Friday Update

Posted on April 12, 2013April 12, 2013 Posted in Commodities, Currencies, Indicators, Macro, Stocks26 Comments

The SP500 has pushed up to the 1600 zone, which fits with the Birinyi/Bannister target, in a potential overthrow move. Plus this weekend marks the shift from the lunar positive to the lunar negative period, and a geomagnetic storm is predicted to be on its way. Lastly, economic surprises for the main regions have been in collapse and a change in trend in this indicator has previously led tops in the market. So collectively reasons for a top here.

However an opposing case can be made too. We don’t see particular degradation in stocks breadth and the SP500 has broken out into clear air. We see a strong/stable position in leading indicators. Here is the latest OECD collection:

Source: OECD

Plus CB reported Japan leading indicators at +1.0, in the first of this month’s updates. Using narrow money the updated picture is one of potentially moderating growth ahead, but as yet no significant downturn.

Source: Moneymovesmarkets

In terms of overbought and overbullish, some measures for equities are elevated, but there is a lack of major warning signs. Conversely we do see extremes in sentiment versus some commodities and commodity related sectors but the other way: bearish.

If you are following the SP500 or Nikkei then things look to be overwhelmingly bullish, but it should be noted that these are the two countries with the most aggressive central bank stimulus/easing programmes. A wider look at pro-risk is captured through combining the world stock index, equally weighted commodities index, euro-usd and 10 year treasury yields:

Source: Bloomberg

We see collective behaviour in pro-risk, but with under- and out-performers. So, up from June to Sept 2012, down to mid-November, up then to the turn of January into February, down into the end of last week. Could we now be the start of a new collective uptrend for pro-risk? Again, followers of the SP500 or Nikkei might find that hard to believe, but the wider look at pro-risk suggests it could be possible, and a rotation in leadership if of course feasible. The collective picture for pro-risk fits with 5-models-in-alignment:

https://solarcycles.net/2013/01/09/tools-for-2013/

Namely, a pullback from the end of Jan to Mar/April, then a final rally into around June time, to either end the cyclical bull (in my primary scenario) or produce a significant swing top (in my alternative scenario).

With US earnings season just getting under way, there is another potential mover in the markets. Let’s see.

More In The Balance

Posted on April 9, 2013 Posted in Commodities, Indicators, Inflation, Macro, Solar Cycles, Stocks19 Comments

Secular commodities peak behind or ahead? Here we go again.

The last secular bear in commodities, circa 1980-2000, lost 50% in nominal value from top to bottom. The previous secular bear, circa 1948-1968 lost a third of its value top to bottom. Assume a secular bear in commodities began following the peak in 2011, then drawing on those past events we could estimate a secular bear bottom in the zone shown:

Source: MCRI

We could go further back in time to average in more secular commodity bears, but I suggest the evironment was different, pre fiat capital era, pre free globalised markets, and pre inflationary government policies. The 1980-2000 secular commodities bear has a sideways bias, that is also shared by the 1948-1968 secular bear, and we see overall sideways action in secular equities bears too – and these are all because of modern government policies of inflation. In real inflation-adjusted terms, we see more of a downward bias, compared to the nominal.

The 1980-2000 commodities bear proceeded in waves, i.e. cyclical bulls and bears within an overall secular bear, and this too is similar to progress in secular stocks bears. If the secular bull peak for commodities is already in, back in 2011, then the chart above shows that we would already be getting towards around half way between secular bear top and bottom. Given that the secular bear progresses in waves, then a wave up ought to be soon due, perhaps like the 1982-1984 cyclical bull, post 1980 peak. As it happens, multiple commodities are currently at levels of extreme bearish sentiment, including corn, silver, copper, soybean meal and sugar, which would provide the fuel for such a potential rally. That said, overbearish or oversold increases the likelihood of a mean reversion or relief rally, but on occasion these extremes can persist and test patience, until the evironment becomes more supportive. So how does demand and supply look currently in some key commodities?

Natural gas shows a recent tightening of demand and supply, as inventories are dipping beneath the historic average. Nothing extreme though:

Crude oil inventories are plentiful, which is a depressant on price:

Source: Bespoke

Both zinc and copper show increasing inventories. Both in notably different positions to 2008 when commodities made a big interim peak.

Cereals, i.e. wheat, rice, maize, show a fairly steady position, with inventories largely tracking sideways over the last 5 years:

Source: FAO

And lastly to gold. Demand decreased last year on the year before, but remains high, with central bank and investor demand the main areas of growth the last few years:

Source: Moneygame

Whilst supply has been growing since a bottom in 2008, to a now all time high:

Source: ZealLLC

In summary, the overall demand-supply situation in these key commodities is no backdrop to a major rally, at least not as things currently stand. But to return to the opening question of whether a secular commodities peak is behind or ahead of us, the clues may still be in gold. If the period since 2000 is a K-winter then gold should be the leading asset. If demand slack in other commodities reflects recent weak economic growth, then the picture for gold is more complicated, as it is less a commodity and more a hard currency. Gold can thrive in conditions of negative real interest rates and money printing (or currency dilution). That said, it is also an inflation hedge and depressed commodity prices are doing nothing to convey troubling inflation expectations. As gold is sensitive to investor interest, were there to be a shift in stance from central bank away from negligible rates and currency diluting policy action, we might have conditions in place for an enduring secular bear. Indeed, this is what I predict will happen, the question is when? Does gold have a parabolic rise left in it yet, to end its secular bull, or did that occur in 2011 with silver making such a blow-off move?

This next chart shows how we are into the region of a secular transition in stocks and real estate versus gold. Gold is relatively expensive versus both and a rounded bottoming in the ratios could be in progress:

Source: Sharelynx

The ratios are low enough to justify a secular reversal, or they could yet break lower to around 1980’s levels to complete the secular extreme relative valuation. The curiosity is the Q ratio, which together with CAPE for US stocks, leads some analysts to expect steep falls in US equities from here, such as to 450 on the SP500 ( Russell Napier) to rectify it. I doubt it because of secular low valuations reached already on other stock indices around the world in this secular bear: such as Japan sub p/b 1, PIIGS p/es between 2 and 7, Germany, UK and Hong Kong all reaching below 10. In the last secular stocks bear, Japan only reached a low of p/e 20, so not all indices necessarily have to wash out, as long as most do.

