured by the S&P 500 Index, have outperformed small cap stocks, measured by the S&P 600 Small Cap Index. The same picture can be found for the S&P 100 Index vs. the S&P 500 Index (second chart).

However, a look at the broader Russel 2000 Index reveals, that this rotation is currently near a critical point, as recently the upper line of long-term downtrend was touched.

A break of the downtrend line would be a confirmation of the rotation into large cap stocks. The fundamental reasons behind this trend are the relative overvaluation of small cap stocks and the change in the interest environment.

Disclosure: The author has a long position in SPY and a short position in IWM.

CME Outpaces it´s Rival CBOT

2006-08-21T22:42:00.000+02:00

Chicago Board of Trade's parent, CBOT Holdings (NYSE: BOT), went public on October the 9th 2005 at a price of $54 per share. Yesterday it traded at $118.88 per share, which is above the highest price target at $118, issued by Wall Street´s analysts. The lowest price target is currently at $100 and the median price target is at $105 (Source: Thomson/First Call). On August the 15th, analyst Jason Willey of Standard & Poor's Equity Research lowered his investment recommendation on shares of CBOT to "strong sell" from "sell" and put a price target on the stock of $105. Currently 8 analysts have a "Hold", 2 a "Sell" and 1 analyst has a "Strong Sell" rcommendation on the stock (Source: Thomson/First Call). However, despite the analysts´ reservation about the growth prospects of CBOT in comparison to it´s biggest rival the Chicago Merchantile Exchange (NYSE: CME), the stock has outperformed CME with an year-to-date return of 26.8 percent.
On a trailing earnings basis BOT trades currently at an PE of 52 where CME trades at a PE of 45. Regarding this year´s earnings both trade at a PE of 39. On a forward looking basis, BOT trades at a slightly higher PE of 32 in comparison to CME which trades at a forward PE of 31 for 2007 earnings. To justify these high PE ratios, well above the price-earnings ratio of less than 20 on the average S&P 500 stock, both companies should exhibit the same growth prespectives.
Both companies derive their biggest part of revenues from clearing and transaction fees (see figure below). However, it should be noted that the CME provides clearing services for the BOT and the NYMEX. An increase in the clearing revenues of the BOT or the NYMEX should therefore also boost clearing revenues of the CME.

As the figure below shows, trading volume on both exchanges has increased over the last 3 years by 26 percent on the CBOT and by 31 percent on the CME. A lot of the trading volume on these two exchanges has moved from the open outcry market to the electronical trading platforms, as the growth rates for electronic trading volume have outpaced the growth rates of the total trading volume. CBOT currently processes 67 percent of it´s tradimg volume electronical, whereas CME processes 70 percent of it´s trading volume over it´s GLOBEX trading platform.

This trend seems to be the key-factor which drives the profitabilty of these two exchanges. However, the figure below clearly shows that the CME with a operating margin of 61 percent is by far more profitable than the CBOT, which has a operating margin of less than 46 percent. The CME had a much higher revenue growth compared to the CBOT while it maintained to grow expenses at a lower rate than the CBOT did.

The figure below shows the product mixes of the two exchanges. It can be clearly seen that the CBOT earns most of its money from its interest rates products and agriculture products, whereas CME has a host of products that cover trading in interest rates, stock indexes, currencies, and commodities.

The most important point regarding the valuation of the two exchanges are their growth prospects. The figure below compares the year over year (yoy) growth rates of the total trading volume on both exchanges to their 3 1/2-year compounded annual growth rates (CAGR).

It can be clearly seen that the yoy-growth rates of the CBOT have already decreased in the recent quarters whereas the yoy-growth rates of the CME are still at their historical CAGR-levels and show no sign of a sharpe decrease. A more detailed look into the different product categories (see figure below) reveals, that the yoy-growth rates of interest rates products of the CBOT have dramatically cooled down to single digit growth rates at 9% in the latest two quarters, which is well below its 3 1/2-year CAGR at 24 percent. Growth rates for equity index products, which contribute only 4 percent to the total trading volume of the CBOT, have also sharply decreased in the recent quarters. The main contributors to the recent upswing in the yoy-growth rates in the total trading volume were the agricultural products and the metal products, which are not displayed as they contribute only 2 percent to the total trading volume on the CBOT. However, the trading volume in agricultural products is highly cyclical and will not deliver steady growth rates in the quarters ahead. And the strong growth rates for metal products were due to an increase of market share against it´s rival Comex, which is part of the New York Mercantile Exchange. However, this trend should be short lived, as the Comex plans to introduce electronic trading for gold futures in the near future. So with decreasing growth rates in it´s flagship product "Interest Rates" and a recent up-swing in its cyclical agricultural business, the CBOT should exhibit lower growth rates in total trading volume in the coming quarters.

Unfortunately, growth rates of interest products at the CME have also declined in the recent quarters. However, they are still well above the growth rates of the CBOT. Growth rates of the equity E-mini products, which contribute 28 percent to the total trading volume of the CME, are on the rise and growth rates of foreign exchange products exhibit strong growth rates with a 3 1/2-year CAGR of 50 percent. The CME is going to expand it´s foreign exchange products in the coming months with the launch of Chinese Renminbi futures and options contracts against the U.S. dollar, euro and Japanese yen on August 28th and the launch of Korean Won futures and options on September 18th. Additionally, CME has created FXMarketSpace, the world’s first centrally-cleared global FX marketplace, in cooperation with Reuters. This joint venture should boost revenues from the FX market. Given the mentioned facts, the current growth outlook for CME is clearly much better than for the CBOT.

The figure below shows the rates per contract (RPC) of the open outcry and the electronic trading markets of both exchanges.

It can be clearly seen that the CME currently earns 30 percent more than the CBOT for one contract traded on its electronic trading platform GLOBEX.

To summarize, the CME clearly has a much better growth outlook compared to the CBOT and has more pricing power. Both facts should translate into higher trading volume growth rates and higher earnings growth rates. However, higher growth prospects should be priced in by a premium in the forward PE ratio of the CME compared to the CBOT. As currently the foward PE ratios of both exchanges are nearly the same, the shares of the CBOT should underperform relativ to the CME in the coming weeks. Possibly, if the earnings estimates for the CBOT are to high, the fall could be even much bigger.

Given the recent outperformance of the CBOT against the CME (see chart above), a relative value trade (long CME and short BOT) seems to be a good low-risk profit-opportunity. If an investor decides to set up the trade, he should be careful and watch the merger disussion of New York´s Board of Trade (NYBOT). A merger between the NYBOT and the CBOT could change the whole picture, as the NYBOT would bring a clearing business into the partnership.

Disclosure: The author has a long position in CME and a short position in BOT.

Missing Confirmation of Breakouts

2006-08-18T10:41:00.000+02:00

Although the S&P 500, the Dow Jones Industrial and the Nasdaq recently broke out, Tate Dwinnell is still cautious to call this a raging bull market as the volume remains a bit tepid. Barry Ritholtz also misses confirming volume.

Eddy Elfenbein noticed that stock prices still lag earnings growth. Therefore, he can´t think of a real bull market as price/earnings ratios decline. And J.D. Steinhilber highlights that the S&P 500’s earnings yield is higher than the 10-year Treasury yield.

A deeper look into the market reveals that the recent break out of the S&P 500 could be a bull trap and the S&P 500 could soon resume its downtrend.

