cycle analysis


Snoopy-Typing-Away-1-CVV14J0D95-1024x768

Essentially these are just a copy of the Value Line charts, but, probably a lot cheaper.

426415-13626734084638653-Chuck-Carnevale_origin

Snoopy-Typing-Away-1-CVV14J0D95-1024x768

The question is being discussed broadly across blogoland and investors: can stocks rise, in a rising interest environment?

SP500_Max_630_378

DGS10_Max_630_378

The answer is clearly no.

However, the argument will be; yes, but that was an extraordinary time, inflation was rampant and Volcker had to push interest rates higher to tame inflation. There is no inflation to speak of currently.

Really?

PPIACO_Max_630_378

PPIFGS_Max_630_378

CPIAUCSL_Max_630_378

There is plenty of inflation. There always has been ever since the US went off of gold and the dollar became fully fiat. To fund any shortfall in government spending, the US simply borrowed. Very often the Federal Reserve was that purchaser.

GFDEBTN_Max_630_378

The result being that the money supply has increased, which is responsible for the price inflation.

M2_Max_630_378

So the bottom line is this. Stocks will rise with inflation in nominal terms. Sometimes they will rise in real terms as well. Stocks are [reasonable] inflation hedges when interest rates are not rising to combat inflation, which, is pretty much never if the government have their way.

The question should really be: how bad does inflation have to get before the only answer is to let rates rise, or force them to rise?

The constant rhetoric out of the Federal Reserve is that inflation is low to non-existent. The pledge is to keep interest rates low possibly into 2016.

Inflation will remain manageable [in Fed terms] while the economy is depressed and unemployment high. Why? Because as prices rise, consumers who cannot afford, do not purchase, thus reducing demand. This reduced demand has till now resulted in a compounding inflation rate of around 2.3%. If by some miracle employment levels rise and the economy starts growing and credit expands, that 2.3% will jump.

At that point what does the Fed do? Do they allow inflation to continue higher? Or, do they try to nip it in the bud, and if so, what happens to the economy on the ‘initial rise’ in rates?

The cycles are long runs. The current highs are defined from [more or less] the highs in 2000. I know we have broken higher technically, and while rates remain low and inflation chugs merrily along, it is practical to stay long, selling down periodically to lock in profits…trading the market rather than just B&H, which, could result in losing profits gained if we get for whatever reason a market break.

The takeaway – markets do not rise into rising rates. They may not fall, but, they do not move significantly higher in nominal terms. In real terms they might even gain a little, but it isn’t flash.

Snoopy-Typing-Away-1-CVV14J0D95-1024x768

My point is this: PIMCO’s epoch, Berkshire Hathaway’s epoch, Peter Lynch’s epoch, all occurred or have occurred within an epoch of credit expansion – a period where those that reached for carry, that sold volatility, that tilted towards yield and more credit risk, or that were sheltered either structurally or reputationally from withdrawals and delevering (Buffett) that clipped competitors at just the wrong time – succeeded. Yet all of these epochs were perhaps just that – epochs.

What if an epoch changes? What if perpetual credit expansion and its fertilization of asset prices and returns are substantially altered? What if zero-bound interest rates define the end of a total return epoch that began in the 1970s, accelerated in 1981 and has come to a mathematical dead-end for bonds in 2012/2013 and commonsensically for other conjoined asset classes as well? What if a future epoch favors lower than index carry or continual bouts of 2008 Lehmanesque volatility, or encompasses a period of global geopolitical confrontation with a quest for scarce and scarcer resources such as oil, water, or simply food as suggested by Jeremy Grantham?

