Historic - What We're Reading - StockBuz2024-03-28T19:58:28Zhttp://stockbuz.ning.com/articles/feed/category/HistoricDon't Be Fooled The Bond Rally Continueshttp://stockbuz.ning.com/articles/don-t-be-fooled-the-bond-rally-continues2016-08-11T01:08:59.000Z2016-08-11T01:08:59.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;"><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1291344?profile=original"><img class="align-left" src="http://storage.ning.com/topology/rest/1.0/file/get/1291344?profile=RESIZE_480x480" width="450"></a>We’ve been bulls on 30-year Treasury bonds since 1981 when we stated, “We’re entering the bond rally of a lifetime.” It’s still under way, in our opinion. Their yields back then were 15.2%, but our forecast called for huge declines in inflation and, with it, a gigantic fall in bond yields to our then-target of 3%.</span></span></p>
<h3><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">The Cause of Inflation</span></span></h3>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">We’ve argued that the root of inflation is excess demand, and historically it’s caused by huge government spending on top of a fully-employed economy. That happens during wars, and so inflation and wars always go together, going back to the French and Indian War, the Revolutionary War, the War of 1812, the Mexican War of 1846, the Civil War, the Spanish American War of 1898, World Wars I and II and the Korean War. In the late 1960s and 1970s, huge government spending, and the associated double-digit inflation (<em>Chart 1</em>), resulted from the Vietnam War on top's LBJ’s War on Poverty.</span></span></p>
<p align="center"><img alt="" style="width: 550px; height: 360px;" src="http://ggc-mauldin-images.s3.amazonaws.com/uploads/newsletters/Image_1_20160810_OTB.jpg"></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">By the late 1970s, however, the frustrations over military stalemate and loss of American lives in Vietnam as well as the failures of the War on Poverty and Great Society programs to propel lower-income folks led to a rejection of voters’ belief that government could aid Americans and solve major problems. The first clear manifestation of this switch in conviction was Proposition 13 in California, which limited residential real estate taxes. That was followed by the 1980 election of Ronald Reagan, who declared that government <em>was</em> the basic problem, not the solution to the nation’s woes.</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">This belief convinced us that Washington’s involvement in the economy would atrophy and so would inflation. Given the close correlation between inflation and Treasury bond yields (Chart 1), we then forecast the unwinding of inflation—disinflation—and a related breathtaking decline in Treasury bond yields to 3%, as noted earlier. At that time, virtually no one believed our forecast since most thought that double-digit inflation would last indefinitely. </span></span></p>
<h3><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Lock Up For Infinity?</span></span></h3>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Despite the high initial yields on “the long bond,” as the most-recently issued 30-year Treasury is called, our focus has always been on price appreciation as yields drop, not on yields, per se. A vivid example of this strategy occurred in March 2006—before the 2007–2009 Great Recession promoted the nosedive in stocks and leap in Treasury bond prices. I was invited by Professor Jeremy Siegel of Wharton for a public debate on stocks versus bonds. He, of course, favored stocks and I advocated Treasury bonds.</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">At one point, he addressed the audience of about 500 and said, “I don’t know why anyone in their right mind would tie up their money for 30 years for a 4.75% yield [the then-yield on the 30-year Treasury].” When it came my turn to reply, I asked the audience, “What’s the maturity on stocks?” I got no answer, but pointed out that unless a company merges or goes bankrupt, the maturity on its stock is infinity—it has no maturity. My follow-up question was, “What is the yield on stocks?” to which someone correctly replied, “It’s 2% on the S&P 500 Index.” </span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">So I continued, “I don’t know why anyone would tie up money for infinity for a 2% yield.” I was putting the query, apples to apples, in the same framework as Professor Siegel’s rhetorical question. “I've never, never, never bought Treasury bonds for yield, but for appreciation, the same reason that most people buy stocks. I couldn't care less what the yield is, as long as it's going down since, then, Treasury prices are rising.”</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Of course, Siegel isn’t the only one who hates bonds in general and Treasuries in particular. And because of that, Treasurys, unlike stocks, are seldom the subject of irrational exuberance. Their leap in price in the dark days in late 2008 (<em>Chart 2</em>) is a rare exception to a market that seldom gets giddy, despite the declining trend in yields and related decline in prices for almost three decades.</span></span></p>
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<h3><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Treasury Haters</span></span></h3>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Stockholders inherently hate Treasurys. They say they don’t understand them. But their quality is unquestioned, and Treasurys and the forces that move yields are well-defined—Fed policy and inflation or deflation (Chart 1) are among the few important factors. Stock prices, by contrast, depend on the business cycle, conditions in that particular industry, Congressional legislation, the quality of company management, merger and acquisition possibilities, corporate accounting, company pricing power, new and old product potentials, and myriad other variables.</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Also, many others may see bonds—except for junk, which really are equities in disguise—as uniform and gray. It's a lot more interesting at a cocktail party to talk about the unlimited potential of a new online retailer that sells dog food to Alaskan dogsledders than to discuss the different trading characteristics of a Treasury of 20- compared to 30-year maturity. In addition, many brokers have traditionally refrained from recommending or even discussing bonds with clients. Commissions are much lower and turnover tends to be much slower than with stocks. </span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Stockholders also understand that Treasurys normally rally in weak economic conditions, which are negative for stock prices, so declining Treasury yields are a bad omen. It was only individual investors’ extreme distaste for stocks in 2009 after their bloodbath collapse that precipitated the rush into bond mutual funds that year. They plowed $69 billion into long-term municipal bond funds alone in 2009, up from only $8 billion in 2008 and $11 billion in 2007.</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Another reason is that most of those promoting stocks prefer them to bonds is because they compare equities with short duration fixed-income securities that did not have long enough maturities to appreciate much as interest rates declined since the early 1980s.</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Investment strategists cite numbers like a 6.7% annual return for Treasury bond mutual funds for the decade of the 1990s while the S&P 500 total annual return, including dividends, was 18.1%. But those government bond funds have average maturities and durations far shorter than on 30-year coupon and zero-coupon Treasurys that we favor and which have way, way outperformed equities since the early 1980s</span></span>.</p>