Barry Ritzhold recently highlighted the current rotation from samll cap into large cap stocks which can be identified by the relative performance of the S&P 500 Index against the S&P 600 Small Cap Index. The recent up move in the chart below suggest that this rotation is underway since the market toped in May.

A look at the chart of the S&P 600 Small Cap Index and the S&P 400 Mid Cap Index reveals that both small caps and mid caps are still in their downtrend.

Given the fact that the S&P 100 yesterday was is just 0.75 percent below its 52 week high, the recent breakouts of the major large cap indices seem to be result of the rotation from small to large cap stocks and not a true trend reversal.

The action in the volume also confirms this interpretation, as the the volume in the large cap indices in the last days was clearly higher than the volume in the small and mid cap indices. The lack of confirming volume was much more visible in the small and mid cap indices as it was in the large cap indices.

However, if the recent up move in S&P 500 Index is a real trend reversal, the S&P 600 Small Cap Index and the S&P 400 Mid Cap Index should also break out of their downtrends.

An Asian Currency Option

2006-08-17T17:52:00.000+02:00

On August 8th, Lehman Brothers (NYSE: LEH) sold to the public 4.9 million warrants that let investors bet on a group of Asian currencies against the greenback. Each Asian Appreciation Basket warrant has an initial notional value of $95 and covers four currencies - the Chinese yuan (CNY), the Japanese yen (JPY), the Singapore dollar (SGD) and the Taiwan dollar (TWD), each makes up a portion of the Basket with a weighting of 25 percent - and will expire on Feb. 13, 2008. The warrants, which are cash-settled, trade at the AMEX under the symbol AAB.WS and were price at their "IPO" at $6.23 each. The initial reference currency rates were as follows:

CNY: 7.9740
TWD: 32.8300
JPY: 115.0400
SGD: 1.5739

Already in February Morgan Stanley projected Asian currency appreciation in 2006 by highlighting several points:

CNY and JPY are the two remaining structural tension points in the currency space, as they are undervalued.
Global growth is very robust.
The official reserves of several countries in Asia have reached or are approaching ‘saturation’ levels.
Currency politics from the US are heating up.
China likely to be ready to impart more currency variability in USD/CNY.
Lastly, the Fed and USD/JPY Will Disturb, Not Reverse this Trend

The rising currency reseves of Asian central banks (see chart below) clearly indicate that they are currently intervening to hold their currencies down against the U.S Dollar, while world financial leaders push for stronger Asian currencies.

As a result currency reserves of the developing world nearly quadrupled over the past decade to $2.9 trillion last year, while those of industrialized countries rose only 150% to $1.3 trillion. The share of total reserves held in dollars was 66.5% in 2005 (see chart below).

IMF statistics show that developed countries have remained remarkably reliant on the greenback, which still accounted for 74% of their overall reserves in 2005. Yet developing nations have reduced the share of their dollar holdings to 60.5% from a high of 71.1% in 1998. China´s National Bureau of Statistics recently commented that China should increasingly diversify its foreign-exchange reserves to reduce the risk of losses from declines in the dollar. As Dr Enzio von Pfeil pointed out, Asian Bonds are currently a real alternative to U.S. Treasuries for Asian central banks.

Given the growing push of developed countries to revalue Asian currencies and the Asian central banks´ growing need to diversify their currency reserves, Lehman´s Asian Appreciation Basket warrant could provide a good vehicle to profit from this development. See below the charts for the individual Asian currencies and the one of the basket of all four currencies against the U.S. dollar.
The prospect can be found here.

Shipping Stocks Rise as Fundamentals Improve

2006-08-15T21:36:00.000+02:00

Shipping stocks gained strength in the last weeks as fundamentals are still improving. The weekly chart below shows that leading shipping stocks (Frontline Ltd Adr (FRO), General Maritime Corp (GMR), Nordic Amer Tanker Ship (NAT), O M I Corp (OMM), Overseas Shipholding Grp (OSG), Tsakos Energy Navigation (TNP), Knightsbridge Tankers (VLCCF)) have risen both absolute and relative to the S&P 500 in the last weeks.

The Baltic Dirty Tanker Index (BDTI) and the Baltic Clean Tanker Index (BCTI) which measure the dayrates for tankers have been rising since June 2006. The BDTI index, which measures the costs of hiring ships able to transport crude, rose 10.2 per cent last week, and is 42.8 per cent higher than last year. The index is up by an even sharper 51 per cent from April lows. The BCTI has been rising since April and is currently 45 per cent higher than last year and 68 per cent above March lows.However, the movement in dayrates can be attributed to the time of year, as dayrates tend to rise between August and November, to meet winter heating demand. Nevertheless, as Ole-Rikard Hammer, analyst at the Norwegian shipping broker PF Bassoe noted the shipping market was enjoying an unusually strong summer run even before the Prudhoe Bay news:

"From a shipping perspective, growth in oil demand has proved much stronger than expected, and we have also seen the increase in fleet capacity take a breather this year, with few VLCCs coming to market in 2006."

China’s oil demand growth has risen by an estimated 6.1 percent this year, significantly above the level for last year´s 2.6 percent. Chinese imports of crude oil and related products from overseas suppliers rose 20% year over year in the first quarter of 2006 (Source: IEA).
The shutdown of production at Prudhoe Bay oilfield in Alaska caused shipping rates to jump higher, as BP was enquiring about the availability of a wide range of ships from the Middle East, the Gulf, West Africa, the Mediterranean and the Caribbean (Source: FT). Analysts predict it would require 12 VLCCs to transport crude from the Gulf or West Africa to fully meet Prudhoe Bay’s 400,000 barrels of daily production over a 60-day period. Given the fact, that currently the worldwide fleet of VLCCs consists of 465 ships, the uncertainties of Prudhoe Bay’s shutdown could additionally tighten the tanker market in the coming months, beside the high Chinese oil imports.

Gold at Critical Technical Point

2006-08-09T11:17:00.000+02:00

A look at the daily chart reveals that Gold could be at a critical point as it reached its mid-term downward-sloping trendline.

In the last 6 days Gold has been trading in a tight range between $652 and $644. Yesterday gold tried to break out of this narrow range to the downside, but recovered very fast back to $648 and closed at $644. However, it did not get above its intraday 50 and 100 hour moving average, which could be bearish sign for Gold in the coming days. If Gold breaks below the key support at the 643-level and if the 200 hour moving average will not support it, then Gold should fall at least to around $630 per ounce. The 630-level is a key support of the previous up-move from $600 to $655. Additionally to that, the 100 day moving average will get close to this level in the next few days, so there could be some support at the 630-level.

If Gold should also fall below the 630-level and the 50 day moving average around $620 will not support it, then Gold should at least test its July low at around $600 per ounce.

U.S. Large Cap Revival: Follow-Up

2006-08-07T10:59:00.000+02:00

I mentioned in a previous post, that large cap stocks should outperform small cap stock in the coming months based on the changes in the interest environment. William Hester from Hussman Funds recently pointed out that current valuations do also indicate that,

"in terms of relative performance, there may be better days ahead for large-cap companies (if not gaining more than small caps, then maybe at least falling less)."

The S&P 500 has currently a P/E ratio of 16.9 whereas the Russell 2000´s P/E ratio is currently at 33, almost twice that of the S&P 500. Bloomberg estimates that the earnings of the S&P 500 companies will grow in the next 12 months at 14.8 percent whereas the Russell 2000 companies´ earnings should increase by 42.9 percent, almost three times that the S&P 500.

