What worries me most about the stock market rally are the peculiar divergences we are seeing. What do I mean? Let's look at some charts. My first chart shows that gold is breaking out to the upside on heavy volume. SPDR Gold Trust Gold is an inflation hedge, a currency hedge, and a safe-haven asset. When gold rises, other financial assets are often falling. But my stock market chart shows that the S&P 500 has rallied virtually uninterrupted since bottoming in March. S&P 500 Oddly, though, volume is falling while prices are rising. A divergence in price and volume … [Read more...]
Get It While It’s Cheap
Natural gas is super cheap today, but it could get cheaper before the cycle is over. There is an abundance of it. U.S. storage capacity is almost full. If excess production does not drop before capacity fills up, the price of natural gas is likely to weaken. Natural gas is out of favor. The momentum crowd is bailing out, driving prices below the cost of production. Smart successful investors move against the crowd. You want to be a buyer when everybody else is selling. Long term, today's depressed natural gas price is unsustainable. It has to rise. Gas is cheap, clean, and available in … [Read more...]
Protect your Portfolio from the Blindside
On day one of football training camp, the first lesson many players learn is to play to the whistle. My coach used to drill this into all the new players. He'd say, "I don't care if the ball is 50 yards downfield, you play full speed until the ref blows the whistle." When the ball is downfield, the tendency of many players is to jog slowly toward the action until the whistle blows. After all, if you aren't in the center of the action, what's the point of playing full speed? That's an attitude that doesn't last long. For me, one scrimmage was enough to learn the importance of playing to the … [Read more...]
A Strategy for the Current Stock Market Rally
The S&P 500 is up 15% since July 10 and up close to 50% from its March low. What's the catalyst for recent gains? A strong second-quarter earnings season. More than 75% of S&P 500 companies that have reported earnings beat analysts' estimates. Strong second-quarter earnings gave the minutiae-focused quarterly earnings crowd the courage to leap back into stocks. Even after the recent rally, there remains a truckload of cash sitting on the sidelines. But are quarterly earnings a reliable signal of future sustainable stock gains? In this case, I think not. Closer examination of the … [Read more...]
Telling Stories
Last week, I wrote about a possible bubble developing in the Chinese stock market. If you missed it (we experienced some technical difficulties) you can read it here. Every great bubble is accompanied by a great story. In the dot-com stock bubble, investors were mesmerized by the awe-inspiring potential of the Internet. Consumers were expected to do all of their shopping online. Bricks-and-mortar retailers were considered outdated and obsolete. Dot-com start-ups and telecom equipment stocks were what investors bought for growth. And the growth was expected to compound at exceptional rates for … [Read more...]
Where’s the Bubble?
The Shanghai A-share stock index is up 79% YTD, making it the second-best-performing stock market in the world. What is driving the resurgence in Chinese shares? China is a command economy. When the government wants to get something done, it happens. Want to implement a monetary stimulus plan? Just encourage banks to start lending. To combat the credit crisis, China implemented the conventional monetary stimulus measures that all central banks resort to when they want to stimulate the economy. The country's main policy rate was cut, and reserve requirements were reduced, but China's most … [Read more...]
Young Research’s Top Commodity Play
The U.S. recession has curbed demand for natural gas while supply has continued to increase. The obvious result has been a fall in prices. Currently, natural gas inventories are plentiful, but they will not remain so permanently. Lower natural gas futures have already caused a significant supply response. The Baker Hughes natural gas rig count is down to 665 from a high of 1606 last August. A lower rig count means less new natural gas supply. Add to that the natural decline in production in existing wells and when demand returns, there is the potential for a spike in natural gas prices. Baker … [Read more...]
Fundamentals vs. Sentiment
Stocks are assets. The true value of any asset is simply the discounted value of all future cash flows. This holds true for stocks, bonds, property, natural resources, and even collectibles. To calculate the value of an asset you simply estimate all future cash flows and discount them at an appropriate rate. When you go through this exercise for a company you quickly realize that the value of any individual year's worth of cash flows accounts for a relatively small portion of that company's value. The majority of a company's value is determined by adding up discounted cash flows far into the … [Read more...]
Crumbling Pillars
The pillars of support preventing the overvalued euro from depreciating versus the U.S. dollar are quickly crumbling. On a purchasing power parity basis, our favored approach to estimating long-term currency values, the euro is deeply overvalued and has been for some time (Chart 1). The euro has been supported by a positive and rising interest rate differential between euro interest rates and U.S. interest rates. Chart 2 shows the interest rate differential between 2-year government bonds in the Euro-Zone and the U.S. The widening interest rate differential was caused by … [Read more...]
The Energy Equivalent Value of Wood
People who live in cold northern climates are likely to face stiff home heating oil bills this winter. If heating oil prices average $5 per gallon this winter, as some analysts are estimating, the average heating oil consumer may have to fork over more than $4,000 just to keep warm. With many low and middle-income consumers already struggling from high prices at the pump, surging heating oil bills are not an expense some will be able to bear. One solution to ease high heating bills is wood. A cord or two of wood and a wood stove can go a long way in reducing home heating oil bills. To see … [Read more...]