Prechter

“I think stocks are topping out, commodities are topping out and the dollar is making a bottom,” says Robert Prechter, president of Elliott Wave International and author of “Conquer the Crash“.

According to Yahoo Finance – Tech Ticker, Prechter also makes the seemingly counterintuitive argument that the dollar will rally because there’s so much debt, rather than being doomed because of it. “If the economy turns sour again in 2010, as he predicts, Prechter says the dollar will benefit as more dollar-denominated IOUs get called by creditors seeking to shore up their own balance sheets, as was the case in 2008.

“A sustained rally in the dollar would have devastating consequences for stocks, emerging-market assets, high-yield debt and commodities. But gold might be the exception, because it represents ‘real money’ and more people are questioning the global paper money system, Prechter says.”

This is an example of generals fighting the last war. This is essentially what we have just experienced.

However there are some key differences. There are two classes of debt.

*Government held debt from mortgages etc that collapsed banks
*Government issued debt

When the government holds the debt, it is opaque, it has no requirement to be marked-to-market, it is unlikely to default as the government will socialise any losses.

When the debt is government issued, interest payments on government issued debt can be printed if necessary. Thus the triggers necessary to reignite the contraction of credit are currently missing.

 

Nothing like a little humility

Morning Thoughts
Friday, November 6, 2009 at at 9:00 am 22
Yesterday’s best trades were in WFMI and FSYS. I am nearing a 20% total portfolio gain for just this week alone and the week isn’t even over yet. If you don’t believe me, then obviously you’re a nOOb reader in the CA Trading Room. I am the one and only Chart Addict and my returns are far superior than yours. Stick around for a while and you might learn something.

Yesterday’s call on the general market was very wrong, and I don’t care. I don’t even trade the general market. It’s such a beautiful thing when your predictions are wrong, yet you still make a +6% total portfolio gain. Hope that’s a lesson in playing only the best and highest probability trades, regardless of overall direction.

I have to see how this next leg turns out. I estimate that it will be another week before a IT determination can be made. Always keep an open mind and never let your opinions get in the way of great opportunities. You are your own worst enemy. Never forget the POWER OF CHARTS.

I have no idea where we are going in the markets, but I guarantee you that I will win again today – that would make every single day of this week a win. Watch and learn, folks.

Damn, I really must try and master this hindsight trading lark. Somehow his analysis using charts for the diversified market is hideously wrong, yet the charts for penny stocks are reliable?

If you actually think about this for a moment, it makes no logical sense, but of course in iBC fantasy stock-trading, this is a minor point of no importance….my main man.

 

Gold jogging

On a technical basis, Gold has broken out, retested via a pullback, and is off and jogging now. Ultimately, Gold will create a bubble, sucking in the latecomers. Having arrived very late to gold, I’ll be looking for the top very closely to exit. For the moment, enjoy the ride.

 

Running silent no more

After running silent for a few weeks, ChartAddict has surfaced with a couple of calls. One is definitely in real time, as it’s hideously wrong, the other, fantastically correct is I’m guessing, hindsight. See if you can figure which is which, in no particular order, so that I can confuse you -

Yesterday’s big trades were in TRLG for me. It wasn’t like the day before where I absolutely killed it, but nonetheless, I managed to hit TRLG twice and profit twice. The diagram of trades taken is pictured below. The green squares are short entry points and the orange squares are scaled out exit points. I “missed” two trades, but only because the volume wasn’t there and also because the 2nd “miss” was right after the FOMC decision. Execution was near perfect on this, so study it.

Moving onto the general market, I am bearish as the title of the post suggests. We formed a gravestone doji on the SPX, shooting star on the DJIA, and a dark cloud cover on the RUT. All three are bearish signals. In addition, note how the indices are “churning” at their respective MA’s. If you watch my shows on Stocktwits TV, you would know that I consider this move mostly bearish.

 

Apparently, there is disagreement

As far as the stockmarket is concerned, the market is a buy until the inflationary stimulus is removed. As such, the Fed Statement seemingly boils down to this:

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period

The older statement, the one that basically hangs bears out to dry, changed into this one:

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period

So the argument now extends to:

*What is a low rate of resource utilization
*Subdued inflation trend
*Stable inflation expectation

On expectations;

On resouce utilization;

As to subdued inflation trends your guess is as good as mine. Until there is concrete language that ends the current expansion of liquidity, through the raising of interest rates, anything else is purely jawboning that will exaggerate volatility, but essentially not effect a trend change in the market, which is up currently.