Leading Market-Based Recession Indicators

2006-08-05T15:47:00.000+02:00

As the controversy about a possible U.S. recession is gaining strengh in the last months, it would be vital for investors to spot emerging danger signs of a coming recession.
John Hussmann pointed out in his weekly newsletter on July 31th:

"Investors are tenuously sticking to the first story line – moderating growth with no risk of recession, moderating inflation, beliefs that stocks are reasonably valued, and hopes for an end to the tightening cycle. Yet the data are actually consistent with a second story line – emerging (though not imminent) recession risks, persistent “structural” inflation, rich valuations, probable contraction of profit margins, and an incoherent Fed policy that is likely to become even more incoherent in attempting to battle weaker economic growth and persistent inflation simultaneously (not that I believe Fed actions will be effective in any event)."

Even Ed Yardeni wrote about a possible U.S. recession in his Morning Briefing on Monday July 31th:

"We think if a recession is in the cards, then it is more likely to happen over the next 6 months than 6-18 months from now. If the economy continues to grow over the rest of the year, then it should continue to do so all of next year. In other words, it's Showtime for the economy. If it has the resilience we believe it does, then the housing recession, flattening home prices, gasoline prices over $3, heightened geopolitical risks, and one more (and last?) hike in the federal funds rate shouldn't cause a significant slowdown or a recession."

John Hussmann already pointed out on May 15th:

"...that sudden dollar weakness would probably be among the first signs of oncoming economic weakness, especially if accompanied (at the same time or shortly thereafter) by widening credit spreads."

However, if the Fed has reached the end of the road on rate hikes at 5.25%, and other central banks are still raising their interest rates, then the US dollar could fall sharply lower. Given the onging dispute between the US Congress and Beijing about the revaluation of the Chinese yuan, the dollar could fall against the yuan. That would translate into much higher prices for US consumers and higher inflation. A weaker dollar could also exert upward pressure on gold, base metals, crude oil, and other commodities, and elevate inflationary pressure with higher import prices.

William Gross believes as well that sometime within the next several years, a U.S. recession is likely, due to currency, commodity, and housing related influences. In PIMCO´s October 2005 Investment Outlook he wrote:

"If real housing prices decline in the U.S. in 2006 or 2007, a recession is nearly inevitable."

A continued fall in the homebuilder stocks could indicate the start of a bursting U.S. housing bubble and that the U.S. consumers would be strapped by falling home prices.

Regarding the corporate credit spreads, Mark Kiesel showed in PIMCO´s September 2005 U.S. Credit Perspectives that corporate credit spreads are mainly influenced by the following five factors:

Balance sheet leverage (Debt/Ebitda)
Interest coverage (Ebitda/Interest)
Stock returns
Risk appetite or banks’ willingness to lend
Volatility or the VIX index

However, the first four factors can only describe historical credit spreads, as there are only back-dated time series available. By contrast, as the figure below shows, the VIX can give some indications about future credit spreads.
To summarize there seems to be four main leading market-based indicators which could be helpfull for predicting the possible recession:

a falling U.S. dollar (measured by the US Dollar Index),
a continued fall of homebuilder stocks (measured by the SPDR Homebuilders (AMEX: XHB),
widening corporate credit spreads (measured by the difference between Moody's BAA and AAA yields and 10-year Treasury yields), and
high equity volatily levels (measured by the VIX).

Recession Signal from The Dow Theory?

2006-08-04T20:35:00.000+02:00

To Charles Dow, the originator of the Dow Theory, a bull market in the Dow Jones Industrials (DJI) could not occur unless the Dow Transportation average (DJT) rallied as well. Therefore, the two averages should be moving in the same direction. When the performances of the indexes diverge, the bull market could be in trouble. One can argue the relevance this has in a service economy or even if the DJI is an industrial index at all. The point is that the theory still works. As previously mentioned by Birinyi's Ticker Sense there is currently a divergence between the DJI and the DJT. Does this divergence indicate the first sign of a possible recession, which would result in falling stock market?
Let´s have a look at the year 1994, in which the U.S. economy accomplish a softlanding. The chart below displays the daily closing prices of the DJI and the DJT from January 1994 until June 1995. It can be clearly seen that during 1994 there was a large divergence between the DJI and the DJT as the later one recorded three lower lows throught the years, whereas the DJI did not fall below it´s low recorded in April 1994.

However, as the bull market started in December 1994, the indices began to rise in tandem. The successful breakout attempt of the DJI in March 1995, was supported by a rising DJT, which did not show all time record levels, but exhibited a strong up-trend. From the Dow Theory´s perspective, the current divergence does not mean that a softlanding à la 1994 is out of chance.

However, the DJT is worth watching in the coming weeks, as the DJI and the S&P 500 are currently trying to penetrate their overhead resistance zones at 11,250-11,300 and 1,280-1,290, respectively. In order to support the up-trend, the DJT should climb back at least ablove the support zone between 4,400 and 4,450. However, if the DJT cannot accomplish this minor feat, and instead, continues to fall, then the DJI might selloff from the horizontal resistance zone at 11,250-11,300 towards key support at the 11,700-level and the S&P 500 could fall towards key support at the 1,240-level.

How to Cash in on Risen Fed Rates

2006-08-03T09:24:00.000+02:00

BCA Research published on July 24th an interesting pice of research with the title U.S. Large Cap Revival:

"Small cap stocks have surged into overshoot territory over the past few years, fueled by a steady diet of easy money and rapid economic growth. In fact, relative performance has reached an extreme, two standard deviations above its 20-year trend. While markets can stay overbought for a prolonged period, the conditions supporting small cap outperformance have begun to fade: liquidity is draining from the financial system at the same time the main engines of growth are slowing, namely the U.S. consumer and Chinese investment growth. These forces have helped set in motion an upturn in financial market volatility and act as the catalyst to return to large cap leadership."

There are several ways how to take action and profit of this pice of information:

A mutual fund manager can overweight large caps relative to small caps,

a hedge fund manager can set up a relative value trade by being long a large cap index and short a small cap index, and

an individual investor has the choice between the two implementations, which clearly depends on both your operating experience and your risk awareness.

To put the relative value trade into action the investor needs financial instruments which reproduce the performance of the indices used in the mentioned study. However, there are four indices available which fulfil this criteria. For small cap stocks there is the S&P 600 and the Russell 2000 available and the S&P 500 and the Russell 1000 represent large cap stocks. Regarding the financial instruments, the investor has the choice between futures and Exchange Traded Funds (ETF). As far as the futures are concerned, there are contracts with different sizes listed on the Chicago Mercantile Exchange (CME) for all of the above mentioned indices. However, let´s focus on the ETFs. iShares has issued EFTs on all the four mentioned indices and for the S&P 500 there is additionally the legendary SPDR available. A closer look at the trading properties of these ETFs reveals, that not all are suited for such a trade, as the trading volumes and the bid-ask-spreads differ substantially. I would suggest to use the SPDR for the S&P 500 (AMEX: SPY) and the Ishare Russell 2000 Index Trust (AMEX: IWM) for this relative value trade, as they have the highest daily trading volumes and the lowest bid-ask-spreads.
After changing the indices we have to investigate whether they deliver the same results or modify the performance. The figure below clearly shows the same picture regarding the connection between rising Real Fed Funds Rates and large cap leadership.