Add in treasury bonds, due a reversal out of a 3 decade secular bull market and potentially bottoming around now along with money velocity, and consider the rounded bottoming in progress in many real estate markets around the world, and we have a window, and evidence, here for a broad secular transition, out of a K-winter and into a K-spring, switching from a secular commodities bull to a secular stocks bull, to a new secular treasuries bear and a new bull market in real estate.

The US dollar also appears primed for a new bull market, following a decade long bear. Interestingly, although the perception is that commodities generally advance when the US dollar is declining, in fact the last secular commodities bull peak took place against a sideways dollar, and the previous two commodities peaks against a rising dollar. In the secular commodities bull since 2000 we have seen more periods of commodities rising whilst the dollar has been falling, but we have also seen periods of them moving together. In summary, it does not appear that the fortunes of the USD particularly correlate to the fortunes of commodities. So what other clues can we use to assess if commodities made a secular peak in 2011 instead of biding time before a secular peak erupts ahead?

Well, I’ve left out solar cycles until now so time to bring them in. My analysis shows commodities making secular tops close to solar maximums. Danny suggested that food and metal peaks tend to occur at different times. It is true that historically individual commodities have peaked at different times. Here is a brief summary of previous secular commodities bull peaks:

1917 solar peak: copper peaked 5 months before, wheat 4 months before, corn dead on the solar peak, silver not until 27 months after.

1947 solar peak: oats peaked 6 months after, wheat 6 months after, corn 7 months after, copper 15 months after.

1979/80 solar peak: copper peaked dead on, gold peaked 1 month after, oil 4 months after, sugar 9 months after.

There is the possibility that the tighter packing to the solar peak in 1979/80 could be related to the free-est, fast-est, most globalised conditions to enable solar-related speculation to be at its most potent, but if we exclude that then we are left between the historic examples to expect commodities to make individual peaks at various times around the solar peak window. That peak is currently anticipated for Autumn/Fall 2013. Could the peaks in copper, silver, and cotton in 2011 be near enough to be within range for solar validation? Possibly, but a little stretched, and when we consider the likes of oil and wheat made their peaks back in 2008, that becomes then too far away.

What I have previously explained is that secular asset peaks around solar maximums are speculative. The solar activity brings about buying and speculation behaviours in humans through biological changes. Spikes in inflation occur at each solar maximum as shown, within a range of about a year either side:

Therefore I suggest it is possible through a feedback looping of commodity speculation and inflation to bring about a secular commodities peak ahead, even with looser inventories. Once demand increases and the perception is of a change in trend in inventories (rather than accute inventories) then the status quo can quickly change. However, there is no doubt that the looser inventories and weaker Chinese / global growth are a headwind. After all, there is nothing magical about the solar influence, it is just one influence in sentiment. I have also argued that the secular asset of the time becomes the target of the solar-influenced speculation, and if the perception is currently that commodities and equities have already switched secular position, then could stocks become the target of the speculative frenzy? I can’t rule it out. However, it remains that oil and other commodities tend to be late cyclicals, making a peak after stocks, so when stocks make their swing or cyclical peak, we could then see a move into commodities. As gold has built out a sideways range near its secular highs, it could then potentially break out, giving the technical break into clear air to inspire a speculative frenzy.

In conclusion, the call as to whether a secular commodities peak is ahead or behind us remains a tough one, very much in the balance. But it comes down to how to trade this, until evidence aligns more decisively one way or the other (gold breaks up or down, CCI breaks up or down, sunspots make a new high, commodities take over as the outperforming class or equities roar away). I am already positioned long a basket of commodities. Because of the uncertainty I do not wish to add here, despite the overbearish extremes. However, if commodities did peak in 2011 then as per the first chart the CCI is reaching towards a price level and time point where it is due a cyclical bull rally soon. I therefore believe that I can likely make a profitable trade out of commodities regardless of their secular position, with a little patience.

Money Velocity

Posted on April 8, 2013April 8, 2013 Posted in Bonds, Commodities, Indicators, Macro, Solar Cycles14 Comments

The Fed, BOE and BOJ have all been busy creating money out of thin air to make purchases in the bond market. The institutions selling the bonds then have new money in their accounts and so this produces an increase in the money supply. The intention is to stimulate the economy by increasing the money supply, once interest rate cuts have been exhausted. The ECB has this kind of direct action on standby. The BOJ has just doubled its purchases. The result of these policies is that we have seen a large and unprecedented increase in the world’s money supply over the last few years:

Source: Maomoney-maoproblems

As more money chases the same amount of goods and services, this clearly has the potential for massive inflation. Yet, so far, the banks and institutions have largely sat on their increased reserves. The new money is parked, rather than circulating in the economy. This shows the lack of confidence in growth and a persistence of fear. So the increase in the money supply has been offset by a lack of money velocity. Here are money velocity charts for Japan, the Eurozone and the US, in order:

Source: Nowandfutures

On the US chart, which is longer term, we see the same long term cycling in money velocity as in treasury yields: This perhaps makes sense as money velocity would tend to be lower when money is being parked into treasury bonds in an enduring trend, and vice versa. So, are we going to see money velocity about to turn upwards, at the same time as treasuries starting a new long term bear market? Certainly, with treasury bonds up to 20 years in duration paying negative real returns (using official CPI), the potential is there. Purchasers of treasuries are buying something offering a guaranteed loss, and the main reason for that is capital preservation: they expect equities, real estate and commodities to do worse. If confidence is restored in growth and pro-risk assets then we could expect a significant reversal in money flows, out of bonds. Aggregating the US money velocity measures and zooming in on the last few years we see have seen a gradual flattening out, which raises the potential this could begin to rise in 2013: By my solar cycles work, this is indeed what should occur. Growthflation, money bidding up the secular pro-risk asset into a peak, money reversing out of treasury bonds. But we need to see velocity start to pick up, rather than flatline. If we look back at our closest historical mirror, 1947, then in the US longer term velocity chart further up we can see that velocity just reversed out of its downtrend with about a year to go before the solar/secular commodities peak. Treasury bonds also topped around a year before the solar peak, which confirms the correlation between the bonds and velocity. So, with the solar peak expected around Fall / Autumn 2013, did treasury bonds top out and yields bottom some time last year? They potentially did, subject to where they go from here:

Source: stockcharts

And using the money multiplier measure of velocity, we also see potential this bottomed too:

Source: St Louis Fed

Now let’s say I’m wrong about the solar maximum correlation. Unless you believe the system is broken and/or not cleansed in the cleansing cycle since 2000, then a natural cycle of growth should still take hold at some point – only the timing would differ. Once the entrenched growth becomes clear then the wall of money will be rapidly tempted out of cash reserves and bonds as it remains that they are paying negative real returns. Unless central banks then very swiftly neutralise all the new money and the easy conditions – and with history as our guide this is unlikely – then there is a high risk of major inflation in the prices of goods and in pro-risk assets. If we get such an inflationary episode, we should see the feedback looping with commodities (as hard asset inflation hedges) to deliver the secular parabolic finale that I anticipate. The alternative scenarios would be these. One, we continue to only muster low and spotty growth, nothing entrenched or sustained, which keeps the wall of money largely parked, central banks on the accelerator, and stocks gently rising. Two, all the central bank interference has prevented the cleansing cycle from doing its work, and we need a big deflationary episode before any genuine growth can be mustered. I don’t rate either of these scenarios as likely. I believe we have seen a normal cleansing cycle, with equities and real estate valuation sufficiently washed out, and private sector balance sheets significantly repaired (public sector clearly not – but it is the private sector that is the engine of growth – and public debt should not reach crunch point in the major economies until later this century on current trends). Plus the cleansing cycle has been of normal duration and characteristics. The central bank action did not succeed in restoring natural growth in this period – the cycle was king – but rather their actions are likely to supercharge what happens next. With history as our guide, it is likely that central banks will be behind the curve as inflation and speculation rapidly escalate, and with little appetite to reverse or neutralise all the new money supply. Bring back in my solar cycling theory, and we are primed for that to occur 2013 into 2014, before excessive commodity prices and belated central bank tightening tip us into a global recession again. If leading economic indicators start to turn down again, then central banks are likely to respond again, with yet more stimulus. Perhaps the ECB would join the QEers. But another cycle of indicators and asset prices falling over the next few months would start to stretch the solar timing. So I’m keen to see if the current growth is the one that sticks, and that leading indicators stay in the positive. The next chart suggests that this may be so:

Source: Moneymovesmarkets

The leading indicator of leading indicator has just lately strengthened again instead of tumbling. If the growth can stick here, then I expect the rest to fall into place: money flows out of treasury bonds, money velocity to pick up, commodity price escalation and inflation, and all to the timing of the solar maximum. Here’s a final chart that may be predicting this:

Source: Nowandfutures

In The Balance

Posted on April 4, 2013 Posted in Bonds, Commodities, Currencies, Indicators, Inflation, Macro, Real Estate, Solar Cycles, Stocks51 Comments

Time for an updated look at the big picture: is a secular commodities peak ahead or behind us?

Here is the equally weighted commodities index. It remains in the nose of a large triangle. A decisive break down through the twin supports will add weight to a secular commodities peak having already occurred in 2011, whereas an upwards break beyond down sloping resistance will add weight to a secular bull still in tact.

Source: MCRI

By solar/secular history, a secular commodities peak normally occurs around or closely following a solar maximum. However, that too remains in the balance as shown by the alternate predictions in the SIDC chart below – either a solar peak occurred at the turn of 2012 or a solar peak is ahead later this year.

Source: SIDC

The most common consensus remains that the solar peak is rather ahead than behind us, with the median forecast for Autumn/Fall 2013. Planetary models predict a spike in sunspot action around Sept/Oct 2013 and some physicists also predict a burst in activity later this year, which would fulfil the NOAA red line prediction below:

However, until such a flurry is seen, it remains unresolved.

Danny challenged the 33 year secular commodities peak and solar peak correlation with this chart:

It is an ultra long term modelling of commodity prices, to which I have added the markers to show when the industrial revolution began and when the gold standard was abolished. It can be seen that the correlation in solar peaks and commodities peaks largely failed prior to the industrial revolution. Understand that prior to this time there were only localised markets for commodities, little storage, and almost nothing in the way of demand and supply matching. Farmers tended to grow their usual crop, bring it to market, get the best price they could for it, and anything unsold went to waste. For a natural cycle that influences collective human behaviour to manifest itself, I suggest optimum conditions are instant, globalised, free markets, like we have in the current day and age. In pre-revolution conditions, it would have been impossible to draw out real cycles from slow, localised, restricted and fragmented markets. I don’t see that part of the chart as valid therefore. See also below how the solar/secular oscillation in the Dow-gold ratio became pronounced after the freeing of gold and paper:

Source: Sharelynx

So, returning to the ultra long term commodities price chart above, we see an broken success rate (as shown by the circles) in the fiat era and between the industrial revolution and fiat era two successes and a potential inversion or double failure. However we classify that anomaly, such a failure could potentially reoccur in the future – unless it was the result of a non-free, slow, localised era. But a failure amongst a majority of successes would be in line with all other ‘real’ trading disciplines, i.e. there is no holy grail, nothing that works all the time, just things that work most of the time. To sum up, the solar peak is probably ahead, and the secular commodities peak is probably ahead in line with that.

Turning to climate and agricultural commodities, are we going to see another year of extreme temperatures and natural disasters, which would drive up commodity prices? The next chart reveals that the last two years have not been as severe as a cluster before that. However, they were both La Nina years, which has a cooling effect.

Source: NOAA

This year, a largely neutral year is expected (no dominance of La Nina – or El Nino either) so there is the potential for a bigger bar – unless the long term trend is now reversing.