<h3><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Media Bias</span></span></h3>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">The media also hates Treasury bonds, as their extremely biased statements reveal. The June 10 edition of <em>The Wall Street Journal</em> stated: “The frenzy of buying has sparked warnings about the potential of large losses if interest rates rise. The longer the maturity, the more sharply a bond’s price falls in response to a rise in rates. And with yields so low, buyers aren’t getting much income to compensate for that risk.” Since then, the 30-year Treasury yield has dropped from 2.48% to 2.21% as the price has risen by 8.3%.</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Then, the July 1 <em>Journal</em> wrote: “Analysts have warned that piling into government debt, especially long-term securities at these slim yields, leaves bondholders vulnerable to the potential of large capital losses if yields march higher.” Since then, the price of the 30-year Treasury has climbed 1.7%. </span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">While soft-pedaling the tremendous appreciation in long-term sovereigns this year, <em>Wall Street Journal</em> columnist James MacKintosh worries about the reverse. On July 28, he wrote, “Investors are taking a very big risk with these long-dated assets....Japan's 40-year bond would fall 15% in price if the yield rose by just half a percentage point, taking it back to where it stood in March. If yields merely rise back to where they started the year, it would be catastrophic for those who have chased longer duration. The 30-year Treasury would lose 14% of its value, while Japan's 40-year would lose a quarter of its value.” </span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">The July 11 edition of the <em>Journal</em> said, “Changes in monetary policy could also trigger potential losses across the sovereign bond world. Even a small increase in interest rates could inflict hefty losses on investors.” </span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">But in response to Brexit, the Bank of England has already eased, not tightened, credit, with more likely to follow. The European Central Bank is also likely to pump out more money as is the Bank of Japan as part of a new $268 billion stimulus package. Meanwhile, even though Fed Chairwoman Yellen has talked about raising interest rates later this year, we continue to believe that the next Fed move will be to reduce them.</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Major central banks have already driven their reference rates to essentially zero and now negative in Japan and Europe (<em>Chart 3</em>) while quantitative easing exploded their assets (<em>Chart 4</em>). The Bank of England immediately after Brexit moved to increase the funds available for lending by U.K. banks by $200 billion. Earlier, on June 30, BOE chief Mark Carney said that the central bank would need to cut rates “over the summer” and hinted at a revival of QE that the BOE ended in July 2012.</span></span></p>
<p align="center"><img alt="" style="width: 550px; height: 359px;" src="http://ggc-mauldin-images.s3.amazonaws.com/uploads/newsletters/Image_3_20160810_OTB.jpg"></p>
<p align="center"><img alt="" style="width: 550px; height: 359px;" src="http://ggc-mauldin-images.s3.amazonaws.com/uploads/newsletters/Image_4_20160810_OTB.jpg"></p>
<h3><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Lonely Bulls</span></span></h3>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">We’ve been pretty lonely as Treasury bond bulls for 35 years, but we’re comfortable being in the minority and tend to make more money in that position than by running with the herd. Incidentally, we continue to favor the 30-year bond over the 10-year note, which became the benchmark after the Treasury in 2001 stopped issuing the “long bond.” At that time, the Treasury was retiring debt because of the short-lived federal government surpluses caused by the post–Cold War decline in defense spending and big capital gains and other tax collections associated with the Internet stock bubble.</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">But after the federal budget returned to deficits as usual, the Treasury resumed long bond issues in 2006. In addition, after stock losses in the 2000–2002 bear market, many pension funds wanted longer-maturity Treasurys to match against the pension benefit liability that stretched further into the future as people live longer, and they still do.</span></span></p>
<h3><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Maturity Matters</span></span></h3>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">We also prefer the long bond because maturity matters to appreciation when rates decline. Because of compound interest, a 30-year bond increases in value much more for each percentage point decline in interest rates than does a shorter maturity bond (<em>Chart 5</em>).</span></span></p>
<p align="center"><img alt="" style="width: 550px; height: 360px;" src="http://ggc-mauldin-images.s3.amazonaws.com/uploads/newsletters/Image_5a_20160810_OTB.jpg"></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Note (<em>Chart 6</em>) that at recent interest rates, a one percentage point fall in rates increases the price of a 5-year Treasury note by about 4.8%, a 10-year note by around 9.5%, but a 30-year bond by around 24.2%. Unfortunately, this works both ways, so if interest rates go up, you’ll lose much more on the bond than the notes if rates rise the same for both.</span></span></p>
<p align="center"><img alt="" style="width: 403px; height: 278px;" src="http://ggc-mauldin-images.s3.amazonaws.com/uploads/newsletters/Image_6_20160810_OTB.jpg"></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">If you really believe, as we have for 35 years, that interest rates are going down, you want to own the longest-maturity bond possible. This is true even if short-term rates were to fall twice as much as 30-year bond yields. Many investors don’t understand this and want only to buy a longer-maturity bond if its yield is higher.</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Others only buy fixed-income securities that mature when they need the money back. Or they'll buy a ladder of bonds that mature in a series of future dates. This strikes us as odd, especially for Treasurys that trade hundreds of billions of dollars’ worth each day and can be easily bought and sold without disturbing the market price. Of course, when you need the cash, interest rates may have risen and you’ll sell at a loss, whereas if you hold a bond until it matures, you’ll get the full par value unless it defaults in the meanwhile. But what about stocks? They have no maturity so you’re never sure you’ll get back what you pay for them.</span></span></p>
<h3><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Three Sterling Qualities</span></span></h3>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">We’ve also always liked Treasury coupon and zero-coupon bonds because of their three sterling qualities. First, they have gigantic liquidity with hundreds of billions of dollars’ worth trading each day, as noted earlier. So all but the few largest investors can buy or sell without disturbing the market.</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Second, in most cases, they can’t be called before maturity. This is an annoying feature of corporate and municipal bonds. When interest rates are declining and you’d like longer maturities to get more appreciation per given fall in yields, issuers can call the bonds at fixed prices, limiting your appreciation. Even if they aren’t called, callable bonds don’t often rise over the call price because of that threat. But when rates rise and you prefer shorter maturities, you’re stuck with the bonds until maturity because issuers have no interest in calling them. It’s a game of heads the issuer wins, tails the investor loses.</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Third, Treasurys are generally considered the best-quality issues in the world. This was clear in 2008 when 30-year Treasurys returned 42%, but global corporate bonds fell 8%, emerging market bonds lost 10%, junk bonds dropped 27%, and even investment-grade municipal bonds fell 4% in price.</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Slowing global economic growth and the growing prospects of deflation are favorable for lower Treasury yields. So is the likelihood of further ease by central banks, including even a rate cut by the Fed, as noted earlier. </span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Along with the dollar (<em>Chart 7</em>), Treasurys are at the top of the list of investment safe havens as domestic and foreign investors, who own about half of outstanding Treasurys, clamor for them.</span></span></p>
<p align="center"><img alt="" style="width: 550px; height: 358px;" src="http://ggc-mauldin-images.s3.amazonaws.com/uploads/newsletters/Image_7_20160810_OTB.jpg"></p>
<h3><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Sovereign Shortages</span></span></h3>
<p><span style="font-family: times new roman,times,serif;">Furthermore, the recent drop in the federal deficit has reduced government funding needs so the Treasury has reduced the issuance of bonds in recent years. In addition, tighter regulators force U.S. financial institutions to hold more Treasurys. </span></p>