However, if you decide to set up the trade, keep in mind that the research study on which you based your decision does include data of the stagflation-period in the 70s. This fact could be a crucial factor for the profitability of this trade, as John Hussmann recently pointed out:

"Stagflation isn't an outside chance, but a reasonable likelihood here."

Will Oil Peak This Year in July?

2006-07-31T21:02:00.000+02:00

As Yaser Anwar points out, from a technical perspective oil is done for now, as it hit an intermediate top on July the 14th at $78.40. And William Trent highlights that oil inventories continue to rise. However, Faisal Laljee explains why he thinks oil is cheap at $75 a barrel. Jim Rogers says oil prices will reach $100 a barrel, possibly this year, and adds:

"Unless somebody discovers something very quickly and very accessibly, we're all going to be dumbfounded at how high the price of oil will go, including me."

Francisco Blanch, head of commdities research at Merril Lynch, said in a July 17 interview:

"It's unlikely we will see another price rally from here, unless the current conflict expands beyond its current borders. You'd need physical disruptions, and large ones, to bring the price to $100. You'd probably need to lose Iran."

$100 a barrel seems to be a magic number for commodity investors as the number of options to buy crude at $100 this year is currently at 53,047, triple the amount on April 21, for the September through December contracts (Source: Bloomberg).

The chart below shows that oil has a strong seasonal period from July to October.

Oil´s seasonal strength from July to October is heavily influnced by
hurricans and the hurricane season is now fast approaching. As Elliot Gue, Editor of the Energy Strategist, points out:

"Hurricane activity tends to move in multi-year cycles. Unfortunately, most meteorologists agree we’re now in the midst of a more-active Atlantic hurricane cycle, meaning there’s potential for a larger-than-normal number of major hurricanes to strike the Gulf of Mexico this summer."

In 2004 oil peaked in October and in 2005 it reached it highest price in August.

Taking a Closer Look at the GDP Numbers

2006-07-29T21:32:00.000+02:00

The Bureau of Economic Analysis (BEA) released the Advanced Q2 GDP report on Friday morning: Real gross domestic product (GDP), the most comprehensive measure of economic activity, increased 2.5 percent in the second quarter after increasing 5.6 percent in the first quarter.
A first view reveals that growth rates for all the components of GDP have simply been downsized.

Consumer spending, which accounts for more than two-thirds of the economy, contributed 1.74 percent to the real GDP growth in the second quarter compared to a contribution of 3.38 percent in the first quarter. For the first time since Q1 in 2003, residential construction drained 0.4 percent from Q2 GDP growth after it exhibited a gradually decreasing contribution in the previous three quarters. Last year, for example, residential construction contributed about a sixth of the total 3.2% in real GDP growth. For the first time in a year, net exports made a positive contribution to GDP growth. Unfortunately, this was caused by a decreased drain of imports and not by a large increase in the constribution of exports. Exports´ contribution to the real GDP has in fact decrased from 1.41 percent in the first quarter to 0.35 percent in Q2.
Fed Chair Ben Bernanke has expressed hope that

"investment in nonresidential structures, which had been weak since 2001, seems to have picked up appreciably, providing some offset to the slower growth in residential construction. [...] Growth of the global economy will help support U.S. economic activity by continuing to stimulate demand for our exports of goods and services."

But with nonresidential investment contributing +0.28 percent to real GDP in the second quarter, residential investment -0.4 percent and exports +0.35 percent, it seems safe to say that Bernanke's optimism does not find much confirmation in the latest GDP numbers.

The low consumption number could be due to decreasing Mortgage Equity Withdrawals (MEW), which seem to have had a strong impact on the GDP in the last 5 years. However, MEW numbers for the second quarter will be availabe at the earliest on September 14th, when the FED's flow of funds report is published.

As James Hamilton points out the GDP growth in the first quarter was so strong that it brought the recession probability index down from 7.1 percent for previous quarter (Q4 2005) to 3.4 percent for the first quarter in 2006. This index is not a forecast of where the economy will be later this year, but is a backward-looking assessment of where the economy was as of Q1 in 2006, using the latest data to form that assessment. Background on how the recession probability index is constructed and a review of its historical performance are available here.

Market´s Reaction on GDP Data

2006-07-29T19:54:00.000+02:00

Last week numerous Wall Street Economists had raised their GDP estimates, with consensus coming in at 3.2 percent -- despite slowing retail sales, decreased mortgage apps, and cooling home sales. The actual GDP figure for the second quarter came in at 2.5 precent.

The Financial Times adds:

"However, there was further evidence of building inflationary pressures, with a keenly watched prices gauge rising at a much faster pace than forecast."

Bloomberg weights in as well:

"A separate report from the Labor Department showed U.S. labor costs rose 0.9 percent last quarter, more than expected, led by the biggest increase in wages in three years. The rise followed a 0.6 percent gain in the previous three months."

"The government's personal consumption expenditures index, a measure of prices tied to consumer spending, rose 4.1 percent after a 2.0 percent rise in the first quarter. The index excluding food and energy, a measure favored by Fed policy makers, rose at a 2.9 percent annual rate after a 2.1 percent rise the previous quarter."

And the Wall Street Journal reports:

"Economists said that the main message in the data -- slowing growth, rising prices -- will further complicate the Fed's task of deciding what level of interest rates is high enough to contain inflation, but not so high that it would snuff out economic growth."

The stock market apparently sees a soft landing coming, as the S&P 500 rose by 1.22 percent and closed only marginal under its daily high of 1,280.42 at 1,278.55. In line with the sector rotation model, the leading sectors were Materials (+1.82%), Financial Services (+1.78%) and Technology (+1.74%), whereas Energy (+0.03%), Healthcare (+0.53%) and Utilities (+0.68%) were the lagging sectors. The bond market, on the other hand, aggressively bought treasuries, driving the 10 year note below 5 percent and closed slightly above its daily low of 4.979 percent at 4.99 percent.

From a technical perspective the strong move on Friday was not overwhelming to me:

The volume of 2,2 billion shares changing hands on Friday was the lowest in the week. And regarding the level, the S&P 500 is clearly in front of a massive resistance zone between 1,280 and 1,290, which is marked by the highs from July and June and the 200 day moving average.

Additionally, last weeks rally seems to me is loosing its power, as the volume of up days was clearly lower than the volume on the days when the S&P 500 closed down.

Barry Ritholtz concludes from an interesting earnings season study from Birinyi Associates, that currently

"most of the good news is already built into stock prices and the bad news is not yet factored in,"

as the average one-day price reaction of S&P 500 companies, that missed earnings, is the highest one and the average price reaction on beating earning is the lowest one in the last four years. Despite quarterly numbers are coming in better than expected, compared the the last four years.

The Market´s view on the future path of interes rates has goten somewhat clearer after the the release of the GDP numbers, as the following figures show.

It seems that the market currently sees the end of the FED´s rate hikes comming in August.

Gold Has Toped at $730

2006-07-25T22:16:00.000+02:00

From a technical perspective Gold seems to have toped out at $730 an ounce. The monthly chart below shows the cash price of Gold in the last 10 years.

