With geopolitical turmoil spreading to key oil-producing countries in the Middle East and Africa, oil prices have spiked in the last two weeks. West Texas Intermediate, the key U.S. benchmark, is now trading near $96 per barrel. Brent Crude, the European benchmark, is trading north of $110 per barrel. The increasing risk of an oil price shock has apparently caught many investors off guard. One would have thought that revolutions in Tunisia and Egypt, as well as protests in Yemen, Bahrain, and Algeria, would have alerted investors to the growing risk of a price shock, but they didn’t. The … [Read more...]
Archives for February 2011
Is the Dollar Losing its Safe-Haven Status?
In times of geopolitical upheaval, investors traditionally flee to perceived safe-haven assets. Historically, the dollar has been considered a safe-haven. You can see this trend in my chart below. The chart compares the VIX Index (a.k.a the Fear Index), which is a measure of investor risk aversion in equity markets, to the dollar index. Over recent years, increases in the Fear Index have been highly directionally correlated with the dollar index. But the most recent spike in the Fear Index has been accompanied by a falling dollar index. The fear index hasn’t yet spiked to levels comparable to … [Read more...]
The Money Flood Market
In case you still thought stock prices were advancing on improving economic growth, take a gander at this puppy. The grey line is the Fed’s securities holdings. You know – all the Treasuries (and MBS) the Fed is buying from Wall Street with freshly printed money. The black line is the S&P 500. Quite a correlation wouldn’t you say? The question that savvy investors should be asking themselves is, “What happens when the Fed stops buying bonds in June?” It could be an unpleasant summer for the unprepared. … [Read more...]
Home Prices Slide in December
The S&P/Case-Shiller Home Price Indices for December were released this morning. Home prices continued their decline in December, falling .4%. In the fourth quarter, home prices fell 1.9% and for the 12-month period ending in December, home prices declined 2.4%. After two home buyer tax credits, multiple foreclosure modification programs, and trillions in support from the Fed, it appears that we have only managed to delay the ultimate bottom in home prices. Home prices are now much closer to a bottom than to the top, but that doesn’t offer much comfort to the homeowners in Las Vegas, … [Read more...]
The Only Variable That Matters
This was a busy week for economic data releases. In the manufacturing sector, January industrial production and capacity utilization were released, as were the regional manufacturing surveys from New York and Philadelphia. In the housing sector, data on housing starts, building permits, and homebuilder sentiment were released. January retail sales and inflation data also came out this week. I could run through each of the economic releases and give you the investment implications, but I would be wasting your time. You see, this market is uninterested in economic data. It doesn’t matter that … [Read more...]
A Threat to the Muni Union
It turns out that not only is the adoption of a right-to-work (RTW) law in states good for business, but even the threat of passing a RTW law is good for business. This is great news for businesses in Wisconsin and the dozen or so other states trying to enact RTW laws and standing up to public union leadership. Idaho became the last state to enact RTW laws in the U.S., becoming the 22nd RTW state back in 1986. Isn’t it shocking to you that the majority of states in the U.S. are non-RTW states? It is to me. That’s a lasting testament to the stranglehold that union leadership has on fiscal … [Read more...]
An Uber-Bull
Call this the uber-bull case for stocks. Laszlo Birinyi is forecasting S&P 2,800 by September of 2013. Laszlo relies on historical patterns to make his predictions and obviously pays little attention to fundamentals. For those of us who still pay attention to fundamentals, Mr. Birinyi’s price target implies a P/E ratio on 2012 operating earnings estimates of more than 23X. The last time the S&P 500 traded at a forward operating earnings estimate of 23X was 1999. We all know how that turned out. … [Read more...]
Criminals Consistently Outflank Regulators
The slimier characters in the hedge fund industry will always find a way around the rules. Excessive regulation is not always effective regulation. SEC investigates ETF use in insider trading by Kara Scannell, Financial Times “The Securities and Exchange Commission is investigating whether Wall Street traders are using exchange-traded funds as a means of disguising insider trading…ETFs have emerged as a possible mechanism for maximising gains in one stock while potentially masking trading patterns, people familiar with the matter say…In one scenario, a trader could learn information … [Read more...]
HC Risk
As any seasoned investor will tell you, there are many risks in investing—volatility risk, business risk, default risk, longevity risk, and inflation risk, to name a few. This week I was reminded of another kind of risk. I call it HC risk. While reading the newswires on the Bloomberg service, I noticed the following headline: “Crystallex Plunges on Cancelled Venezuela Gold Accord.” What is HC risk? The headline probably tipped you off, but if it didn’t, HC risk is Hugo Chavez risk. Yes, Hugo deserves his own type of risk. Apparently, Hugo decided to cancel a contract with Crystallex to … [Read more...]
106% Profits—in Bonds
With stocks rising virtually uninterrupted since the end of August and doubling from their March 2009 lows, you may be kicking yourself for not shifting more of your bond investments into stocks. Don’t. Some bonds have actually beaten stocks. Measuring from their respective cycle lows, the Merrill Lynch High-Yield Master II index is up 106% and the S&P is up about 100%. Not bad for boring old bonds. … [Read more...]