<p><span style="font-family: times new roman,times,serif;">Also, central bank QE has vacuumed up highly-rated sovereigns, creating shortages among private institutional and individual buyers. The Fed stopped buying securities in late 2014, but the European Central Bank and the Bank of Japan, which already owns 34% of outstanding Japanese government securities, are plunging ahead. The resulting shortages of sovereigns abroad and the declining interest rates drive foreign investors to U.S. Treasurys.</span></p>
<p><span style="font-family: times new roman,times,serif;">Also, as we’ve pointed out repeatedly over the past two years, low as Treasury yields are, they’re higher than almost all other developed country sovereigns, some of which are negative (<em>Chart 8</em>). So an overseas investor can get a better return in Treasurys than his own sovereigns. And if the dollar continues to rise against his home country currency, he gets a currency translation gain to boot.</span></p>
<p align="center"><img alt="" style="width: 550px; height: 358px;" src="http://ggc-mauldin-images.s3.amazonaws.com/uploads/newsletters/Image_8_20160810_OTB.jpg"></p>
<h3><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">"The Bond Rally of a Lifetime"</span></span></h3>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">We believe, then, that what we dubbed “the bond rally of a lifetime” 35 years ago in 1981 when 30-year Treasurys yielded 15.2% is still intact. This rally has been tremendous, as shown in <em>Chart 9</em>, and we happily participated in it as forecasters, money managers and personal investors.</span></span></p>
<p align="center"><img alt="" style="width: 550px; height: 360px;" src="http://ggc-mauldin-images.s3.amazonaws.com/uploads/newsletters/Image_9_20160810_OTB.jpg"></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Chart 9 uses 25-year zero-coupon bonds because of data availability but the returns on 30-year zeros were even greater. Even still, $100 invested in that 25-year zero-coupon Treasury in October 1981 at the height in yield and low in price and rolled over each year maintains its maturity or duration to avoid the declining interest rate sensitivity of a bond as its maturity shortens with the passing years. It was worth $31,688 in June of this year, for an 18.1% annual gain. In contrast, $100 invested in the S&P 500 index at its low in July 1982 is now worth $4,620 with reinvested dividends. So the Treasurys have outperformed stocks by 7.0 <em>times</em> since the early 1980s.</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">So far this year, 30-year zero-coupon Treasurys have returned 26% compared to 3.8% for the S&P 500. And we believe there’s more to go. Over a year ago, we forecast a 2.0% yield for the 30-year bond and 1.0% for the 10-year note. If yields fall to those levels by the end of the year from the current 2.21% and 1.5%, respectively, the total return on the 30-year coupon bond will be 5.7% and 5.6% on the 10-year note. The returns on zero-coupon Treasurys with the same rate declines will be 6.4% and 5.1% (<em>Chart 10</em>).</span></span></p>
<p align="center"><img alt="" style="width: 400px; height: 307px;" src="http://ggc-mauldin-images.s3.amazonaws.com/uploads/newsletters/Image_10_20160810_OTB.jpg"></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Besides Treasurys, sovereign bonds of other major countries have been rallying this year as yields fell (<em>Chart 11</em>) and investors have stampeded into safe corrals after Brexit.</span></span></p>
<p align="center"><img alt="" style="width: 550px; height: 360px;" src="http://ggc-mauldin-images.s3.amazonaws.com/uploads/newsletters/Image_11_20160810_OTB.jpg"></p>
<h3><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Finally Facing Reality</span></span></h3>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Interestingly, some in the media are finally facing the reality of this superior performance of Treasury bonds and backpedaling on their 35-year assertions that it can’t last. The July 12 <em>Wall Street Journal</em> stated: “Bonds are churning out returns many equity investors would envy. Remarkably, more than 80% of returns on U.S., German, Japanese and U.K. bonds are attributable to gains in price, Barclays index data show. Bondholders are no longer patient coupon-clippers accruing steady income.”</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">The July 14 <em>Journal</em> said, “Ultra low interest rates are here to stay,” and credited not only central bank buying of sovereigns but also slow global growth. Another <em>Journal</em> article from that same day noted that central banks can make interest rates even more negative and, if so, “even bonds bought at today’s low rates could go up in price.” And in the July 16 <em>Journal</em>, columnist Jason Zweig wrote, “The generation-long bull market in bonds is probably drawing to a close. But high quality bonds are still the safest way to counteract the risk of holding stocks, as this year’s returns for both assets has shown. Even at today’s emaciated yields, bonds still are worth owning.” What a diametric change from earlier pessimism on bonds!</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">The July 11 <em>Journal</em> said, “Recently, the extra yield investors demand to hold the 10-year relative to the two-year Treasury note hit its lowest level since November 2007 (<em>Chart 12</em>). In the past, investors have taken this narrowing spread as a warning sign that growth momentum may soon slow because the Fed is about to raise interest rates—a move that would cause shorter-dated bond yields to rise faster than longer-dated ones. Now, like much else, it is largely being blamed on investors’ quest for yield.” Note (Chart 12) that when the spread went negative, with 2-year yields exceeding those on 10-year Treasury notes, a recession always followed. But that was because the Fed's attempts to cool off what it saw as an overheating economy with higher rates was overdone, precipitating a business downturn. That's not li kely in today's continuing weak global economy.</span></span></p>
<p align="center"><img alt="" style="width: 550px; height: 360px;" src="http://ggc-mauldin-images.s3.amazonaws.com/uploads/newsletters/Image_12_20160810_OTB.jpg"></p>
<h3><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Persistent Stock Bulls</span></span></h3>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Nevertheless, many stock bulls haven’t given up their persistent love of equities compared to Treasurys. Their new argument is that Treasury bonds may be providing superior appreciation, but stocks should be owned for dividend yield. </span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">That, of course, is the exact opposite of the historical view, but in line with recent results. The 2.1% dividend yield on the S&P 500 exceeds the 1.50% yield on the 10-year Treasury note and is close to the 2.21% yield on the 30-year bond. Recently, the stocks that have performed the best have included those with above average dividend yields such as telecom, utilities and consumer staples (<em>Chart 13</em>).</span></span></p>
<p align="center"><img alt="" style="width: 550px; height: 358px;" src="http://ggc-mauldin-images.s3.amazonaws.com/uploads/newsletters/Image_13_20160810_OTB.jpg"></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Then there is the contention by stock bulls that low interest rates make stocks cheap even through the S&P 500 price-to-earnings ratio, averaged over the last 10 years to iron out cyclical fluctuations, now is 26 compared to the long-term average of 16.7(<em>Chart 14</em>). This makes stocks 36% overvalued, assuming that the long run P/E average is still valid. And note that since the P/E has run above the long-term average for over a decade, it will fall below it for a number of future years—if the statistical mean is still relevant.</span></span></p>
<p align="center"><img alt="" style="width: 550px; height: 362px;" src="http://ggc-mauldin-images.s3.amazonaws.com/uploads/newsletters/Image_14_20160810_OTB.jpg"></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Instead, stock bulls points to the high earnings yield, the inverse of the P/E, in relation to the 10-year Treasury note yield. They believe that low interest rates make stocks cheap. Maybe so, and we’re not at all sure what low and negative nominal interest rates are telling us.</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">We’ll know for sure in a year or two. It may turn out to be the result of aggressive central banks and investors hungry for yield with few alternatives. Or low rates may foretell global economic weakness, chronic deflation and even more aggressive central bank largess in response. We’re guessing the latter is the more likely explanation.</span></span></p>