What if the effects of global “climate change or perhaps aging demographics,” substantially alter the rather fertile petri dish of capitalistic expansion and endorsement? What if quantitative easing policies eventually collapse instead of elevate asset prices? What if there is a future that demands that an investor – a seemingly great investor – change course, or at least learn new tricks? Ah, now, that would be a test of greatness: the ability to adapt to a new epoch. The problem with the Buffetts, the Fusses, the Granthams, the Marks, the Dalios, the Gabellis, the Coopermans, and the Grosses of the world is that they’ll likely never find out. Epochs can and likely will outlast them. But then one never knows what time has in store for each of us, or what any of us will do in the spans of time.

The meat of a quite interesting article. Have a think on it. I’ll be adding comments later.

Still, the primary way to coin money over the past 30 years has been to use money to make money. Although the price of it started in 1981 at a rather exorbitantly high yield of 15% for long-term Treasuries, 20% for the prime, and real interest rates at an almost unbelievable 7-8%, the gradual decline of yields over the past three decades has allowed P/E ratios, real estate prices and bond fund NAVs to expand on a seemingly endless virtuous timeline. Books such as “Stocks for the Long Run” or articles such as “Dow 36,000” captured the public’s imagination much like a Montana to Jerry Rice pass that always seemed to clinch a 49ers victory. Yet an instant replay of these past few decades would have shown that accelerating asset prices weren’t due to any particular wisdom on the part of academia or the investment community but an offensively minded Federal Reserve and their global counterparts who were printing money, lowering yields and bringing forward a false sense of monetary wealth that was dependent on perpetual motion. “Rinse, lather, repeat – Rinse, lather, repeat” was in effect the singular mantra of central bankers ever since the departure of Paul Volcker, but there was no sense that the shampoo bottle filled with money would ever run dry. Well, it has. Interest rates have a mathematical bottom and when they get there, the washing of the financial market’s hair produces a lot less lather when it’s wet, and a lot less body after the blow dry. At the zero bound, not only are yields rendered impotent to elevate P/E ratios and lower real estate cap rates, but they begin to poison the financial well. Low yields, instead of fostering capital gains for investors via the magic of present value discounting and lower credit spreads, begin to reduce household incomes, lower corporate profit margins and wreak havoc on historical business models connected to banking, money market funds and the pension industry. The offensively oriented investment world that we have grown so used to over the past three decades is being stonewalled by a zero bound goal line stand. Investment defense is coming of age.

PIMCO Offensive Strategy 1981 – 2011

Ready, Set, Hut 1, Hut 2 –
Recognize downward trend in interest rates and scale duration accordingly.

A. Emphasize income and capital gains. PIMCO Total Return Strategy.
B. Utilize prudent derivative structures that benefit from systemic leveraging – financial futures,
swaps (but no subprimes!)
C. Combine A and B along with careful bottom-up security selection to seek consistent alpha.

PIMCO Defensive Strategy 2012 – ?
Ready, Set, Hut, Hut, Hut –

Recognize zero bound limits and systemic debt risk in global financial markets. Accept financial repression but avoid its impact when and where possible.

A. Emphasize income we believe to be relatively reliable/safe.
B. De-emphasize derivative structures that are fully valued and potentially volatile.
C. Combine A and B along with security selection to seek consistent alpha with admittedly lower nominal returns than historical industry examples.

SVU is getting twitchy, down 7% today as I type. Why? Some possible reasons.

Put buying dominated the option activity in Supervalu yesterday as the food retailer’s shares hit the middle of their range.

SVU finished the day at $9.43, picking up 2 percent on the day. The stock in the middle of its recent range as well as its 52-week range from $7 to $12.45.

More than 23,000 August 9 puts changed hands against open interest of 946, according to optionMONSTER’s systems. Most of those contracts traded in the afternoon, with two block of 10,000 bought for $0.45 and $0.50.

There was significant stock volume in SVU around the time as blocks of 380,000 went for prices from $9.32 up to $9.4579. So it appears that the puts were hedged with the long shares.

This would create an overall strategy that is long volatility and can profit if SVU moves sharply in either direction, getting back to the highs or lows of the year.