Gold started its latest move in September 2005 when it broke the mark at $450 (previous high from November 2004) and rose as high as $730 an ounce in May 2006. This movement showed an increase of 62 percent. How much time needed Gold previous to that large up-move to complete a movement of such a hughe magnitude (62%)? That movement took 35 months. It started in January 2002 when Gold broke above $281 and reached ultimately $456 in November 2004. Compared to the length of the latest move with the same magnitude, which was only 9 months, this timeframe was quite long. I think Gold went for broke in its latest move. However, this does not mean that I am bearish for Gold in the long-term. I am still a believer of the secular bullmarket trend in commodities, as long as the Asian economies will show such high economic expansions.
Lets take another look at the chart above. What does the evolution of volatility tell us? If you look at the last four bars, you can see, that the volatility, as an absolute measure from high to low (notice, that this an logarithmic chart and therefore the flowing statement is also true for a relative volatility measure), was tremendous in the last four months. I think this is another sign that Gold has toped out at $730, at least for the next 6 months perhaps for even a much longer period, if the world economy suffers from a possible recession. Given the choppy water behind us, I guess Gold will be less volatile in the near future on a weekly basis.

Trying to sell tops and buying bottoms in Gold seems to me is the best strategy for Gold in the coming months.

Gold Short Position: Update II

2006-07-24T17:20:00.000+02:00

As Gold is currently down another 2 percent today and it is reaching its 200 day moving average, I suggest to take half of the profits already earned und cut the position in half. Wait for a possible technical correction to probably $620-$625 perhaps $630.

Gold Short Position: Update

2006-07-24T14:27:00.000+02:00

As GLD has been lower in the last two trading session, it should not rise above the previous support at around $63.50. Therefore, move the stop-loss near your entry price at around $63.50 to ensure you do not lose any omeny on this trade.

Uncertainties About Fed´s Rate Policy

2006-07-23T17:11:00.000+02:00

Federal Reserve Chairman Ben Bernanke's Congressional testimony and the release of the June FOMC meeting minutes accentuated a split among economists about where interest rates are headed after next month. Bernanke told the Congress:

"Taking a longer perspective, the U.S. economy appears to be in the midst of a transition in which the rate of increase in real gross domestic product (GDP) is moving from a pace above that of its longer-run capacity to a more moderate and sustainable rate. An important element in the transition is the lagged effect of the changes in monetary policy since mid-2004, changes that have been intended to keep inflation low and to promote sustainable economic expansion by aligning real economic activity more closely with the economy's productive potential. The resulting easing in inflation should help contain long-run inflation expectations."

His statements regarding the outlook on inflation were a little bit cautious:

"More broadly, if the higher rate of core inflation seen this year persists, it could induce a deterioration in longer-run inflation expectations that, in turn, might give greater momentum to inflation. However, the risks to the inflation outlook are not entirely to the upside. In the current environment of elevated profit margins, competitive forces, both in domestic markets and from abroad, could impose significant restraint on the pricing decisions of businesses."

Jan Hatzitus, Goldman Sachs Group´s New York based chief U.S. economist, said that he is very comfortable with the growth-decelerating story and expects the Fed to cut the benchmark rate to 4 percent by the end of next year. That prediction contrasts with the view of Ethan Harris, chief U.S. economist at Lehman Brothers, who said:

"The Fed has a very optimistic view about inflation, and I think they will find out they are wrong and will have to tighten more."

He estimates the Fed will push its benchmark rate to 5.75 percent by year's end, from 5.25 percent currently. (Source: Bloomberg).
A recent research report from GaveKal Research criticizes Bernanke´s foreward-looking approach to monetary policy, beacuse it seems that Bernanke isn´t worried about a recession nor about inflation. As pointed out by Paul Kasriel, director of economic research at Northern Trust, the Fed currently forecasts a growth rate of the real GPD of about 2.75 percent annualized over the remaining three quarters of 2006, which is below Fed´s targeted potential growth rate between 3 and 3.25 percent. Regarding the inflation, the Fed already has raised their forecast for 2006 from about 2 percent in February up to 2.25-2.50 percent. The forecast for 2007 was raised from 1.75-2.00 percent in February to 2.00-2.25 percent.

The June FOMC meeting minutes revealed that Federal Reserve officials were undecided in June about future interest-rate decisions and expressed concern about higher inflation while expecting it to decline.

"Many members noted that significant uncertainty accompanied the appropriate setting of policy going forward, and one indicated that the decision to raise the target federal funds rate at this meeting was a close call."

However, the FOMC voted unanimously on June 29 to raise the overnight lending rate between banks by a quarter-point to 5.25 percent, the 17th straight increase since June 2004. According to a recent comment on Bloomberg, the risk of split votes on interest-rate decision seems to be rising, as the Fed´s dozen presidents appear to be separated in two camps.

The discussion whether the U.S. economy is slowing or not, will keep controversial given the mixed economic data last week.

Even Bernanke admitted, that he can't do anything about the latest inflation rate and instead will look at the forecasts (Source: WSJ).

So take a look at the economic data, which will be released in the comming days before the FOMC meeting.

The Market´s view on the outcome of the next Fed meeting on August 8th is displayed in the figure below.

Given the influence of the latest economic data, a clear trend in the probabilities of the different scenarios seems to emerge:

the probability of a pause in raising rates has risen to 51.3 percent, and

the probability of a 0.25 percent rate hike has declined to 46.0 percent.

To measure the Market´s view on expeted inflation we use the spread between nominal and inflation-indexed Treasuries (TIPS, as everyone likes to call them) with 10-year maturities.

The figure above shows that the market currently expects inflation to be 2.58 percent over the coming 10 years.
However, it should be noted that this method is influenced by two countervailing factors. First, inflation risk, in and of itself, implies that TIPS-based expected inflation should overstate actual expected inflation. Second, and even more important, is the relative illiquidity of the TIPS market, which leads TIPS-based expected inflation to understate actual expected inflation.

These uncertainties could be due to a possible turning point, as a recent research study from Federal Reserve Bank of Cleveland points out:

"It is perhaps not surprising that the greatest prediction errors would occur prior to the onset of a recession. Such turning points are notoriously difficult to predict."

Shorting Gold: A Low Risk Possibility

2006-07-20T16:30:00.000+02:00

The 10 day intraday chart of the Gold ETF (NYSE: GLD) displays a low risk shorting possibility for Gold.

A break of $63.50 could lead to an sharpe down move, which could bring the Gold ETF down to at least $60-$61 (100 day moving average) perhaps even to $58-$56 (200 day moving average). The stop for this trade could be set between $64-$65 (depends on the risk tolerance).
The exponential increase in Gold from late March 2006 until mid May 2006, when Gold reached $730, indicated a possible temporary end of the strong bull market in Gold. I think this thought was confirmed by the sharpe fall from mid May 2006 until mid June 2006. These two extreme movements suggest that Gold will be a little bit more quiet than the past 3 months.

I think the sharpe recovery in the last 4 weeks (from $541 to $676), which seems to be aborted by the reversal day on July 17th, offers a good opportunity to profit from a possible second test of the lows around $540.
Regarding the fundamentals, a possible slow-down of the world economy could led to an temporary cooling-down of the current bull market in commodities.
Gary Dorsch published recently an intersting comment on Gold, which also suggests a slide towards the double bottom. However David Andrew Taylor is still bullish on Gold.