<p><span style="font-size: 16px;"><span style="font-family: times new roman,times,serif;">Courtesy of <a href="http://www.agaryshilling.com/insight/" target="_blank">A.GaryShilllingsInsight</a></span></span></p></div>No Crude Oil Recovery In 2015http://stockbuz.ning.com/articles/no-crude-oil-recovery-in-20152015-01-01T19:43:42.000Z2015-01-01T19:43:42.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><img src="http://storage.ning.com/topology/rest/1.0/file/get/2208480?profile=RESIZE_400x&width=400"></div><div><p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1291322?profile=original"><img class="align-left" src="http://storage.ning.com/topology/rest/1.0/file/get/1291168?profile=RESIZE_320x320" width="300"></a>While guests on <span style="text-decoration: line-through;">CNBS</span> CNBC and Bloomberg are busy encouraging you to buy oil names which are down over 50%, I wouldn't expect to reap any big rewards any time soon. In fact I believe there will be much more pain ahead, depending on the strength of the company you chose. Iran sanctions may be giving it a boost near term but once they're lifted (or eased) their production is expected to <span style="text-decoration: underline;">double</span> which is once again, bearish for this oversupplied market</p>
<p>While everyone is in agreement that crude oil is in a bear market, quite often one strategy is to buy the laggard and anticipate it to outperform the following year. The trouble with crude oil however, are the fundamentals.</p>
<ol>
<li>U.S. consumer Demand (figure 1) Consumption has been dropping since 2000 thanks to more fuel efficient autos and younger Americans (millennials born from 1980 to early 2000s) being drawn to work in and the lifestyles of large metropolitan areas. Baby boomers (born 1946-1964 or 51-69 years of age) will contribute less and less to overall GDP and consumption as they continue to approach retirement age. Gen Xers (children of baby boomers) being the only ones migrating to the suburbs as they have children, pay at the pump and handle the long commute to the office each day.</li>
<li>Production is up; way up (figure 2 to right) The U.S. has been ramping up black gold producing rig counts and oil production since 2000 back to levels not seen in 30 years and projections are that these levels will continue to at least 2020. Abundant supply shall continue.</li>
<li>OPEC feels the least pressure from an operating standpoint to cut production as they have the lowest cost to operate worldwide. They have <a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1291208?profile=original"><img class="align-right" src="http://storage.ning.com/topology/rest/1.0/file/get/1291208?profile=RESIZE_320x320" width="300"></a>stated they are completely comfortable with lower crude oil pricing will not cut back production unless someone else joins in the fun (hint to Russia and Venezuela) but this chess game could remain in check for quite some time.</li>
<li>What we are witnessing is mean reversion in crude oil or price reverting back to a long term average in price. (see chart 3 below left) While there are numerous investing strategies when a stock reverts to the mean, an entire "sector" <a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1291280?profile=original"><img class="align-left" src="http://storage.ning.com/topology/rest/1.0/file/get/1291280?profile=RESIZE_320x320" width="300"></a>reverting to the mean <em>can translate</em> into an <span style="text-decoration: underline;">underlying problem</span>. According to <a href="http://www.investopedia.com/terms/m/meanreversion.asp" target="_blank">Investopedia</a> mean reversion......</li>
</ol>
<blockquote>
........has led to many investing strategies involving the purchase or sale of stocks or other securities whose recent performance has greatly differed from their historical averages. However,
<span style="text-decoration: underline;">a change in returns could be a sign that the company no longer has the same prospects it once did</span>,
</blockquote>
<p>Now wrap your head around this. According to the <a href="http://www.bls.gov/iag/tgs/iag211.htm#iag211bdmcew.f.P" target="_blank">BLS</a>, in the U.S. alone, there are <em>technically</em> over 9,000 companies cranking out crude oil ,so one can only imagine how many exist world wide. Just mind blowing. F</p>
<p>or the sake of this theory, let's weed out the shell corporations and Mom & Pop operations with a pumper out on their back 40. If we look at just names publicly-traded in U.S. markets and <em>include</em> oil service names who will also be affected by lower prices and lower demand, there are over 700 according an Ameritrade screener. </p>
<p></p>
<p><span class="font-size-3" style="text-decoration: underline;"><strong>The First Domino Is The Price</strong></span></p>
<p>So let's say prices snap back but then continue drop and do not recover. A company only has "so much" in cash reserves to continue to operate. As they watch their market cap evaporate, they have limited options:</p>
<ol>
<li>Cut capital expenditures which we've already <a href="http://www.fool.com/investing/general/2014/12/08/oil-news-150-billion-in-oil-projects-are-at-risk-d.aspx" target="_blank">begun to witness</a> with projects worth billions more in jeopardy of postponement. Just in October alone, shale drilling <a href="http://www.reuters.com/article/2014/12/01/us-oil-prices-shale-permits-idUSKCN0JF2CU20141201" target="_blank">permits dropped 15%</a> in an area which had seen permits double from a year prior.</li>
<li>As <a href="http://www.eia.gov/todayinenergy/detail.cfm?id=17311" target="_blank">cash from operations shrink with price</a>, they can sell assets however this is obviously unsustainable.</li>
<li>Increase their stock buyback program in an effort to "buoy" their stock price. While this can work in a <em>bullish</em> environment, when the market is bearish and you repurchase more than is being bought, it's a cash drain.</li>
<li>Cut their dividend to save money unless they're able to get outside funding (not likely given forecasts). Funds will not like that one bit. Immediately funds will trim their positions even further than they already have seeking yield elsewhere. This has (I believe) already begun as Seadrill Ltd. (NYSE: <a href="http://www.streetinsider.com/stock_lookup.php?q=SDRL">SDRL</a>) and North Atlantic Drilling Ltd. (NYSE: <a href="http://www.streetinsider.com/stock_lookup.php?q=NADL">NADL</a>) announced that the two companies would be suspending dividends. Many are anticipating a cut in RIG's dividend (currently at 16%) but even supposedly strong players such as ESV (10%) have suffered a huge drop in share price.</li>
<li>They'll be forced to cut their forecast - more stock price pain</li>
<li>They'll be forced to eventually lower their prices to attract new or retain current customers. More pain in earnings and this can cause price wars. Remember airfare wars? Great for the consumer but killer for a balance sheet.</li>
<li>Restructure, reorganize, layoff and cut costs.</li>
<li>Pray a supply disruption, OPEC to cut production or for M&A to ramp up in the space and <em>shrink</em> the field of competitors.</li>
</ol>
<p><span class="font-size-3" style="text-decoration: underline;"><strong>Debt Debt Baby<br></strong></span></p>
<p>The low-interest-rate environment and continued central bank stimulus have helped energy companies ramp their capex via cheap, ubiquitous financing. Consequently, debt levels in the energy sector have soared. For example, <strong>Linn Energy, LLC</strong> (<a href="https://dwq4do82y8xi7.cloudfront.net/x/sRFaKe5h/" target="_blank">LINE</a>), a favorite stock for yield hogs due to its 10%-plus yield, has increased its long-term debt levels from $2.7 billion at the end of 2010 to <span style="text-decoration: underline;">$9.6 billion currently.</span></p>
<p>The Energy Information Administration (EIA) estimates that, in the <span style="text-decoration: underline;">last year alone</span>, major oil and natural gas companies added over $100 <span style="text-decoration: underline;">billion</span> in net debt.</p>
<p>It's no better across the pond where a <a href="http://www.telegraph.co.uk/finance/newsbysector/energy/11315956/Third-of-listed-UK-oil-and-gas-drillers-face-bankruptcy.html" target="_blank">third of Britain's</a> listed oil and gas companies are in danger of running out of working capital and even going bankrupt amid a slump in the value of crude, according to new research. Financial risk management group Company Watch believes that 70pc of the UK’s publicly listed oil exploration and production companies are now unprofitable, racking up significant losses in the region of £1.8bn.</p>