Global warming is one factor, global wierding (rate of natural disasters) another, and in the US, drought conditions at the start of 2013 are displaying patterns that could unfold into the equivalent of the worst drought years in history. Grains took a big hit in price this last week due to higher than expected plantings and stockpiles, but there remains the potential that climate developments could drive agricultural commodities higher again in the remainder of the year.

Rising commodity prices and inflation together make a mutually reinforcing feedback loop. Escalating commodity prices drive up inflation and escalating inflation attracts money into commodities as an inflation hedge. So how do inflation expectations look, aside any climate developments? The next chart shows expectations have been on the rise since Q3 2012, with a divergence in gold that we might expect will be rectified:

Source: M Boesler

If gold is not to make up that ground, then we might expect inflation expectations to fall instead – i.e. a period of deflation would be ahead.

Turning to valuations, gold is historically expensive here versus stocks and real estate, but could yet become more extreme expensive before reversing.

Source: Fred

Source: Approximity

All 3 charts reveal gold’s meteoric relative rise in price to stocks and real estate since 2000. The question is, does it have a parabolic finale yet to come in which it reaches the obvious zones, or is going to stop short and is already in relative decline?

If gold has already made its secular top (in 2011), then we would expect stocks to be now in a new secular bull. So did stocks wash out sufficiently, in terms of price/earnings and price/book valuations, to make it likely the secular bear is over? So far in the secular bear, the FTSE reached a p/e of 7, the Dax 9, the Hang Seng 8, the SP500 and Dow 9. The Nikkei only reached 13, but it made a p/b ratio of under 1. Broadly speaking, they are all low enough to satisfy secular bear cleansing, and we can add to that the extreme low p/es reached in the PIIGS at the height of the Eurozone crisis. If we look at other valuation measures in relation to the SP500 then we get a different picture:

Source: Dshort

These four valuations combined suggest the secular bear has not washed through sufficiently, and that current valuations are closer to a top than a bottom. However, we ought to note the much higher top in 2000 and question whether central bank policies of unprecedented easing and stimulus have dragged all these measures permanently higher.

US indices aside, we have reasonable evidence from around the world that secular cleansing could be largely complete in terms of valuations reached at the bottom of the falls in 2011. Plus this year we have what appears to be a new secular bull break out in the Japanese indices.

What about treasuries? This secular transition should also be accompanied by a secular transition in treasuries from a long term bull market to a new long term bear. Did treauries top – and yields bottom – in 2012? It remains to be seen as it is currently too technically ambiguous to say with confidence.

Source: Stockcharts

Using history as our guide, if a secular commodities peak is ahead later this year (and potentially into H1 2014), then we should see a topping process in equities by around mid-year whilst commodities take over as the outperforming class. A feedback looping between inflation and commodities should occur, until too expensive commodity prices and tightening yields help push the economy into recession. That recession should be fairly mild, with stocks making a shallow bear market, whilst commodities plunge harder, in the mirror of their preceding parabolic escalation. The bottom of that shallow stocks bear would be the momentum ‘go’ point for the new secular stocks bull.

Alternatively, if a secular commodities peak already occurred in 2011, then secular bull momentum in stocks should already be underway, and we might point to action in the Nikkei or SP500 in 2013 as supporting evidence. The recession that should follow the secular commodities peak occurred then in 2011-12, with the Eurozone and the UK two notable areas that experienced this. It was not a world recession however, and we did not see typical cyclical stocks bull topping bells ringing preceding it. If we look at an overlay of the CCI commodities index on the MSCI World stock index, we can see that they topped together in April/May 2011:

Source: Bloomberg

We did see outperformance in commodities, but not to the degree of 2008, or the last secular commodities bull peak of 1980. But silver did make a suitable parabolic blow-off in price.

To sum up, a case can be made for both competing scenarios: a secular commodities peak ahead or behind us in 2011. It remains in the balance, but not indefinitely. The CCI commodities index will break one way or the other. Gold will catch up to inflation expectations, or inflation expectations will fall. Sunspot evidence will come in more definitely in favour of a solar peak ahead or behind. Climate evidence as 2013 unfolds will drive agricultural commodities to escalating or plummeting prices. Equities will maintain secular bull momentum and outperformance of equities, or they will begin to make a topping process whilst commodities outperform.

What about a third scenario: both equities and commodities drop here into a bear market, with treasuries the beneficiary? For that to occur, we should still need to see a topping process in stocks whilst leading indicators and internals deteriorate. Currently, we do not see major warning flags in either, with leading indicators and breadth supportive. However, we have lately seen changes in trend in economic surprises, both in the US and Europe:

This coincides with the change in geomagnetism trend, and perhaps provides fuel for a pullback. I do not believe, however, that we have evidence for more than a swing pullback at this point, but it could become part of a more significant topping process that lasts several months.

If we pull back and look at the wider environment for assets, we largely/generally have ultra low rates, central bank support, money supply growth, cash and bonds paying negligible or negative real returns, stock yields exceeding bond yields, low/spotty economic growth and not excessive inflation, and historically below average valuations for stocks and real estate. This is a fairly positive environment in which equities and housing can attract money flows, and that is what we are seeing. It would take another sharp slowdown in the world or another debt-related crisis coming to the fore somewhere, for this to change. The question is whether we have seen a sufficient cycle of cleansing since 2000 and sufficient foot-on-the-accelerator central bank action to now sustain growth. If growth can stick and even accelerate, then we have better chances of reaching growthlationary froth and the commodities/inflation feedback loop, as all the inflationary stimulus and easing could quickly become problematic, with faster money flows out of bonds.

Finally, a few more potential clues as to the likely winner in the scenarios. Crude oil inventories are approaching a record, which has the potential to pull the rug from under crude prices if growth stumbles. Inflation should make a bigger peak 5 years after 2008, which would be this year, based on secular/solar history. Emerging markets manufacturing surveys (a leading indicator) picked up to 52.6 in March (over 50 is growth), of which China is the biggest commodity consumer. Commodities generally move opposite to the US dollar, as they are priced in US dollars, and the US dollar could be ripe for a sustained decline as speculator positions hit a record and this has previously led a swing top.