Chinese Oil Imports Are Rising

2006-07-20T14:05:00.000+02:00

There´s no sign of any slowdown in Chinese oil imports yet, as the nations economy expanded 10.9 percent in the first half of the year and 11.3 percent in the second quarter, the fastest pace in more than a decade (Source

: Bloomberg (Link)

). Shippments of crude oil and related products from overseas suppliers rose 20 percent year over year in the first quarter (Source

: IEA (Homepage)

). The figure below displays the oil imports from overseas in the recent quarters.

Follwoing the high growth rates in 2003 and 2004, imports decreased marginally in 2005. However, the growth rates seem to rise again, as the first quarter showed a strong increase in oil imports.
Cnooc Ltd. Chairman Fu Chengyu said in a July 18 interview, that shipments will stay near 130 million metric tons a year but will decline (Source

: Bloomberg (Link)

). He also said:

"The policies on energy saving will take three to five years to implement. I feel confident that energy imports won't be as much as we thought before"

That prediction contrasts with the statement of Barry Cheung, chief executive of Titan Petrochemicals, the country´s larget oil-supertanker owner, on April 12th in Hong Kong:

"We expect China to import 10 to 15 percent more crude this year. We believe 2006 will be a better year than 2005"

China's energy consumption is 8.4 metric tons of oil equivalent per $10,000 of gross domestic product, 3.4 times the global average, 8 times that of Japan and 4 times the figure in the U.S., Donovan Huang, senior analyst at credit-rating agency Standard & Poor´s, said. The figure below documents that the oil-sensitifity of the Chinese economy has risen in the past years.

China aims to cut the amount of energy used to produce each unit of GDP by 20 percent in five years, and 4 percent this year, Premier Wen Jiabao said in March. The government is seeking to reduce the nation's reliance on oil imports by promoting power sources such as nuclear, solar and hydropower. China´s National Development and reform Comission (NDRC) and the National Bureau of Statistics (NBS) recently announced that Chinese oil demand fell slightly (0.3-0.5%) in 2005. Which is in contrast to an increase of 2.5% reported by the International Energy Agency (IEA). However, it should be noted that this difference may be attributed to different methods of tallying apparent demand, as the offical numbers are influenced by changes in inventories, which are currently not published.
The IEA forecasts that China may increase oil consumption by 5.5 percent in 2007, after a 6.1 percent increase this year, because of strong economic growth.
Given China´s currently strong economic growth and the possiblity that it´s inventories have declined (Source

: IEA Montly Oil Report, February 2006 (Link (pdf))

), the recent strong increase of oil imports suggests that oil imports will rise at least through out the rest of year, as China beginns to fill its strategic governmetn storage.

Investors are getting feard by worries

2006-07-15T00:28:00.000+02:00

The strong increases in the volatility indices in the last 2 weeks (VIX +37%, VXN +37%, RVX +27%) show that investors are getting feared by the current worries surrounding the stock market.

Wall Streets biggest concern seems to be the potential slowdown in the global economy as worldwide interest rates and commodities prices are rising. As John Hussman points out in a recent comment, the stock market climate currently seems to be unfavorable, as investors still have a negative bias.

Bloomberg: Positive Comment on Shipping Stocks

2006-07-12T11:13:00.000+02:00

Bloomberg published on Tuesday a positive Comment on Shipping Stocks: "Tanker Stocks, Havens in Market's Decline, May Rally". Dune Lawrence interviewed bullish as well as bearish analysts to get the whole picture what the market is thinking about shipping stocks. He highlights:

the strong performance of shipping stocks relative to the Standard & Poor´s 500 Index in recent months,

their appealing PE Ratio at 8.2 times earnings over the last 12 months (compared with 13.4 when the Bloomberg Tanker Index peaked in November 2004 and compared to the PE of 17 for the S&P 500),

their high dividend yield at 6.3 percent (compared twith 3.5 percent for both electric utilities and telephone companies in the S&P 500),

and that members of the tanker index have announcedd $1.31 billion in buybacks in the past year, which amounts to about 11 percent of the gauge´s total market capitalization of $12 billion.

He also mentions that freight rates have increased in the last months and therefore earnings have held up better than analysts´ predicted earlier this year. Firts-quarter profits at all six mebers of the tanker index exceeded analysts´ estimates. Omar Nokta, an analyst at Dahlman Rose & Co. said in a statement:

"If you buy now, you get this awesome run for the fourth quarter. Most of the Street hasn´t changed their estimates yet, not even for the current environment."

Some analysts say the higher rates, and the rally won´t last. They warn that the stocks´ low valutaion reflects the risk of investing in an industry where rates and earnings fluctuate rapidly. Jonathan Chappell at JPMorgan Chase & Co., who attributed the June rate surge to short-term factors including the use of some tankers as storage by Iran and Saudi Arabia, said:

"Everything else, from inventories, to demand estimates, to numbers of ships that have been removed this year, points to a bearish market."

Shipping analysts at Jefferies & Co. predict that tanker demand wil increase 3.8 percent in 2006 through 2008, compared with fleet growth of 5.4 percent.

Near-term Neutral Outlook for Oil-Sands Stocks

2006-07-07T18:42:00.000+02:00

Several press releases about the cost overruns of major expansion projects of oil-sands companies have been puslished in the last 3 months. Western Oil Sands (TSE: WTO) noted on July 6th that the planned expansion of the mine and upgrading refinery could cost close to C$11 billion, 50 percent more than estimated just a year ago (Source

: Reuters (Link)

). Syncrude Canada, the world's largest producer of synthetic crude oil, also reported billions of overruns in the expansion of its oil-sands project (Source

: Reuters (Link)

). And UTS Energy (TSE: UTS) already reported on April 20th that upgrading refinery for the C$10 billion Fort Hills oil-sands project could be 70 percent larger than first planned (Source

: Reuters (Link)

). Beside these cost overruns Syncrude also reported delays in its expansion plan (Source

: Reuters (Link)

).
As it can be seen from the weekly chart of 10

:
Western Oil Sands Inc. (TSE: WTO)
UTS Energy Corp. (TSE: UTS)
Connacher Oil & Gas Ltd. (TSE: CLL)
OPTI Canada Inc. (TSE: OPC)
Canadian Natural Resources Ltd (TSE: CNQ)
Canadian Oil Sands Trust (TSE: COS.UN)
Nexen Inc. (TSE: NXY)
Suncor Energy Inc. (TSE: SU)
Husky Energy Inc. (TSE: HSE)
Petro-Canada (TSE: PCA)

oil-sands stocks below, the impressive rise in Candian oil-sands stocks started in July 2003. Another oil-sands stock index is the Oil Sands Sector Index publised by Sustainable Wealth Management.