<p>Ratings agency <a href="http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/11314794/Oil-majors-finances-strained-by-price-slump.html" target="_blank">Standard & Poor’s recently flagged</a> its concern of some of Europe’s biggest oil and gas groups such as Royal Dutch Shell, BP and BG Group. Its primary worry is debt levels which it says have jumped from a combined $162.9bn (£105bn) for the five largest European companies in the sector at the end of 2008 to an estimated $240bn in 2014.</p>
<p>Martin S. Fridson, a prominent figure in the high-yield bond market, sees as much as <a href="http://blogs.cfainstitute.org/investor/2014/10/30/who-will-suffer-from-a-leveraged-credit-shakeout/" target="_blank">$1.6 trillion in high-yield defaults</a> coming in a surge that he expects to begin shortly.</p>
<p>We are already beginning to see the beginning of what I believe will be more pain ahead as Seadrill Ltd. (NYSE: <a href="https://dwq4do82y8xi7.cloudfront.net/x/35RFIdp7/" target="_blank">SDRL</a>) and North Atlantic Drilling Ltd. (NYSE: <a href="https://dwq4do82y8xi7.cloudfront.net/x/HIecdhRM/" target="_blank">NADL</a>) announced that the two companies would be suspending dividends.</p>
<p>So <span style="text-decoration: underline;">barring any disruption in supply,</span> I believe we won't see crude oil with any true, long term rebound in 2015. In fact, with no rebound in price we'll not only see Capex and dividends continue to be cut, but there will be <strong>defaults.</strong> I believe M&A is on the way and yes, failures, Bankruptcies and more dividend/buyback cuts. If you're a long term investor, sure go ahead and buy some shares (making certain they're financially strong) but don't expect a substantial return any time soon. Just pray your company survives or is bought out. Many will not survive.</p>
<p>(As a side note, <a href="http://www.fool.com/investing/general/2015/01/01/3-reasons-these-high-yielding-offshore-drillers-co.aspx" target="_blank">TheMotleyFool</a> has an interesting article on off shore drillers which may be of interest to long term investors. I love to bottom feed and the author makes a great point about retiring rigs. Check it out and let me know what you think)</p>
<p>The good news is once the smoke clears we will have fewer players on the oil field, prices will rise organically based on demand and competitive pricing and you, the consumer will benefit in the interim.</p>
<p></p></div>The Big Market Squeezehttp://stockbuz.ning.com/articles/the-big-market-squeeze2014-12-20T00:12:42.000Z2014-12-20T00:12:42.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1291142?profile=original"><img class="align-right" src="http://storage.ning.com/topology/rest/1.0/file/get/1291033?profile=RESIZE_320x320" width="300"></a>Volatility definitely increased leading up to this weeks quadruple witching <em>and</em> the <a href="http://headlines.ransquawk.com/headlines/us-index-changes-and-expiries-quadruple-witching-and-the-s-p-rebalance-due-on-friday-19th-december-2014-15-12-2014" target="_blank">S&P (400, 500 and 600) index re-balancing</a> taking place tonight after the close. Selling the last two weeks resulted in oversold conditions in the near term charts and massive short covering at the market as every fund and investment bank bought new shares (as they rebalanced ahead of the indexes), resulted in two astounding days of back to back two percent gains. Bulls were partying in the streets but is it warranted? Has anything truly changed? </p>
<p>Yes, the Fed has reassured investors that they have no intention of raising rates any time soon which is what everyone wanted to hear but we still have a bull market which has had an incredible six-year run so just "who" is going to buy at these elevated levels for their 2015 portfolio?</p>
<p>I also do not believe that crude oil (and oil/gas companies) are out of the woods yet either. <a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1291057?profile=original"><img class="align-left" src="http://storage.ning.com/topology/rest/1.0/file/get/1291057?profile=RESIZE_320x320" width="200"></a>There's that pesky $OVX which is the VIX for crude oil. Note how it's not coming back to earth? Hmmmmm This certainly seems to imply to me that crude oil's fall is not over......but hey, I could be wrong. Let's watch and see if worries of oil & gas name defaults doesn't resurface in the weeks to come.<a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1291114?profile=original"><img class="align-right" src="http://storage.ning.com/topology/rest/1.0/file/get/1291114?profile=RESIZE_320x320" width="300"></a></p>
<p>For what it's worth everyone is curious how often the market had two day, two percent moves and here are the numbers as well as a 20-year chart. How you interpret it is up to you. (click to enlarge)</p>
<p>With Christmas and New Years the next two weeks <em>and</em> fund managers headed out to vacation, volumes will be abysmal and algos set to low speed. It's a great time to shut down the computer and take time off yourself. Barring any unexpected news such as defaults, I would expect the market to drift sideways to up. Happy Holidays to all.</p>
<p></p></div>SPX And Recessionshttp://stockbuz.ning.com/articles/spx-and-recessions2014-06-25T13:22:44.000Z2014-06-25T13:22:44.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p>Given today's big GPS miss (-2.9% vs. expected -1.8%), I felt we should take a look at the historical performance of the S&P500 when it comes to recessions. For all of those who harp that the stock market <em>is not</em> the economy, past reactions to recessions is certainly interesting.<a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290765?profile=original"><img class="align-right" src="http://storage.ning.com/topology/rest/1.0/file/get/1290765?profile=RESIZE_1024x1024" width="750"></a></p>
<p>Click image to enlarge.</p>
<p>Chart courtesy of <a href="http://www.elliottwaveanalytics.com" target="_blank">ElliottWaveAnalytics</a></p>
<p></p></div>Variant Warns: Profit Margins To Head Lowerhttp://stockbuz.ning.com/articles/variant-warns-profit-margins-to-head-lower2014-05-27T14:12:00.000Z2014-05-27T14:12:00.000ZKoshttp://stockbuz.ning.com/members/Kos<div><p><em>While the continual question remains, why are bonds holding up? Why isn't that money flowing into equities? We highly recommend recommend this piece from Variant Perceptions. These gusy have nailed it over and over again in the past and maybe, just maybe big investors are embracing something that the little guy doesn't wish to accept. That profit margins in our "new recovery" are unsustainable. We may crawl higher, but they wouldn't bet the bank it will last long. That's great! I'd prefer reverting to the mean and loading up on names..........at lower levels. Enjoy-</em></p><p>Profit margins in the US have hit modern-day record levels, and this has been used to help justify high equity valuations. Consensus estimates are for profit margins to remain steady, or even increase from current levels. We disagree for ironclad economic and accounting realities, and think margins will fall, taking equities down too.</p><p>Profit margins have, at least until now, exhibited mean-reversion like behaviour. There has been a contention that we have reached a structural break, and profit margins will stay well above their long-term average. We disagree.</p><p><a rel="nofollow" target="_blank" href="http://blog.variantperception.com/wp-content/uploads/2014/05/img1-300x183.png"><img class="align-left" src="http://blog.variantperception.com/wp-content/uploads/2014/05/img1-300x183.png?width=300" width="300"/></a></p><p>Profit margins are high compared to their long-term average, and this is still true (but less so) if you just consider domestic profits, and non-financial profits.</p><p>The Kalecki Equation attempts to explain the drivers of profits. It is derived from the flow of funds concept and accounting identities. We’ll just state the equation here – it’s fairly intuitive – but we encourage readers to look up the derivation and the background. The equation is:</p><p>Profits = Investment – Household Savings – Government Savings – Savings from Abroad + Dividends</p><p>So profits are driven by different sectors of the economy. The following chart, from James Montier at GMO, shows the decomposition of profits over the last 60 years (click on image to enlarge).</p><p><a rel="nofollow" target="_blank" href="http://blog.variantperception.com/wp-content/uploads/2014/05/img2-300x174.png"><img class="align-right" src="http://blog.variantperception.com/wp-content/uploads/2014/05/img2-300x174.png?width=300" width="300"/></a></p><p>The blue part of the diagram – investment spending – has been the largest contributor to profit margins for most of the last six decades. But most lately, government spending has been the main driver of US profits.