In conclusion, there remains no clear winner, with good evidence supporting a secular commodities peak ahead, or that it occurred already in 2011 and a new secular stocks bull is in progress. I maintain that the balance of probability lies with the secular commodities peak being ahead in H2 2013 – H1 2014, which should mean a cyclical stocks bull top occurring by mid-year 2013. However, if that is the case, then it should only give rise to a shallow stocks bear before new secular bull momentum. I am positioned for a secular commodities bull finale ahead, with significant exposure to precious metals, energy and agricultural commodities. I have only a position in Russia by way of equities exposure. So there is my concern: if the alternative scenario is the correct one, then my current portfolio will perform badly. However, if commodities did top in 2011, there should be an ‘echo’ bounce around 3-4 years later in line with history (as the commodities supply-demand story is not resolved overnight), which would be a belated opportunity to make some profits on those positions, with correct timing. In the meantime, evidence would increase in favour of a new secular stocks bull being underway and I would add trades there.

I will continue to weigh this up as developments come to light. Your views and any additional evidence very welcome. I have personally found that we have reached a period of time in the markets, and perhaps in my progress, where I don’t really feel there are any ‘experts’ out there I can rely on. I believe this is the difficulty of trying to navigate a secular transition, which in effect takes several years.

Russian Stock Index

Posted on April 2, 2013 Posted in Indicators, Macro, Stocks32 Comments

Russian stocks are currently very cheap. Firstly, they are the cheapest by p/e around the world in the table below (cheaper than when I last drew attention to them here), whilst paying a 4.5% yield:

Source: FT

Secondly, they are also ultra cheap by cyclically adjusted p/e valuation:

Plus thirdly, they are on a price-to-book ratio of just 0.68 (data as at 1st March). Anything less than 1 means that a liquidation of the entire index would return more in net assets than the current valuation. Something to bear in mind when considering how much lower they could yet fall.

Source: Fool.com

Generally speaking historically, stock indices have been a buy when p/es have reached sub 10 and p/bs sub 1.5, i.e. they have returned consistently well when purchasing at these levels. So what’s up with Russian stocks that sees them languishing at extreme cheap valuations? Why haven’t buyers stepped in?

There are some ongoing broad issues with investing in Russia, such as a lack of political transparency, a corruption problem, and demographic issues. These collectively give Russia a risk premium, that can lead to cheaper ‘normal’ valuations. We can see this in the next chart, showing p/e trends over recent years for certain emerging markets – Russia has largely traded at cheaper levels to the others. It broke sub p/e 5 at the bottom of both of the last two cyclical bears, but the current valuation has not been beaten aside of these.

Compared to the other three members of the BRIC emerging group (of which China also has political and demographic challenges), the economic position in Russia stands up fairly well, with low debt to GDP and unemployment, yet it trades at a 50% discount or more:

Source: Fool.com

Russia experienced a recession around the financial crisis of 2008 but has since maintained positive growth. That growth however is at a lower level to pre-2008, as shown:

Source: Syz

One reason for this lower growth has been energy prices. Energy contributes up to 25% of GDP and 65% of exports. It is the largest producer and exporter of oil in the world, and has the largest reserves and is the largest exporter of natural gas. Up to and into 2008, energy was ‘hot’ and Russia benefited accordingly. Whereas since 2008, natural gas prices have tumbled, and in the last two years oil prices have largely tracked sideways.

In the next chart it can be seen that the Russian stock index has a close correlation with the oil price, up to a 0.9 correlation.

Three companies dominate the RTS and MICEX stock indices: Gazprom, Lukoil and Sberbank, of which the first two relate to energy. Therefore, both by economic weighting and stock index weighting, Russia is an energy play, and a key question is, therefore, where are energy prices headed? To partially answer that, let me also show the association in oil demand and oil price to GDP in both USA and China:

Global economic growth is a key driver of energy prices, and therefore expectations in growth become important to the performance of the Russian stock indices. In fact, Russia is regarded as a high beta bet on global growth. As growth spurts have been weak and short-lived over the last 3 years, Russian stocks have been sensitive to that growth ‘not sticking’.

Since mid-2012, however, we have seen a fairly sustained pick up in growth and this picture still persists in leading indicators today. Has the secular cycle rinsing process combined with sustained central bank supportive actions finally produced a new cycle in growth? It is normal for there to be a growthflationary finale to the current cyclical stocks bull and secular/solar cycling, bringing about a tightening in yields and potentially rates, so I see this as very much possible at this stage.

The action in crude oil over the last two weeks also suggests belief in some sustained global growth here, as it has accelerated on good momentum to a point of potential breakout. It outperformed stocks in this period and in the chart below we can see that the Russian Micex index got left behind:

Source: Bloomberg

This is evidence that they do not move lock-step, and another glance at the RTS and Crude Oil longer term price correlation chart reveals that there are occasional periods where one can outperform the other. After all, both the Russian economy and the Russian stock index are not just about energy. So with that in mind, let’s take a look at leading indicators for the Russian economy as they stand currently:

Source: OECD

A pick up in the Russian economy, seen here, is in line with the general global picture, and confirms that Russia is not an outlier to be avoided.

Additionally, natural gas prices have been making a potential bottom, with a reclaim of $4 last week adding to that positive technical picture.

Source: Trading Charts

A technical advance in gas and oil prices, together with maintained positive leading indicators of growth, ought to drag up the Russian stock index. This is also a seasonally positive time for both oil and gas, with prices typically historically on the rise over the next couple of months.

Let me draw all this together. Russian stocks are very cheap by all three valuation measures, both compared to other countries and by their own history. The Russian stock index is generally a play on energy prices and a high beta play on global growth. Global growth and energy prices correlate fairly well, so we could simplify it and say that if global growth can be sustained here, then Russian stocks are an attractive proposition at this point. Alternatively, if energy prices can rally here (which they tend to do as late cyclicals taking over from stocks), then Russian stocks may equally be an attractive proposition.