 

Consumers consuming

Inflationary pressure builds slowly. Increasing evidence of the inflationary forces operating within the economy.

 

Inflation wins the day

Here’s the headline only, and this is what drives the short-term volatility:

Top Stories
Fed Sees Rates Near Zero for Extended Period- Reuters
The U.S. Federal Reserve on Wednesday expressed growing confidence that an economic recovery was building, even though it stuck to its commitment to keep borrowing costs near zero for “an extended period.”

Thus the inflation trade, stockmarkets, commodities, carry-trades, thus, thunderbirds are go, markets will continue to confound the bears who simply will not acknowledge that markets do not reflect the economy as it exists today.

 

Mish so misses the point of his own post

Mish has part 1 of a post regarding money, in an analysis with regards to the deflation/inflation question.

He quotes Rothbard as evidence in support of his case.

[Yet] an increase in money supply, unlike other goods, [does not] confer a social benefit. The public at large is not made richer. Whereas new consumer or capital goods add to standards of living, new money only raises prices—i.e., dilutes its own purchasing power. The reason for this puzzle is that money is only useful for its exchange value.

Mish comes to this conclusion:

The key point above is that an increase in money supply confers no overall economic benefit. Over time, money simply buys less and less.

At any point in time, however, when demand for money increases (people want to hold it as opposed to buy goods and services) prices of goods and services decline decline. This can happen even as money supply increases. It is happening now.

Two points.

First point, yes, if hoarding takes place, as it did, the deleveraging forcing a run to hold cash due to the credit liabilities far exceeding the actual cash, you will create deflationary forces.

Second point, if you then create new money, to circumvent the hoarding forces at work, those deflationary forces are blunted, or even removed, depending on how much new money is created.

The financial system was the demander of money, having amassed huge credit liabilities far in excess of actual reserves. When the panic struck, due to fractional reserving, demand deposit liabilities couldn’t even be met.

The financial system, while still hoarding, and thus a demander of money, has been replaced as the expansionary force in credit by the government. Think Welfare, Shovel Ready, Quantitative Easing, Bailouts, all resulting in a massive expansion in the deficits and debt.

With interest rates at the short-end controlled by the Federal Reserve, yield spreads reflect the low T-bill rates. Excess liquidity, seeking a return has flowed back into the stockmarket, commodity markets and another carry-trade through the currency markets. We now again have multiple bubbles developing.

The risk isn’t one of a deflationary depression, rather an inflationary depression, with the worst outcome scenario being an actual collapse of the US dollar.

 

Another data point

In addition to the Indian Central Bank’s purchase of 200 tons of gold from the IMF, one reason for gold’s strong rally today can be found in yesterday’s ISM. In each month’s Report on Business, ISM publishes the results of its monthly commodities survey where it asks respondents which commodities are rising in price and which are declining. In this month’s survey, respondents saw price increases in eleven commodities and decreases in only one. This month’s net reading of +10 brought the three month moving average to eleven and is the highest level since September 2008.

The chart below compares the three month average net reading in the ISM Commodities Survey (CS) with the year over year change in CPI. Over the last ten years, trends in the CS have often preceded moves in the CPI. So when the net reading in the CS rises, increases in the CPI are typically not far off. Therefore, given that the net number of commodities rising in price is currently at +10 from a low of -15 in February, don’t be surprised if upcoming inflation reports come in on the high side of expectations

 

Railways

The Railway industry, once the premiere investment amongst listed securities. Today almost forgotten by the media. The history of the industry as listed securities extends for over one hundred years. During this time there have been tumultuous changes in the industry. Numerous bankruptcies, reorganizations and business vicissitudes have been hallmarks of the railway industry.

By way of concrete example, Penn Central, was the result of a merger between the “Pennsylvania Railroad” and the “New York Central Railroad” in 1966. Penn Central, by 1970 was itself bankrupt, and eventually reorganized into “Conrail” a government holding company, that was itself bought out by CSX Corp. and the Norfolk & Southern, one of the carriers under analysis.

Yet, through all these travails, the industry has remained vitally important to the American economy and industry. The industry in point of fact was so vital throughout America’s history, that regulation from Federal agencies has been a component of the industry, and remains partly in effect to this day, although, the regulation has started to give way in some instances to free market competition.