</p><p>However, the US government has been reining in its spending (ie its dissaving), so it is unlikely this will continue to be a major source of company profits in the coming years. The budget deficit has come in from 10% of GDP to less than 3%, and in cash terms has made back half the slump it saw during the financial crisis.</p><p><a rel="nofollow" target="_blank" href="http://blog.variantperception.com/wp-content/uploads/2014/05/img3-300x205.png"><img class="align-left" src="http://blog.variantperception.com/wp-content/uploads/2014/05/img3-300x205.png?width=300" width="300"/></a></p><p>Investment spending has been declining in a world on the hunt for income while rates remain at historic lows. It is unlikely this source of profits bounces back soon. Similarly, we don’t expect to see the household sector ramp up its spending when the household balance sheet remains impaired. Dividends have increased, but are unlikely to increase more, by enough to take the up slack from the fall in the government deficit. Finally, we are not expecting the US to start running a current account surplus any time soon.</p><p>So, what are the implications for long-term equity returns if profit margins fall? John Hussman of Hussman funds notes that profit margins on their own are a poor predictor of long-term US equity returns. So are price/earnings multiples. But the two together have a 90% correlation with the subsequent 10 year total return of the S&P, with equal importance.</p><p>So then the question remains, are we likely to see more multiple expansion driving long-term equity returns? Given the bulk of the last two years’ equity returns came from multiple expansion, we think it will be difficult for this to help push equities much higher before they return to fair value.</p><p></p><p><a rel="nofollow" target="_blank" href="http://blog.variantperception.com/wp-content/uploads/2014/05/img4-300x164.png"><img class="align-right" src="http://blog.variantperception.com/wp-content/uploads/2014/05/img4-300x164.png?width=300" width="300"/></a>From where we are in the cycle, it is difficult to see what will keep profit margins at current levels that are above long-term averages. If this is the case, then it is difficult to see what will drive equities much higher. The prognosis over the longer term for US equities is thus poor.<br/><br/></p><p>Courtesy of <a rel="nofollow" href="http://variantperceptions.com" target="_blank">VariantPerceptions</a></p></div>The Rising Cost of U.S. Educationhttp://stockbuz.ning.com/articles/the-rising-cost-of-u-s-education2014-05-08T18:52:12.000Z2014-05-08T18:52:12.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p>In a word: sustainable?</p>
<p><img class="align-center SKYUI-Highlight-Node a02p05gt" src="http://storage.ning.com/topology/rest/1.0/file/get/1290665?profile=original" width="610"></p></div>Yellen 'U.S. Income and Wealth Inequality is ‘Very Worrisomehttp://stockbuz.ning.com/articles/yellen-u-s-income-and-wealth-inequality-is-very-worrisome2014-05-08T00:23:03.000Z2014-05-08T00:23:03.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p class="p1"><em><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290626?profile=original"><img class="align-left" src="http://storage.ning.com/topology/rest/1.0/file/get/1290626?profile=original" width="300"></a></em></p>
<p class="p1"><strong>Interesting today was the Janice Yellen addressed the distribution of wealth and the effect that Fed policy has has on income inequality. Mentioning the Koch brothers at least three (3) times and that continuance of same not only affects taxpayers ability to <span style="text-decoration: underline;">influence democrac</span>y but can affect <span style="text-decoration: underline;">social stability</span>. This is the first time I've EVER heard any Fed member address this and it will be interesting to see if such "speak" continues going forward.</strong></p>
<p class="p1"><em>Income and wealth inequality in America are “very worrisome,” Federal Reserve Chair Janet Yellen told Sen. Bernie Sanders at a congressional hearing on Wednesday. In her first appearance before Congress as the nation’s central banker, the new Fed chief told Sanders that “there is no question that we’ve had a trend toward growing inequality and I personally find it a very worrisome trend that deserves the attention of policy makers.” Yellen added that “it greatly concerns me” that the growing <span style="text-decoration: underline; color: #00ff00;"><strong>wealth and income gap “can shape and determine the ability of different groups to participate equally in the democracy and have grave effects on social stability over time.”</strong></span></em></p>
<p class="p1"><em>Sanders, a member of the Joint Economic Committee, questioned Yellen about a <a href="http://www.princeton.edu/%7Emgilens/Gilens%20homepage%20materials/Gilens%20and%20Page/Gilens%20and%20Page%202014-Testing%20Theories%203-7-14.pdf"><span class="s1">recent study</span></a> by Princeton and Northwestern professors on how a small number of powerful players are taking over our democracy. “If policymaking is dominated by powerful business organizations and a small number of affluent Americans, then America's claims to being a democratic society are seriously threatened,” Princeton’s Martin Gilens and Northwestern’s Benjamin Page asserted. “When a majority of citizens disagrees with economic elites and/or with organized interests [in the U.S.], they generally lose,” the professors wrote. “Moreover, even when fairly large majorities of Americans favor policy change, they generally do not get it.”</em></p>
<p class="p1"><em>In the richest country on earth, Sanders said, almost all of the new wealth and income flows to the top 1 percent, creating the most unequal distribution of wealth and income of any major country in the world. As a consequence, the senator added, the middle class is disappearing and more Americans living in poverty today than at any time in our nation’s history.</em></p>
<p class="p1"><em>The richest 400 Americans today own more wealth than the bottom half of the population – more than 150 million Americans. The top 1 percent owns about 38 percent of the financial wealth of America. The bottom 60 percent owns a mere 2.3 percent.</em></p>
<p class="p1"><em>Today, <span style="color: #00ff00;">the Walton family</span> — the owners of Wal-Mart and the wealthiest family in America — is now worth $148 billion, which is <span style="color: #ff0000;"><span style="color: #00ff00;">more wealth than the bottom 40 percent.</span> </span></em></p>
<p class="p1"><em>From March of 2013 to March of 2014, the industrialists Charles and David Koch increased their wealth by $12 billion – from $68 billion to $80 billion. Bloomberg now estimates that the Koch brothers are worth more than $100 billion. </em></p>
<p class="p1"><em>Las Vegas casino magnate Sheldon Adelson, increased his wealth by $11.5 billion since last year and is now worth over $38. billion.</em></p>
<p class="p1"><em>In terms of income, 95 percent of all new income generated in this country went to the top one percent from 2009-2012, the latest information available. </em></p>
<p class="p1"><em>Meanwhile, almost 22 percent of American children are living in poverty and we have the highest rate of childhood poverty of any major country on earth.</em></p>
<p class="p1"><em>The typical middle-class American family earned less income last year than it did 25 years ago – back in 1989.</em></p>
<p class="p1"><em>As a result of the Supreme Court decision in Citizens United and other cases, the wealthiest people and largest corporations in this country can now spend an unlimited sum of money to influence the political process.</em></p>
<p class="p1"><em>Courtesy of <a href="http://www.sanders.senate.gov/newsroom/recent-business/fed-chief-us-income-and-wealth-inequality-is-very-worrisome" target="_blank">Bernie Sanders</a></em></p></div>When You Can't Even Afford To Renthttp://stockbuz.ning.com/articles/when-you-can-t-even-afford-to-rent2014-05-03T19:40:34.000Z2014-05-03T19:40:34.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><a target="_blank" href="http://houseofdebt.org/wp-content/uploads/houseofdebt_20140428_1.png"><img class="align-left" src="http://houseofdebt.org/wp-content/uploads/houseofdebt_20140428_1.png?width=559" width="559" /></a>Numerous articles have noted a sharp rise in the price of renting an apartment or house across the U.S.  Many have also argued that the rise in rents disproportionately affects lower and middle class renters.</p>