If we are unsure about the prospects for global growth or momentum in energy prices, then there may still be a mean reversion opportunity here: Russian stocks could play catch up with the oil price rises of the last two weeks, and/or pull a little away from extreme cheap valuation as investors look for value. As an additional consideration, what would happen to Russian stocks under the competing scenarios of a secular commodities finale ahead versus a secular commodities bull over and a new secular stocks bull underway? I suggest that under the former they would be a late outperforming index due to the energy correlation, and under the latter they would suffer from any sharp falls in energy prices but ultimately their cheapness and momentum in global stocks would drag them higher (a rising tide lifts all boats) eventually. Under both scenarios such developments could take time, as patience is often needed for value plays.

Finally, this is a higher risk opportunity – Russia is not the most investment-friendly country, and is more at risk from an ‘event’. That said, it is the 9th largest economy in the world and as such a key player in the global scene.

OK, I have opened a long trade in Russian stocks today. The timing of this is also not far from the start of the lunar positive period, which provides an additional potential support for the trade. I am open on the timescale involved in this trade, as it could be a swift gainer or a longer term play of patience.

As Things Stand

Posted on March 28, 2013 Posted in Commodities, Currencies, Indicators, Lunar Cycles, Macro, Solar Cycles, Stocks33 Comments

The latest CB leading indicator summary looks unequivocally strong:

Source: Conference Board

US economic surprises are also positive and in an uptrend:

Source: Ed Yardeni

However Eurozone economic surprises are conversely in a downtrend, and the relationship shown below suggests this disparity is the dominant factor in the declining Euro v USD FX.

Source: Beleggenopdegolven

If we look at Eur-USD together with other specific pro-risk proxies, namely the MSCI World Stock Index, the CCI Commodities index and 30 Year Treasury Yields, this is the picture:

Source: Bloomberg

The collective trend was up from November to the end of January. Since then it would appear that we have been in consolidation/correction mode – and this is a fit with the 5-models-in-alignment (see my Tools For 2013 post).

Currently, cheap and unloved assets are Euro, coffee, sugar and gold miners, whilst those reaching into overbought and overbullish zones include the US Dollar, Dow Transports and SP500. If we look at the bullish percent over call/put ratio for the SP500 we can see that we have been recently oscillating in the frothy zone which led to a swing top twice in 2012. However, 2010 and 2011 show things could potentially get frothier, with spikes up to 150.

The CCI Commodities Index and crude oil are both into the noses of large triangles, suggesting an imminent break out one way or the other. Here is crude:

Crude has accelerated this last week with good momentum, but now encounters resistance. It does not have fundamental support from stockpiles, as they continue to be above seasonal average, but I suggest it is the global growth story that is the main reason for the advance.

Meanwhile, coffee, sugar and some other agricultural commodities are at secular bull rising support, which also puts them at a key decision point – either a break down or the start of a new upleg. I still believe the greatest likelihood is of commodities taking off and becoming the outperforming class going forward (based on sunspots, secular history, late cyclicals), and I am positioned accordingly. However, I continue to wait for specific supporting evidence to confirm this, namely a new high in sunspots, a technical break out in the CCI, and for any pullback in stocks to be counter-accompanied by an advance in commodities.

This Saturday is the start of the lunar positive period. Is there a ‘highest probability’ stock index trade on offer? Well, there is now a clear change in the geomagnetism trend, as shown here:

A lower low and a lower high means the geomagnetic trend can no longer be classed as up. In addition, there is some frothiness in stocks as identified above. Therefore, as per the make up of my highest probability trading analysis, I am not going to take this one.

I am now back in England.

Commodities, Inflation, Sunspots And Geomagnetism

Posted on March 19, 2013March 21, 2013 Posted in Commodities, Indicators, Inflation, Macro, Solar Cycles, Stocks26 Comments

Forecasts for the smoothed solar peak still diverge as we await more a decisive sunspots trend, but the most common forecast remains for Fall/Autumn 2013 (NASA, SIBET, SIDC CM). If that proves accurate, then by history we should expect a peak in inflation and commodities within months of the solar peak. Here is the inflation guide:

I covered commodities in detail here, showing that we might expect commodities as a class (i.e. we should not need to be picky about which commodities – there should be broad participation) to rise into and around the solar peak, with a bias towards peaking after the solar peak, which could therefore be Q4 2013 or Q1 2014 even.

If commodities do fulfill the prediction, then inflation will fall into place, as those inflation peaks marked ‘C’ above were very much resultant from escalating commodities prices. The inflation ought to be ‘growthflation’, rather than a supply-side squeeze only, as this next chart shows:

We should see growth and inflation together, but with the emphasis on inflation, until commodity prices rise too far and help tip the world into recession.

If we draw together stock market history and exclude solar theory, using Russell Napier’s work, then the current cyclical stocks bull should end with rising treasury yields (6% the historic tipping point marker) and rising inflation (to 4% as a historical marker, using the official inflation rate). In other words, it is the same target: growthflation until excessive inflation and tightening. This is an important lesson, because many have prematurely called the end to this cyclical stocks bull when conditions have appeared to be worsening. We should be looking the other way: we need conditions to become growthflationary before the cyclical stocks bull can end, and since 2009 we have only seen short cycles of growth and/or inflation giving way to short cycles of weakness and deflation. The current strength in leading indicators and coincident data looks promising to stick long enough to get the required frothiness into markets and the economy.

As the Fed has explicitly manipulated the treasury market, I suggest we ignore the 6% marker this time, but just look for evidence of persistent upward trending yields to demonstrate that money is exiting that class and pouring into commodities. We have seen yields rise 25% since 2012’s low (and I believe that move is the process beginning), but they could still potentially be in a downtrend, so I want to see them break out of the downward channel and above the 200MA.

Source: Stockcharts

The historic 4% official inflation marker may also need to be dropped in favour of a ‘persistent upward trending in inflation’. This is because official inflation statistics have been doctored over the years so we no longer are comparing like for like. To this end we should see the main commodities in sharply rising trends, then inflation will fall into place. Here is the equally weighted commodities index, the CCI:

What do you see? A secular commodities bull market that ended with a second peak in 2011? Or a secular bull market still in tact that has been consolidating since 2011? Well, we don’t have to wait long to find out the answer because of the triangle shown. Either commodities will break upwards and out, which should then inspire momentum buying, or commodities will break downwards and out, confirming a bear market in place since 2011. Based on solar-secular history, and based on the solar peak likely being ahead, I predict the former: for commodities to break out and become the outperforming class.

An acceleration in commodities should coincide with a loss of momentum in equities. It is normal for a peak in commodities to follow a peak in stocks (sequence per Hurst). Equities should begin a topping process which is an overall sideways range consisting of a swing top, a retreat, and then a marginal new high but on negative divergences (breadth, leading indicators). Whilst this process is taking place, commodities should be rising. See here:

I have highlighted the last two cyclical stock bulls topping processes and the associated lagged peaks in commodities. This should make it clearer why I exited my stock indices longs, because although I predict a marginally higher high ahead for equities, and we do not as yet see divergences in breadth or leading indicators, I suggest we are at the start of this pattern, and the upside remaining for equities is fairly limited.

My forecasts for inflation, commodities and equities are all based on historic norms as I see it. That does not preclude an anomaly occurring. Therefore I continue to assess whether evidence supports my case. The current trends in coincident data, leading indicators and treasury yields are all supportive. However, the missing elements remain a decisive upward break in sunspots, momentum shifting to commodities, and ideally a run against the US dollar. Chris Puplava expects this latter development – that the fear and negativity that has been directed at Europe will shift to the US for a period. Here we see the US dollar index versus gold and the potential for that to occur: the USD retreats now from resistance whilst gold pushes upwards and out of its triangle.

Source: Stockcharts

The opposite scenario is also possible: that the USD breaks upwards and out and gold breaks down. So one relationship to watch. Personally, I am not sure whether a run against the USD will take place. However, as long as the USD range trades and does not find grounds for a bull run upwards, that should be sufficient as a backdrop for a commodities finale (as occurred for the 1980 commodities peak).

Lastly, there was a significant geomagnetic storm at the weekend. Geomagnetism has been unseasonally tame in the last few weeks so such a storm is in fact normal. The result is a shift in the geomagnetic model (all models have been updated this morning) and it is now displaying a potential top:

Based on this, equities may make a swing top here, or at best lose momentum looking out into April. Should this occur, then commodities should begin to outperform.

In summary, I see developments ahead likely mapped out by historic patterns. However, there are various indicators to watch to confirm or invalidate this, namely:

1. Sunspots should break upwards to add weight to a solar peak being ahead rather than behind

2. Commodities should break out – the CCI and gold from their triangles

3. Commodities should start to outperform equities, as equities make a range top

4. Inflation and treasury yields should make upward trends

5. The USD should either range trade or break down

Let’s see!

Markets, Trades And Solar Update

Posted on March 7, 2013March 7, 2013 Posted in Bonds, Commodities, Currencies, Indicators, Macro, Solar Cycles, Stocks47 Comments

Got internet this morning so time for a post.

The chart below reveals that pro-risk (proxied by MSCI World Equities, Euro-USD, CCI equally weighted commodities index and 30 year treasury yields) made a correction throughout the month of March. Today Euro-USD and commodities have popped up – not captured yet in that chart – so I suggest the correction in pro-risk may now be over. Equities remain the leading class, and various indicies have broken out to new highs in the last two days, which cements the idea of the correction is done.

Source: Bloomberg

If you recall the 5 models in alignment, they projected a January swing top and a March swing bottom. If this is playing out, then the next and final top should be around June. With history as our guide, the stocks cyclical bull should end with a frothy overthrow, so the kind of sentiment and buying levels we are reading about should be expected. However, I am not sure whether stocks can keep pushing on from here until June. I originally targeted around 1600 for the SP500 to top out, and this was echoed in work by Laslo Birinyi and Barry Bannister. We are currently less than 4% away from that.

Again with history as our guide, we should see a topping process with weakening internals and negative divergences in leading indicators. In terms of leading indicators we don’t yet see this. The latest global PMI reading for combined services and manufacturing looks like this, still in expansion:

Source: Markit / JP Morgan

Citigroup economic surprises are back in the positive for the US. ECRI US leading indicators have weakend a little but remain in a strong positive uptrend. The last missing update in CB leading indicators was for Euroland which came in a positive and improved +1.0. So, right now, we have a backdrop for pro-risk to advance, but I am watching for evidence of trend changes in these indicators.

In terms of market internals, stock market breadth has overall been good and confirming. We need to see those internals weaken for greater likelihood of a top. It does not mean we cannot see a deeper pullback before a renewed attempt at a high – which then displays the weaker internals – in fact that would be the historic norm. So, I am not sure about the push on until June from here, without another correction. Supporting this we see a spike in the bullish percent over call/put indicator, which has been missing, which suggests US stocks should top out soon (Tom Demark predicts at 1567). We also see daily sentiment for the Nikkei index over 90 (out of 100) and it stands on that one precarious steep leg. Plus, Monday is the new moon, which has the potential to be a swing top. So, with this in mind, I have taken profits on my Nikkei positions this morning (NZ time) and left my other stock indices positions in tact. Back in October 2012 I wrote about how cheap the Nikkei was and bought for an average of around 8700 (see here). That trade has returned 40%:

I believe the Nikkei has entered a new secular bull, after a 19 year cycle from nominal top to nominal low, but that this steep single leg up needs to become a more stable ‘W’ with a retracement, a higher low and then a push on again.

Commodities, as a whole, are in a different place, with sugar, coffee, precious metals, wheat, orange juice and others suffering bearish sentiment and low buying interest. However, most of those are now back to important support levels, which combined with the contrarian sentiment readings, provide a good base to rally. And so we return to the guide of solar/secular history, which suggests commodities should now take over as the outperforming class, and while equities process a top, commodities go make their secular finale. This, as you know, is subject to the solar peak timing being correct, and we still do not have decisive evidence on this, so I continue to watch sunspots.