The Transport industry, of which the Railways form an important component, while possibly no longer possessing the glamour and excitement of the “GOOG’s” of the investment community, nevertheless provide an essential service to industrial and agricultural America, the same as provided by the “arterial” system to the heart. Yet, the investment community seems to have forgotten about the rail industry.

As investors, what if anything does the Rail industry offer us currently? This question is the one that we shall address. Historically the industry has always required large and regular infusions of new capital. It has been this requirement that has on many occasions led to the over-bonding of individual carriers. It is precisely this tendency within the industry that provides accurate warnings of impending problems with the individual carriers. Thus, the investment quality of both the Bonds and Common can be assessed via an examination of the statistical exhibit regarding interest payments and operating ratios.

The analysis of an individual company is usually carried on against a background of the industry to which it belongs. The future of the individual company usually being assumed to be inextricably linked with the industry. This has not always proven to be true however. The individual carriers have had an ignominious history of bankruptcy, reorganization and consolidation, much of it at the hands of the Federal government. This underlies the over-all importance of the industry, yet the consistent weakness of the individual carriers. It is interesting to note that in Europe, the rail industry has had a long history of “public” ownership via the governments public funding and support.

The overall number of Class 1 railways as defined by the Surface Transport Board (earnings in excess of $250 million) has decreased the number from many, to just a few over the past 100 years. Many of the previous great names are now just memories of stock market and operating history, yet they still exist for the most part in the three companies that are the subject of analysis within this report.

Taking a short walk down stock market history, we find that the total number of Class 1 Railways has dropped precipitously to the following names; BNSF (Burlington) Canadian National Grand Trunk Western RR, CSX Transportation Inc. Kansas City Southern RR, Norfolk Southern Combined, Soo Line RR and the Union Pacific. Compared to the list existing in the 1930’s………Atlantic Coast Line, Baltimore & Ohio, Canadian Pacific, Chesapeake & Ohio, Chicago & North, Chicago & Great Western, Chicago, Milwaukee, St Paul & Pacific, Chicago, Rock Island & Pacific, Great Northern, Illinois Central, New York Central, New York Chicago & St Louis, Norfolk & Western, Pennsylvania RR, Pere Marquette, Reading Co. St Louis, San Francisco, Union Pacific, and the Wabash and even this list is far from complete.

The long history of the railways, their trials and tribulations form a record that should teach today’s investors the lessons of the past. This lesson being, that no matter how important the over-all industry, to the economic prosperity of the nation, individual carriers have, through a variety of reasons become historical fact, and distant memories. Today’s investors would be prudent to heed the warnings of the past.

The analysis of the company, in its form, will in part be governed by the operating characteristics of the industry. Attention can be given to a myriad of factors, geographical location of markets and plant, to the character of competition, both internal, from other carriers, and external from, air, road and sea, to labor costs, government regulation, or deregulation, and special taxes. All of these components are important, and yet are reflected within the operating results over a period of time.

The Railway industry provides an embarrassment of wealth in regards to statistical information. This allows an analyst reliable quantitative data with which to analyze the business and its operations. There are three ratios which traditionally have been given the most importance or weighting. They are (1) the operating ratio, (2) the coverage of fixed and contingent charges, (3) earnings per share of common and preferred.

In a more detailed analysis, further study is undertaken within the financial and physical areas. Within the financial, further ratios are calculated for the maintenance of way, and equipment, and transport ratios. Within the physical, are calculated “net ton miles per train hour.” These ratios are calculated to examine the causal or correlative factors that result in poor or superior operational ratios. They identify the reasons for the either poor or superior statistical exhibit, via a measurement of costs against revenue, but do not alter the conclusion inferred by the analysis provided by the three traditional ratios.

The purpose of any research or analysis should have a “raison d’etre”. This will be to identify within the securities, opportunities for profitable buying, selling, or switching for the investor who holds, or is contemplating a holding in the securities so examined.

In the analysis provided, we have taken three of the Class 1 Railroads financial exhibits for examination. They are the Burlington & Santa Fe, the Norfolk & Southern and the Union Pacific. Within the financial exhibits the following questions need to be answered; for investors of Fixed Income are the interest payments covered sufficiently to ensure safety of Principal and continued income. For holders of the Common, does the market price now reflect an investment commensurate with the established earning power, or does the price represent a speculative operation?

Once satisfactory analysis has been completed, the answers to those questions should be self-evident, allowing the investor to make an informed and rational decision based on a weighing of the facts, and not a decision based on the emotional rollercoaster of speculative fever.