<p>I know in my own situation, my rent increased 9% in 2013 and 10% in 2014.  Did our <span style="text-decoration: underline;"><strong><em>incomes</em></strong></span> increase by as much?  I wish.</p>
<p><a href="http://houseofdebt.org/2014/04/29/where-is-the-rent-too-damn-high.html" target="_blank">Houseofdebt.org</a> decided to take look by examining the great data available on rents from Zillow.</p>
<p>The chart shows general inflation (measured with PCE headline inflation) versus the increase in rents. Both series are indexed to be 100 as of November 2010 (the first month the Zillow data are available).</p>
<p><strong>The pattern is undeniable: rents are rising much more rapidly than other consumer prices.</strong></p>
<p>The Fed may be emphatic that we're not experiencing inflation but when it comes to housing, there's no denying the facts.  Gas at the pump has doubled since 2008 (isn't it convenient they exclude food and energy), food prices have crept higher but <strong>portions and package size</strong> have shrunk (remember when a 24pk of Coke was $4 or a 2-liter was .99 cents.  Now a one liter is .99 cents) and now rents continue to surge.  More and more young adults are living with Mom, Dad and Grandma......and even apartments are now becoming too expensive to the lower classes. </p>
<p>Good thing the stock market and Corporate profits are at all time highs.  The rest of the U.S. is drowning.  The income gap continues and the winners are clear. </p>
</div>Amazing U.S. World Largest Petroleum Producerhttp://stockbuz.ning.com/articles/amazing-u-s-world-largest-petroleum-producer2014-04-24T16:52:13.000Z2014-04-24T16:52:13.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><div class="separator" style="clear: both; text-align: center;"><a target="_blank" href="http://3.bp.blogspot.com/-7eCIcGRUvQA/U1hr-YJ2wRI/AAAAAAAAQkA/mzWvf3aA1Wk/s1600/Crude+production.jpg"><img class="align-right" src="http://3.bp.blogspot.com/-7eCIcGRUvQA/U1hr-YJ2wRI/AAAAAAAAQkA/mzWvf3aA1Wk/s1600/Crude+production.jpg?width=400" width="400" /></a></div>
<p><span style="color: #ffcc99;"><em>Amazing the shift since oil rigs were shifted from gas to more of the black gold AND with Bakken coming on line yet sadly, gasoline at the pump has tripled........smh</em></span></p>
<p><br />
In the span of a mere four years, U.S. production of crude oil has surged by 67%, according to the Dept. of Energy, reaching levels not seen since the late 1980s. Crude production is up 14% in just the past year. This is the fruit of new fracking technology and it is nothing short of astonishing. Natural gas production is up almost 40% over this same period, and—since natural gas is not easily exportable—this has resulted in a two-thirds decline in the price of natural gas, which in turn gives our energy-intensive industries a big competitive advantage. All of this adds up to a huge boost for the U.S. economy, and it has nothing to do with any government initiatives or infrastructure investment. Indeed, it comes despite Obama's reluctance to approve the Keystone pipeline.<br />
<br />
Mark Perry has been doing a terrific job of covering this story. In his most <a href="http://www.aei-ideas.org/2014/04/another-us-energy-milestone-us-was-the-worlds-largest-petroleum-producer-in-december-for-the-14th-straight-month/">recent post</a> on the subject, he points out that "the U.S. was the world's largest petroleum producer in December for the 14th straight month."<br />
<br />
It's hard to be bearish about the economy's prospects when you see big changes like this in a key industry.</p>
<p>Courtesy of <a href="http://scottgrannis.blogspot.com" target="_blank">CalifiaBeachPundit</a></p>
</div>Negative January Effect. Real or Mumbo Jumbo?http://stockbuz.ning.com/articles/negative-january-effect-real-or-mumbo-jumbo2014-02-08T16:45:26.000Z2014-02-08T16:45:26.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290377?profile=original"><img class="align-left" style="padding: 5px;" src="http://storage.ning.com/topology/rest/1.0/file/get/1290377?profile=RESIZE_180x180" width="101"></a>Last week BTIG's <a href="http://www.businessinsider.com/10-corrections-are-not-that-ordinary-2014-2#ixzz2skKWW7HD" target="_blank">Dan Greenhaus</a> tried to dismiss the talk of the January effect (calm investors) stating <em>“Normal corrections” tend to be anywhere from 5-8%, which is basically what we had/are having. If that’s the case, and our underlying fundamental views have not shifted (they have not), then stepping into markets down more than 5% should prove rewarding over time. </em> Of course me, being a skeptic of MSM (and everything out there for that matter), caught the last two words "over time" and raised an eyebrow. Seriously? Over time? Most small investors won't risk more than 10% of any position. Many only $100 if possible and this prompted me to poke around a little further on this January effect *<em>thang*</em></p>
<p><a href="http://www.thestreet.com/story/12224583/1/the-january-effect-does-it-matter-in-2014.html" target="_blank">The Street</a> seems to buy the theory "<em>When the first five trading days of the new year are positive, the month of January ends positive 76% of the time. When the month of January is positive to start the year, the stock market <a style="font-weight: normal; font-size: 100%; font-style: normal; text-decoration: none; border: 0px none transparent; padding: 0px; background-color: transparent; background-image: none; display: inline;" class="itxtnewhook itxthook" href="http://www.thestreet.com/story/12224583/1/the-january-effect-does-it-matter-in-2014.html#" id="itxthook3" rel="nofollow" name="itxthook3"><span id="itxthook3w" class="itxtrst itxtrstspan itxtnowrap itxtnewhookspan" style="font-weight: normal; font-size: 100%; text-decoration: underline ! important; border-width: 0px 0px 1px; border-style: none none solid; border-color: transparent transparent #00cc00; padding: 0px 0px 1px ! important; color: #009900; background-color: transparent;"></span></a>finishes the year positive 82% of the time." </em> While <a href="http://www.ritholtz.com/blog/2014/02/is-the-january-barometer-worth-following/" target="_blank">Barry Ritholtz</a> is clearly more skeptical <em>Lots of analysts, including Ed Yardeni, note the data is statistically significant. But whether it should affect your strategy is an entirely different question. My conclusion is that it shouldn’t....."</em></p>
<p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290434?profile=original"><img class="align-right" src="http://storage.ning.com/topology/rest/1.0/file/get/1290434?profile=RESIZE_320x320" width="300"></a>There's the nuance again "affect your strategy"<em>. </em> Of course we still want to be long in our 401k and IRA accounts Barry but come on.........we'd prefer to have some <span style="text-decoration: underline;">hedges</span> if we're in for more pain. Not just sit and wait it out. We know how well that worked out in 2001 and 2008. Big funds can afford to "wait it out" and have huge draw downs while fully hedged with Puts but us little guys...........were all but wiped out.</p>
<p>My strategy? Buy low and sell high so at this point I'm still curious about this January barometer.</p>
<p>Historically how has it performed? I don't mean since 1990...........but going way back; say to 1950. Enter the market historian, <a href="http://blog.stocktradersalmanac.com/post/SPX-January-Barometer-Results-Are-In" target="_blank">StockTradersAlmanac.</a></p>
<p>Historic work like this blows me away. (click on image to enlarge) Not only did they determine that a negative January had a 80% effective rate of forecasting full year returns, but if Dow took out the December low AND closed negative in January, the forecast jumped to an 88% accuracy rate. Now that's the sh**</p>
<p>The "why" could be any number of things. Currency changes causing funds to liquidate some holdings to meet margin calls. Fears over BRIC stability (which come and go). Fear of Fed tapering, economic data, bad retail sales (blame the weather!), spike in natural gas possibly hitting balance sheets and triggering a recession or maybe the five-year bull run simply needs a breather. As <a href="http://empowerinvestors.ning.com/profiles/articles/bull-market-shelf-life" target="_self">Art Cashin</a> pointed out, bull markets tend to have a five-year shelf life and we're dangerously close. Throw a dart and take your pick but it doesn't much matter to me.</p>
<p>I'm personally placing more weight into historical performance and 88% accuracy is pretty damn impressive if you ask me. Go ahead and back fill S&P. Test that 50day SMA and even the highs. I'll be waiting and placing more hedges, expecting another leg down. If they're right, my portfolio will be somewhat protected. If they're wrong, I'll still sleep better at night and at my age.......that's tough to come by.</p>