Danny pointed out the change in IPA solar peak forecast. I now understand they are using the SIDC methodology, so it doesn’t amount to a different forecast. Here is a summary then of the solar peak projections:

NASA: Fall/Autmun 2013

NOAA: May 2013

SIBET: Sept/Oct 2013

SIDC: Either Fall/Autumn 2013 or it occurred already in Jan/Feb 2012

Polar reversal method: Q1 2013

The consensus therefore remains that it should be taking place ahead this year – and so it remains that a daily sunspot count over 200 would help sure up that likelihood. Therefore, that scenario remains my favoured and I am positioned for it, but until the alternative secnario is weakened, I am not taking on further commodities positions, despite some very attractive current plays.

TheDarkLord referred to the possibility of a twin peak, based on the similarity to solar cycle 14. I covered this last year, when the parallel was already being floated – see here. You can see in the charts on that link that SC14 was essentially a flat top as well as a twin peak, but note that the smoothed solar peak and the secular asset peak both occurred at the front peak – in fact they happened both dead on Feb 1906. So, it is the smoothed peak forecasts, as compiled above, that are key. That said, I have previously shown that there should be an echo commodities peak (a lower peak) a couple of years later, which could tie in with a second solar peak. However, I have also previously shown that by that point, being in equities is the place to be, returning better than commodities. Therefore, it does not change my strategy: assuming the consensus solar peak is correct and ahead, commodities should make their secular peak in the months following it, then I wish to exit commodities and target equities.

I have not been able to update the models this week, but will do so next week. The key points are that the new moon takes place on Monday, the geomagnetism model has weakened slightly (geomagnetism should start to seasonally worsen here) and sunspots are back up around the 100 zone.

The Next 10 Days

Posted on February 25, 2013 Posted in Bonds, Commodities, Currencies, Indicators, Lunar Cycles, Macro, Solar Cycles, Stocks21 Comments

…I will be in a motorhome, touring NZ North Island, so internet access is going to be occasional and fleeting. So an update and roundup on the markets below, and I will post in the comments beneath it anything important in that period. After New Zealand it’s Abu Dhabi for a week, the last stop on the trip, before returning to Europe.

Let’s start with gold. Major extreme readings were reached last week in oversold and overbearish measures, in both gold and gold miners, many more extreme than in the 2008 sharp falls. I won’t reproduce them here, as many blogs and sites have shown them, but it was sufficiently extreme for me to add to both gold and miners last week as declared. Gold has since rallied away from those extremes and therefore in price, and whilst I don’t know how it will shape technically from here, the key question is whether its secular bull is over and ended in 2011 with silver’s parabolic rise and fall. So here is gold since the start of its secular bull in 2000, measured in all the major currencies. It should be clear that gold has tracked sideways since 2011 and has consolidated up high, whichever currency it is measured in.

Source: Gold.org

As a parabolic excessive-greed finale is the norm as a conclusion to an asset secular bull, and as gold is the leading asset in a Kondratieff winter (which we are concluding), I would give good odds to gold finishing with a blow-off parabolic. A comparison with gold’s last secular bull, below, shows that blow-off parabolic clearly and how gold’s secular bull this time has been fairly measured to date.

Source: Nowandfutures

I am not suggesting that gold has to shoot as high as the comparison suggests – only rather that some kind of excessive exuberance would be a normal end. So, the lack of parabolic ending move in gold yet, together with the high sideways consolidation when the whole secular bull from 2000 is viewed, give me a couple of reasons why I believe we have been seeing a final washout of weak hands before gold breaks higher. However, I await supporting evidence such as from sunspots breaking higher (to confirm the solar peak is ahead), commodities starting to outperform equities, and inflation picking up. This is how sunspots look:

There is a mess, rather than a trend. If the solar peak is ahead this year, which remains the most common forecast, then we need to see daily sunspots register over 200 to make the uptrend clearer. So I am looking out for that.

Since my last post on the markets it has become clearer that pro-risk did begin a correction at the turn of January into February. The chart below combines proxies for stocks, commodities, risk-safehaven FX and treasury bond yields.

I suggest there are two paths forward, both of which eventually will see equities return to their highs, in order to deliver a negative divergence top (price advances but internals weaken). The first is the five-models-in-alignment path, which suggests pro-risk may pull back into March before advancing again. The second is that pro-risk is only making a normal lunar pullback, into yesterday’s full moon, and will continue upwards over the next few weeks, for a Spring swing top. This option is supported by cyclicals as a leading indicator, and my geomagnetism model shown:

The tail on the model stretches out into the end of March and remains in an uptrend due to unseasonally tame geomagnetism (actual and forecast). The oscillations within that are the lunar phase pressures.

There also remains a fairly benign macro-economic environment, which should support pro-risk, although we should always be alert for early warning signs of a change, and we could potentially have this in the latest PMIs.

China PMI, US PMI and Europe PMI in order below:

Source: Markit

A droop in the latest data, but still positive in China and the US.

Meanwhile, economic surprises show unclear developments in both Europe and the US, but using oil prices as a leading indicator for the latter, a topping out in this measure may occur in Spring.

Source: BrokenMarkets / Citigroup

US earnings season is pretty much over, and the final results in both earnings and revenues were good, and supportive for equities.

Source: Bespoke

The latest Conference Board leading indicator data table looks like this:

Source: Conference Board

Since my last market post, readings for China, Germany, US and Mexico all came in positive. The table is healthy, for now.

In summary, the picture between leading indicators and economic/earnings data is fairly supportive for pro-risk for now, unless that droop in PMI readings becomes wider weakness ahead.

There is bearish sentiment towards sugar, coffee, wheat, corn and cattle currently, as well as the precious metals, and I would add to commodity positions if we saw improved evidence of a secular commodities peak ahead, namely those developments listed above. Until that becomes clearer however, I am playing it safe and sticking largely with what I have, as both the primary (secular commodities and solar peak ahead) and alternative (secular and solar peak passed) scenarios remain in play.

S O L A R C Y C L E S

Category: Macro

Friday Update

More In The Balance

Money Velocity

In The Balance

Russian Stock Index

As Things Stand

Commodities, Inflation, Sunspots And Geomagnetism

Markets, Trades And Solar Update

The Next 10 Days