These 10 oil-sands stocks gained from July 2003 until April 2006 an impressive 370%. During the run-up to these high levels the industry sector had 4 consoldiations. The first consolidation base was between October 2004 and February 2005 in which the sector lost -12% from its high in Otober to its low in November. The second one lasted from April 2005 until June 2005 with a correction of -14%. The third base was built between September 2005 and January 2006, which had a magnitude from the high in September to the low in October of -23%. The sector showed healthy breakouts of all these three consoldation phases. However, the breakout attempt out of the 4th base, which was formed between February 2006 and April 2006 (-16%) can be clearly classified as a breakout failure. The recent slump in canadian oil-sands stocks was at the same time as all stock markets around the world began to give back some of their gains of the last three years. The loss from the high in April to the low in June amounts to -23%.
The first indication of a possible end of the up-move was given by the announcement of the launch of the Oil-Sands Sector Fund (TSE: OSF.UN) from MarklandStreet in Febuary 2006, which began trading on March 15th. This announcement clearly indicated, that this sector was hot and too crowded.
In addition to the rising projected capital costs, S&P pays also close attention to rising labor costs to get a more specific fix on the part labor plays in cost inflation. Michelle Dathorne, S&P’s director of utilities, energy and project finance, said that although the long-term credit profiles for oil-sands developers have strong potential, the near-term costs are a source of “very real concern” from S&P’s perspective and could put stress on balance sheets Source

: Petroleum News (Link)

).
As oil-sands are facing higher costs for their projects it could be highly possible that the canadian oil-sands stocks will form a large consolidation base, which could last for several months perhaps even one or two years, as these huge projects devour more money than previously thought. However, the long-term outlook for oil-sands stocks remains positive, as they have the lowest geopolitical risk in contrast to other world-wide oil resorts. Given the currently high oil price, it could be possible that the cost overruns will be compensated by higher profits from the sale of oil. However, the future returns on investments from these projects will be lower than previously estimated as the costs have risen.

Oil-Sands Stocks Take a Hit

2006-07-06T23:13:00.000+02:00

Canadian Oil-Sands stocks took a hit in yesterdays trading as Shell Canada Ltd. (TSE: SHC) said on Wednesday its C$7.3 billion Athabasca Oil Sands Project (AOSP) expansion in northern Alberta faced big expense overruns (Source

: Reuters (Link)

). AOSP is a joint venture between Shell Canada Ltd. (60%), Chevron Canada Ltd. (20%) and Western Oil Sands Inc. (20%) (TSE: WTO). The design of this partnership was deliberated as follows: Shell holds the leases; Shell and ChevronTexaco share the upgrading expertise and knowledge of refining; and Western provides the mining and extraction skills.

Shell Canada did not give a target for overruns. Western said late on Wednesday that a planned expansion of the mine and upgrading refinery could cost close to C$11 billion, 50 percent more than estimated just a year ago (Source

: Reuters (Link)

)

Brian Straub, Shell Canada's senior vice-president, oil sands, said in a statement: "We see signs of a heated market for labor, materials and equipment everywhere and we must assure ourselves that we can execute successfully. Right now our focus is on mitigating the costs and risks."

Western Oil Sands Inc. (TSE: WTO) -11.9%
UTS Energy Corp. (TSE: UTS) -10.2%
Synenco Energy Inc. (TSE: SYN) -10.2%
Connacher Oil & Gas Ltd. (TSE: CLL) -5.3%
OPTI Canada Inc. (TSE: OPC) -4.3%
Canadian Natural Resources Ltd (TSE: CNQ) -4.1%
Canadian Oil Sands Trust (TSE: COS.UN) -3.7%
Nexen Inc. (TSE: NXY) -2.0%
Suncor Energy Inc. (TSE: SU) -1.0%
Husky Energy Inc. (TSE: HSE) -1.0%
Petro-Canada (TSE: PCA) +0.2%

The list above cleary shows that diversified companies like Suncor Energy, Husky Energy and Petro-Canda were not as hard hit as the pure Oil-Sands companies like Western Oil Sands, UTS Energy, Synenco Enerrgy, Connacher Oil & Gas, OPTI Canada and Canadian Oil Sands Trust.

Shipping Stocks: Technicals

2006-07-06T13:35:00.000+02:00

Month to date price performance (gain/loss) of stocks covered in the Transportation Shipping sector ranged from 27.0% (EXM) down to -14.9% (FREE), with a median monthly price change of 3.5%.

Quarter to date price performance (gain/loss) of stocks covered in the Transportation Shipping sector ranged from 26.3% (NAT) down to -51.8% (TOPT), with a median QTD price change of -0.2%.

Year to date price performance (gain/loss) of stocks covered in the Transportation Shipping sector ranged from 26.6% (NAT) down to -49.0% (TOPT), with a median YTD price change of -1.2%

Past 52 Week price performance (gain/loss) of stocks covered in the Transportation Shipping sector ranged from 18.4% (MCX) down to -60.5% (TOPT), with a median price change over the past 52 weeks of -8.5%.

Price deviations from the 50 Day Moving Averages (overbought/oversold) ranged for the stocks covered in the Transportation Shipping sector from +21.9% (EXM) down to -14.1% (FREE).

Price deviations from the 200 Day Moving Averages (overbought/oversold) ranged for the stocks covered in the Transportation Shipping sector from +17.5% (OMM) down to -46.9% (TOPT).

Monthly RS Rating Changes* of stocks covered in the Transportation Shipping sector ranged from +53 (OSG) down to -36 (MCX).

* Unfortunatelly, IBD did not provide historical RS Rating for every stock.

Data: IBD, CSI

Shipping Stocks

2006-07-05T00:31:00.000+02:00

As many of the shipping companies have their headquarters outside the U.S. I present a list with all shipping companies which trade on an U.S. exchange:

Alexander & Baldwin Inc. (NASDAQ: ALEX) United States Website
Aries Maritime Transport Ltd. (NASDAQ: RAMS) Greece Website
Arlington Tankers Ltd. (NYSE: ATB) Bermuda Website
B+H Ocean Carriers Ltd. (AMEX: BHO) Bermuda Website
Diana Shipping Inc. (NYSE: DSX) Greece Website
Double Hull Tankers, Inc. (NYSE: DHT) Channel Islands Website
DryShips Inc. (NASDAQ: DRYS) Greece Website
Eagle Bulk Shipping Inc. (NASDAQ: EGLE) United States Website
Excel Maritime Carriers Ltd. (NYSE: EXM) Greece Website
FreeSeas Inc. (NASDAQ: FREE) Greece Website
Frontline Ltd. (NYSE: FRO) Bermuda Website
Genco Shipping&Trading Ltd. (NASDAQ: GSTL) United States Website
General Maritime Corp. (NYSE: GMR) United States Website
Golar LNG Ltd. (NASDAQ: GLNG) Bermuda Website
International Shipholding Corp. (NYSE: ISH) United States Website
Knightsbridge Tankers Ltd. (NASDAQ: VLCCF) Bermuda Website
MC Shipping Inc. (AMEX: MCX) Bermuda Website
Navios Maritime Hold. Inc. (NASDAQ: BULK) United States Website
Nordic American Tanker Ship. Ltd. (NYSE: NAT) Bermuda Website
OMI Corp. (NYSE: OMM) United States Website
Overseas Shipholding Group Inc. (NYSE: OSG) United States Website
Quintana Maritime Ltd. (NASDAQ: QMAR) Greece Website
Seaspan Corp. (NYSE: SSW) Hong Kong Website
Ship Finance International Ltd. (NYSE: SFL) Bermuda Website
Star Maritime Acquisition Corp. (AMEX: SEA) United States Website
StealthGas Inc. (NASDAQ: GASS) Greece Website
Stolt-Nielsen SA (NASDAQ: SNSA) United Kingdom Website
TBS International Ltd. (NASDAQ: TBSI) Bermuda Website
Teekay LNG Partners LP. (NYSE: TGP) Bahamas Website
Teekay Shipping Corp. (NYSE: TK) Bahamas Website
Top Tankers Inc. (NASDAQ: TOPT) Greece Website
Torm A/S (NASDAQ: TRMD) Denmark Website
Tsakos Energy Navigation Ltd. (NYSE: TNP) Greece Website

Industry Watch: Shipping

2006-07-03T21:12:00.000+02:00

The Baltic Dry Index (BDI) ?