<p>Full disclosure: My port is heavily long with a few hedges. I am looking to protect those longs (unless stopped out on those recently added).</p></div>De-Regulation; Great At First Until The Greed Took Overhttp://stockbuz.ning.com/articles/de-regulation-great-at-first-until-the-greed-took-over2013-08-17T20:30:00.000Z2013-08-17T20:30:00.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290335?profile=original"><img class="align-left" style="padding: 10px;" src="http://storage.ning.com/topology/rest/1.0/file/get/1290335?profile=original" width="190"></a>Ah, 1978 and U.S. airline deregulation. What a thing of beauty. Suddenly there seemed to be a new airline popping up each year, all vying for a piece of the pie in the sky. Then how to drum up business. Remember the days of airfare wars? A new start-up would lower prices to attract business and the big boys , no longer with the luxury of their monopoly, had no choice but to follow suit as their passenger counts fell in step. </p>
<p>The consumer was obviously <em>elated</em>! Even those who previously couldn't afford to visit Grandma in Boca, were suddenly able to take to the skies; kiddies and all. </p>
<p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290355?profile=original"><img class="align-right" style="padding: 10px;" src="http://storage.ning.com/topology/rest/1.0/file/get/1290355?profile=RESIZE_320x320" height="158" width="187"></a>Those were the clear benefits of deregulation and the consumer loved it - but corporate profits did not.</p>
<p>Then came the rise of jet fuel. Did the government intervene to stop it? If they did, it was too little too late. (click chart to enlarge) It doesn't take a rocket scientist to imagine what that did to profits and prices.</p>
<p>Oddly enough with dramatically less demand, fuel prices haven't reverted to the mean. Hmmm nice isn't it (sic).</p>
<p>So what's a Corporation to do? Back to oligarchy it is. Obviously let some go to Bankruptcy and buy out the others. </p>
<p>The final result 40 years later with such consolidation? Take two steps forward and five steps back "<a href="http://www.nytimes.com/2013/08/17/opinion/nocera-merge-is-what-airlines-do.html?_r=0" target="_blank">ticket prices have skyrocketed and consumer choice has diminished</a>"</p>
<p>Long live Capitalism.........*sigh*</p></div>Crude Oil Spikes and Historic Recessionshttp://stockbuz.ning.com/articles/crude-oil-spikes-and-recessions2011-03-03T22:00:00.000Z2011-03-03T22:00:00.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p>"<em>I've just completed a new <a href="http://dss.ucsd.edu/~jhamilto/oil_history.pdf">research paper</a> that surveys the history of the oil industry with a particular focus on the events associated with significant changes in the price of oil. Here I report the paper's summary of oil market disruptions and economic downturns since the Second World War. Every recession (with one exception) was preceded by an increase in oil prices, and every oil market disruption (with one exception) was followed by an economic recession."</em></p>
<p><em><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1289974?profile=original"><img class="align-left" style="padding: 20px;" src="http://storage.ning.com/topology/rest/1.0/file/get/1289974?profile=RESIZE_480x480" width="402"></a></em></p>
<p>The table above itemizes the particular postwar events that are reviewed in detail in <a href="http://dss.ucsd.edu/~jhamilto/oil_history.pdf">my paper</a>. The paper also provides the following summary discussion:</p>
<blockquote>
<p>The first column indicates months in which there were contemporary accounts of consumer rationing of gasoline. <a href="http://econ.ucsd.edu/~vramey/research/Ramey_vine_segmentshifts_NBER.pdf">Ramey and Vine</a> have emphasized that non-price rationing can significantly amplify the economic dislocations associated with oil shocks. There were at least some such accounts for 5 of the 7 episodes prior to 1980, but none since then.</p>
<p>The third column indicates whether price controls on crude oil or gasoline were in place at the time. This is relevant for a number of reasons. First, price controls are of course a major explanation for why non-price rationing such as reported in column 1 would be observed. And although there were no explicit price controls in effect in 1947, the threat that they might be imposed at any time was quite significant (Goodwin and Herren, 1975), and this is presumably one reason why reports of rationing are also associated with this episode. No price controls were in effect in the United States in 1956, but they do appear to have been in use in Europe, where the rationing at the time was reported.</p>
<p>Second, price controls were sometimes an important factor contributing to the episode itself. Controls can inhibit markets from responding efficiently to the challenges and can be one cause of inadequate or misallocated supply. In addition, the lifting of price controls was often the explanation for the discrete jump eventually observed in prices, as was the case for example in June 1953 and February 1981. The gradual lifting of price ceilings was likewise a reason that events such as the exile of the Shah of Iran in January of 1979 showed up in oil prices only gradually over time.</p>
<p>Price controls also complicate what one means by the magnitude of the observed price change associated with a given episode. Particularly during the 1970s, there was a very involved set of regulations with elaborate rules for different categories of crude oil. Commonly used measures of oil prices look quite different from each other over this period. <a href="http://dss.ucsd.edu/~jhamilto/oil_nonlinear_macro_dyn.pdf">Hamilton (2010)</a> found that the producer price index for crude petroleum has a better correlation over this period with the prices consumers actually paid for gasoline than do other popular measures such as the price of West Texas Intermediate or the refiner acquisition cost. I have for this reason used the crude petroleum PPI over the period 1973-1981 as the basis for calculating the magnitude of the price change reported in the second column of Table 1. For all other dates the reported price change is based on the monthly WTI.</p>
<p>The fourth column of Table 1 summarizes key contributing factors in each episode. Many of these episodes were associated with dramatic geopolitical developments arising out of conflicts in the Middle East. Strong demand confronting a limited supply response also contributed to many of these episodes. The table collects the price increases of 1973-74 together, though in many respects the shortages in the spring of 1973 and the winter of 1973-74 were distinct events with distinct causes. The modest price spikes of 1969 and 1970 have likewise been grouped together for purposes of the summary....</p>
<p>These historical episodes were often followed by economic recessions in the United States. The last column of Table 1 reports the starting date of U.S. recessions as determined by the National Bureau of Economic Research. All but one of the 11 postwar recessions were associated with an increase in the price of oil, the single exception being the recession of 1960. Likewise, all but one of the 12 oil price episodes listed in Table 1 were accompanied by U.S. recessions, the single exception being the 2003 oil price increase associated with the Venezuelan unrest and second Persian Gulf War.</p>
<p>The correlation between oil shocks and economic recessions appears to be too strong to be just a coincidence (Hamilton, 1983a, 1985). And although demand pressure associated with the later stages of a business cycle expansion seems to have been a contributing factor in a number of these episodes, statistically one cannot predict the oil price changes prior to 1973 on the basis of prior developments in the U.S. economy (Hamilton, 1983a). Moreover, supply disruptions arising from dramatic geopolitical events are prominent causes of a number of the most important episodes. Insofar as events such as the Suez Crisis and first Persian Gulf War were not caused by U.S. business cycle dynamics, a correlation between these events and subsequent economic downturns should be viewed as causal. This is not to claim that the oil price increases themselves were the sole cause of most postwar recessions. Instead the indicated conclusion is that oil shocks were a contributing factor in at least some postwar recessions.</p>
</blockquote>
<p class="posted">Posted by James Hamilton at January 15, 2011 08:18 AM @ <a href="http://bit.ly/gJBiJo">http://bit.ly/gJBiJo</a></p></div>