So possibly a trade ahead of earnings, which have been estimated at:

Wall St. Earnings Expectations: The average estimate of analysts is for profit of 33 cents per share, a decline of 23.3% from the company’s actual earnings for the same quarter a year ago. The average estimate is the same as three months ago. Between one and three months ago, the average estimate moved up, but has dropped from 34 cents during the last month. For the year, analysts are projecting net income of $1.23 per share, a decline of 11.5% from last year.

Past Earnings Performance: The company beat estimates last quarter after falling short in the prior two. In the fourth quarter of the last fiscal year, the company reported profit of 44 cents per share versus a mean estimate of net income of 34 cents per share. In the third quarter of the last fiscal year, the company missed estimates by 7 cents.

Revenue has fallen in the past four quarters. Revenue declined 5.9% to $8.66 billion in fourth quarter of the last fiscal year. The figure fell 5.9% in the third quarter of the last fiscal year from the year earlier, dropped 8.5% in second quarter of the last fiscal year from the year-ago quarter and 9.2% in the first quarter of the last fiscal year.

SUPERVALU’s profit in the latest quarter follows losses in the previous two quarters. The company reported a profit of $95 million in the fourth quarter of the last fiscal year, a loss of $202 million in the third quarter of the last fiscal year and a loss of $1.47 billion in the second quarter of the last fiscal year.

Competitors to Watch: Safeway Inc. , The Kroger Co. , Whole Foods Market, Inc. , Winn-Dixie Stores, Inc. , Ingles Markets, Inc. , Nash-Finch Company , AMCON Distributing Co. , Spartan Stores, Inc. , Wal-Mart , Target and Weis Markets, Inc. .

Safeway (SWY) shares fell 8.6% in afternoon trading after the company posted weak same store sales and declining margins, although its results were helped by higher fuel sales and cost cuts.

The supermarket chain posted 41 cents of EPS, 2 cents better than expectations. revenue came in at $10.2 billion, against expectations for $9.92 billion. sames store sales rose just 0.5% and gross margin declined to 27% from 28.55%.

“This decline was largely the result of some delay in recovering cost increases and increased LIFO expense, partly offset by improved shrink and higher gross margin dollars from Blackhawk,” the company said.

Well, if they miss, it looks as if volatility will be high in the stock. If they get hammered, I’ll definitely be a buyer. It will be ugly for the portfolio in the short term, no doubt, but that can be mitigated over a longer holding period. This of course has one major assumption, that they don’t go bankrupt…again.

I found this interesting. It is not something that I use, or have ever used. I also have no idea as to whether it will be of any use in the future. However it is something that can be looked at in the context of other analysis. Original found here

First a little background information. I’m going to be discussing almost exclusively the intermediate degree cycle. Now to start let me correct some misconceptions. Cycles are virtually worthless for timing tops. Cycles are measured from trough to trough. All we can really do with cycle theory is develop timing bands for bottoms, tops can occur at any time.

Next I want to go over the concept of left and right translated cycles as it is pertinent to what is happening in the stock market.

Now in order to understand how a cycle is translated you first have to determine the average duration of the cycle. In our case we are going to focus on the intermediate degree cycle in the stock market. That cycle averages 20 to 25 weeks trough to trough. The median being 22 weeks. If we divide 22 weeks by 2 we come up with 11 weeks. That is an important number. It is the dividing line between a left translated cycle and a right translated cycle.

Any cycle that tops on week 12 or later constitutes a right translated cycle. Right translated cycles are the hallmark of bull markets. Let me explain.

In a healthy bull market an intermediate degree correction is a profit-taking event, and that’s all it is. The media will find some scary reason for why the market is correcting but the real truth is that the market has just rallied long enough and far enough and is due a corrective move to consolidate the gains. There is one exception, which I will go over in a minute. Healthy bull markets are composed of multiple right translated intermediate cycles.

Left translated cycles, on the other hand, are the hallmark of markets that are in trouble. A left translated cycle is a sign that the fundamentals of the market are broken, or in the process of breaking. A left translated cycle is not a profit-taking event. A left translated cycle is a sign that institutional money is selling into the rally.

Next I’m going to show you the 2002 to 2007 bull market. The intermediate cycle troughs are marked with blue arrows.

In the chart below you can clearly see that every intermediate cycle, with one exception, rallied more than 12 weeks. This is a sign of a healthy bull market. The rallies are moving to new highs. When the intermediate rallies mature they top late in the cycle followed by a profit-taking event that holds well above the prior intermediate trough.

The one exception, and I have marked it with the blue box, is that sometimes an intermediate cycle will top in a left translated manner and make a lower low after the second leg up in a new bull market. This is just a sign of a market that needs to consolidate a huge move out of a bear market bottom.

Next, let’s move into the latter stages of the 2002-2007 bull market.

Again we see the familiar pattern of higher highs and higher lows, and intermediate cycles that are topping deep into their intermediate cycles.

However, in the summer of 07 something happened that was a glaring warning sign that the cyclical bull market was in trouble. And that sign; the summer intermediate cycle dropped all the way down to test the prior cycle low in February. In a healthy bull market that should not happen. As you recall this was right about the time that subprime mortgages began imploding. Smart money could read the writing on the wall, and they began exiting the market.

The deathblow came when the next intermediate cycle topped in an extreme left translated manner on week eight. That was the warning sign that institutional buyers had left the market. At that point the bull had officially died.

Now let’s take a look at the current bull market.

Up until last summer this was a healthy bull market. The intermediate cycles were all right translated, and we were making higher highs and higher lows.

Last summer that started to change. To begin with the intermediate cycle topped on week 12, right on the dividing line of right and left translation. The market had managed to rally 16%, so even though time wise it was a bit early for an intermediate decline, in magnitude a 16% rally is enough to trigger a profit-taking event. However, this did not turn into just a normal profit-taking event. The decline moved below the February intermediate cycle low. Alarm bells started to ring and Bernanke he heard it. Thus began QE2 and the markets were pulled back from the brink… temporarily.

I don’t think anyone is under any delusions about what has powered this bull market and propped up a deeply flawed economy. Trillions and trillions of freshly printed dollars that’s what. But that is now coming to an end. Does anyone really believe that the economy or the stock market can continue to levitate without a constant flood of liquidity? If you do I have some beachfront property I want to sell you here in Las Vegas.

The market doesn’t believe either! We now have an extreme left translated intermediate cycle in progress that topped on week eight. Notice how the rally out of the March bottom was only able to make marginal new highs with absolutely no follow-through. That is a sign that institutional traders sold into the breakout. And now we have a market that is on the verge of penetrating a prior intermediate cycle low.

If the March low gets breached we will have the first confirmation that a new bear market has begun. The second confirmation will come if both the industrials and transports close below the March lows. That would constitute a Dow theory sell signal. The last confirmation will come when the 50 day moving average moves below the 200 day moving average and the 200 day moving average turns down.

Next I want to look at the dollar. In a deflationary environment the value of currency rises. As many of you know I have been predicting a major three-year cycle low for the dollar to occur in the spring or early summer of this year. It came during the first week of May.

These major cycle bottoms tend to produce very powerful rallies, often lasting up to a year. Now if we were just coming out of recession and productivity was increasing, or we had a new industry that was creating massive job growth then yes I would expect the market to be able to resist a rising dollar. Actually in that scenario a rising dollar is signaling a healthy economy.

In our current environment however a rising dollar signals deflation!

You can see that during the rally out of the `08 three year cycle low the stock market came under severe pressure. I think it’s safe to say that the same thing is going to happen this time as the dollar rallies. Unfortunately, we don’t have a new industry to drive job growth, power a sustainable economy, and allow the markets to resist a rising dollar. All we have is commodity inflation created by the Fed in a vain attempt to print prosperity.