(An index, published by The Baltic Exchange in London, that measures freight rates for different-size dry-bulk ships on global trade routes)

has already increased by 44% since its recent low in late January 2006 (+23% ytd.). However, it should be noted that shipping rates have been highly volatile in the last 3 1/2 years. Goldman Sachs and Merill Lynch have the same forecast for the BDI: softer prices in 2006 lead to increased scrap rates followed by a steady upturn into 2007 and 2008 (Source

: Goldman Sachs Global Investment report, March 22 2006

). Interesting to note, that Omar Nokta, a shipping analyst with Dahlman Rose & Co ?

a leading boutique investment bank specialized in the energy sector, including marine shipping and offshore services, oilfield services, and electric utilities)(Link

, upgraded some shipping stocks based on stronger than expected tanker rates so far this year on July 15th (Source

: Reuters (Link)

), followed by a second upgrade on July 30rd (Source

: TradeWinds (Link)

), by which Dahlman is setting itself apart from such analysts as Jefferies, which downgraded the sector prior to its recent rates rally, and Bear Stearns, which maintained a "sell" rating on the group only last week.
A look at the stock market reveals that the Transportation-Shipping Index from Investor´s Business Daily (IBD) has already gained some ground as its Industry Rank (IR) has risen from 137 to 57 in the past 3 months. Last week its IR was actually at 48. The figure below shows a weekly chart of 33

:
Alexander & Baldwin (ALEX)
Aries Maritime Transport (RAMS)
Arlington Tankers Ltd (ATB)
B & H Ocean Carriers Ltd (BHO)
Diana Shipping Inc (DSX)
Double Hull Tankers Inc (DHT)
Dryships Inc (DRYS)
Eagle Bulk Shipping Inc (EGLE)
Excel Maritime Carriers (EXM)
Freeseas Inc (FREE)
Frontline Ltd Adr (FRO)
Genco Shipping & Trading (GSTL)
General Maritime Corp (GMR)
Golar Lng Ltd (GLNG)
International Shipholding Corp (ISH)
Knightsbridge Tankers (VLCCF)
M C Shipping Inc (MCX)
Navios Maritime Holdings (BULK)
Nordic Amer Tanker Ship (NAT)
O M I Corp (OMM)
Overseas Shipholding Grp (OSG)
Quintana Maritime Ltd (QMAR)
Seaspan Corporation (SSW)
Ship Finance Intl Ltd (SFL)
Star Maritime Acq Corp (SEA)
Stealthgas Inc (GASS)
Stolt Nielsen S A Adr (SNSA)
T B S International Ltd (TBSI)
Teekay Lng Partners Lp (TGP)
Teekay Shipping Co (TK)
Top Tankers Inc (TOPT)
TORM D/S Adr (TRMD)
Tsakos Energy Navigation (TNP)

shipping stocks traded on US exchanges.

The chart clearly reveals that shipping stocks are currently working on a long-term base after their strong up-move between August 2003 and February 2005. The spike of the RS line in the last 4 weeks could be an early indication of a possible up-move like the up-move in October 2005.
This could be a turnaorund backed with improving fundamentals. I mean, if shipping rates will stay on this high level through out the rest of the year and increase in the next two years, we will also see an increase in the earnings of shipping stocks. The surprises to the upside can be even quite high, as the current forecasts for shipping rates would be too low. However, time will show us, if shipping rates will perhaps start to increase a little bit earlier as current opinions suggest.

Investing Themes

2006-07-01T15:53:00.000+02:00

During the current bull market, which started in 2003, three global investing themes have emerged: Commodities, Alternative Energy and Emerging Markets (especially China). However, these are only the main global investing themes, which can be broken down into some smaller investment stories, which are in some part stronly linked to each other, like Biofules, Solar Energy, Fuel-Cells (Alternative Energy Theme), Crude-Oil, Precious & Industrial Metals (Commodities), China, India, Russia, South America and Eastern Europe (Emerging Markets).
As mentioned by Richard Farleigh in his book ?

(Taming the Lion: 100 Secret Strategies for Investing (Amazon))

the investment theme "China" brings different possible investment opportunities ?

Long Chinese stocks
Long yuan (Chinese currency)
Long commodities (looking for Chinese demand)
Long shipping stocks (increased Chinese usage for shipping of imports and exports)
Long currencies of countries that export commodities (e.g. Canada and Australia)

to profit from China´s economic growth.
The main purposes of my blog is to highlight some interesting investment themes as they are starting to emerge and profit from these before they are in the daily financial press. I will underpin my analyses with detailed data from other sources which I believe reliable, but I can and do not guarantee its accuracy.
As I have traded in stocks for the past 13 years, I have learned that psychology plays an tremendous role in the financial. Therefore, I will also post some interesting articles from well-known newspapers, magazines, traders and investment bankers to get a feeling of the current sentiment of the stock market and individual industries.

Symbol List

2006-07-01T01:00:00.000+02:00

Stock Market Indices:

$DJA Dow Jones Composite
$INDU Dow Jones Industrial
$TRAN Dow Jones Transportation
$UTIL Dow Jones Utility

$SPX S&P 500 Large Cap Index
$SVX S&P LargeCap 500/Citigroup Value Index
$SGX S&P LargeCap 500/Citigroup Growth Index

$MID S&P 400 Mid Cap Index
$MUV S&P MidCap 400/Citigroup Value Index
$MGD S&P MidCap 400/Citigroup Growth Index

$SML S&P 600 Small Cap Index
$CVK S&P SmallCap 600/Citigroup Value Index
$CKG S&P SmallCap 600/Citigroup Growth Index

$RUA Russell 3000 Index
$RAV Russell 3000 Value Index
$RAG Russell 3000 Growth Index

$RUI Russell 1000 Large Cap Index
$RLV Russell 1000 Value Index
$RLG Russell 1000 Growth Index

$RMC Russell MidCap Index
$RMV Russell MidCap Value Index
$RDG Russell MidCap Growth Index

$RUT Russell 2000 Small Cap Index
$RUJ Russell 2000 Value Index
$RUO Russell 2000 Growth Index

$OEX S&P 100 Index
$NDX Nasdaq 100

$XAX Amex Composite
$NYA NYSE Composite
$COMPQ Nasdaq Composite

Stock Market Technical Indicators:

$SPXA50R S&P 500 Percent of Stocks Above 50 Day Moving Average
$SPXA150R S&P 500 Percent of Stocks Above 150 Day Moving Average
$SPXA200R S&P 500 Percent of Stocks Above 200 Day Moving Average

$NYA50R NYSE Percent of Stocks Above 50 Day Moving Average
$NYA150R NYSE Percent of Stocks Above 150 Day Moving Average
$NYA200R NYSE Percent of Stocks Above 200 Day Moving Average

$NAA50R Nasdaq Percent of Stocks Above 50 Day Moving Average
$NAA150R Nasdaq Percent of Stocks Above 150 Day Moving Average
$NAA200R Nasdaq Percent of Stocks Above 200 Day Moving Average

Stock Market Sentiment Indicators: