Upload
others
View
2
Download
0
Embed Size (px)
Citation preview
Bull Market Dragged Lower 10-20-14
Last week we highlighted the 5 year and midterm election cy-
cles that were due to cause a 2nd half of 2014 correction when
combined with the overbought indicators. With the major stock
averages falling 10% at their lows we advised increasing expo-
sure to 90% invested. Markets are priced on earnings expecta-
tions and long term cycles still point higher. Near term risk is
embodied primarily by the resistance of Europe to stimulate
while their economy slides toward their 3rd recession in 6 years. Ebola has been a minor drag so far on ex-
pectations, but the season of fear remains for now.
We highlighted a short term bottom last week with an options chart at the lows and add this breadth chart of
the % of stocks hitting 50 day lows. Certainly the news can turn unpredictably worse regarding Europe and
Ebola or other more exogenous events such as terror, but technically as we mentioned on the 17th, the stock
markets are oversold.
Global economy decelerates—again!
The vast majority of the standout performance of US
growth vs the world is attributable to Ben Bernanke
and the $3.6 Trillion (QE) Bond buying money crea-
tion scheme he championed 6 years ago. Europe fol-
lowed the US lead until 2 years ago when it assumed
that it could stand on its own feet without printing
money. The dunce cap award goes to European stub-
bornness and false assumptions. They had put out the
fires in Greece and Spain and enjoyed an enormous
fall in interest rates as risk levels equalized across all
countries. Instead of continuing to follow the US with
QE 3, Europe adopted fiscal and monetary austerity.
Now credit risk has returned and fears of a 3rd reces-
sion since 2007 are back. It appears that Europe will
soon begin a modest QE asset backed security buyback program, but it remains to be seen if it will be bold.
German austerity has been the guiding force. A further economic contraction may be required before lead-
ership is witnessed. The US is also jawboning the markets teasing of a possible continuation of our own QE
that is due to terminate this month. The stock markets around the world rebounded Friday on this news, but
the rally will be short lived if its all a bluff, diluted or delayed.
We feel that eventually stimulus will be provided and yet another economic recovery leg will begin in 2015
that should last for a few more years until there are signs of yield curve inversion due to inflation and over-
heating economies. For now the worry is deflation and recession.
Russia in the Red!
We feel compelled to keep updating readers on Russia and Ukraine since it is one of the more egregious re-
porting's of an issue outside of domestic politics. Every time Russia is mentioned in the news we hear how
the economy is crashing. For months after Crimea and aggression in Ukraine this was totally untrue. Oil pric-
es held up, the Russian Ruble and stock market were also buoyed despite being characterized as being in
“collapse”. Truth is Russia’s currency and stock market have not been very healthy since the 2008 peak when
Oil was soaring past $140 a barrel. The Russian currency and stock market were falling sharply in the months
prior to their Ukraine invasion and actually rallied for almost 3 months after. However, since June both the
Ruble and the Russian stock market have fallen more sharply. Will this and the western sanctions make Putin
give up his gains in Crimea and Ukraine? Quite unlikely! The fear we have discussed for months is that Putin
will use the winter of discontent to raise energy prices to Europe and demand Western payments of
Ukrainian energy debts to pay for the blackmail the West is imposing on Russia. The harsher the winter the
better for Russia. Such gains may be short lived if they cause an even slower Europe and thus even lower Oil.
US Economy: 2014 flame out
The US economy has been an oasis of
modest growth in a sea of stagnation
in 2014. The year began with a sur-
prising contraction, then 2 quarters of
solid expansion and ending 2014 with
a slowdown once again it appears.
Consumers and small business job
creators are better, but still subdued.
Inflation is weak and falling gas prices
help consumers, but also signal con-
cern that the economy will stall and
jobs will be lost. If prices were falling
due to increased US production dur-
ing a strong economy—that would be
Goldilocks. Falling prices in this envi-
ronment is not a positive!
Housing and Jobs:
Better, but it doesn’t feel good
Housing prices have been rising, but new construction
remains stagnant. Renters and multi-family construc-
tion are doing well, but historical household formation
is in secular decline.
This recovery since 2009 has been upside down. Good
job creation in the low end, but no income growth.
Higher home prices and low debt service rates, but few
want to build homes due to lack of wealth, confidence
or aging boomers. The 1960’s—2000’s trend is unlikely
to return for a long time other than short term spurts
should the economy start to overheat. The majority of
people in the US (& Europe) feel they are worse off than they were 6 years ago when Obama took the helm
according to all surveys. In 2014 after years of frustration with jobs and the economy the US and the world
have been beset by an escalation of crises: Ukraine, sharply slowing economies, ISIS, Ebola, scandals with the
IRS, and VA, Bergdahl, Benghazi.... What will it take to change the hearts and minds? People vote with their
wallets. While the stock market rise is juiced by excess liquidity courtesy of the Federal Reserve and rising
corporate profits, the high skilled high paying jobs as well as factory capacity have not expanded. While it
may be unhealthy in the long run, what will turn the world positive is coordinated stimulus and less regulated
markets. Should China, Europe and Brazil join the anti-austerity movement we might see a return to the Old
Normal growth patterns for a few years before the next bubble. For now it’s the new mediocre: slow growth
with renewed hope that 2015 brings a rising tide to lift all boats. 2015 to 2017 looks like solid US GDP growth.
Europe Stalls, Yield Falls, Mediocrity Flourishes
Incredibly a 99.9% consensus has been forecasting ever rising interest rates - eventually. After a year being
dead wrong either we should conclude that forecasters lack the big picture understanding of our economy
or the use of “eventually” or “long term” is cover for not having a clue! Falling interest rates have not been a
mystery from our perspective: Europe and China engaged in fiscal and monetary austerity which causes de-
flation while the Russian sanctions compounded existing economic downtrends. In addition we knew that
potential speculation to sell Bonds was unlikely while Hedge Funds were already heavily short. Finally, the
recent nail in the coffin of forecasters has been the anxiety over Ebola the past couple of weeks. There is tre-
mendous resistance to the necessary stimulus that would reverse current trends and the Ebola fear factor
can turn either way in coming weeks. The 4th quarter of 2014 is very likely to mark the low for interest rates
from which point we will examine when rates will begin a more secular rise. There still is No Bond Bubble!
Oil: Demand stalls while supplies rise !
Pretty simple analysis poorly foreseen by most. There was NEVER any doubt that supplies would increase in
2014—as they have for the past several years with the Oil Shale boom. The US is the number 2 producer of
Oil in the world and number 1 in natural gas; a seismic shift from just 5 years ago.
The surprise for most has been the demand side. China has accounted for 50% of the growth in Oil demand
the past 10 years and currently their demand growth is ZERO, a sign their economy is growing much less
than they claim. In addition Europe has decelerated, reducing Oil demand. Hype over Ebola has accelerated
the $28 collapse in Oil since June. The current price in the Mid-$80’s has been our target for months.
Natural Gas, Heating Oil and Gasoline are of course breaking down with Oil as well as most commodities
with the global slowdown and strong US Dollar trends. $75 to $80 should hold as support near term.
Metals—not so precious
While there have been no new long term Sell signals in Gold and Silver since the 2011-2013 break, the song
remains the same. Disinflation and in places outright producer price deflation is the concern due to a decade
of deleveraging bad debts, Euro and Chinese austerity and a rising US Dollar. While Europe, China and
Emerging markets refuse to massively stimulate the past 2 years despite signs of renewed recession, it’s no
coincidence that metals have fallen sharply in sympathy. Inflation is falling, commodities are deflating, energy
prices are collapsing, but most importantly Europe has drained much of the massive excess bank reserves
they printed. Until Germany’s export machine shifts to domestic stimulation of consumption it seems unlikely
these trends will change. There is no compelling technical or fundamental reason to own Precious Metals yet.
Silver and Platinum have broken down more than Gold recently reaching 4 and a half year lows. Hedgers
have moved closer to oversold positions Buy levels. However, while modest rallies in all precious metals are
due, they should be viewed as selling opportunities for now. Should Gold break its 2013 lows of 1179 it will
confirm a new panic over a Global slowdown has accelerated.
Ags:
Corn (ZC), Soybean Meal (ZSM) and Oats (ZO): Hedge Funds and Commercials are neutral. Global cooling
has provided bountiful growing conditions in 2014 combined with a strong Dollar sending prices lower on
fundamentals, but technicals are more balanced now.
Wheat (ZW) and Soybeans (S) have had modest rallies in October after large down moves during the grow-
ing season. Hedge fund shorts and Commercial long positions indicate the odds favor that a strong bottom is
in place as long as the Dollar doesn’t rise too sharply.
Soybean Oil (ZL) and Rice (ZR) despite large down moves we see signs of a final leg down based upon the
excessive short positons by Hedge fund managers. Both commodities are close to triggering unrelated Sell
signals basis our KDelta trading model (see charts).
—————————————————————————————————————————————————————————-
K DELTA 2014: Commodity futures trading system $ P/(L) P/L Date Signal Entry exit date/price Contract %margin
09-09-14 Sell HGZ 31015 09-16-14 312.05 (475) (16%)
09-03-14 Sell ZWZ 542 09-11-14 511 1550 94%
09-09-14 Sell ZMZ 337.7 09-18-14 323.7 1400 64%
09-04-14 Sell SBV 1529 09-10-14 1463 739 49%
September results: 3 Wins &1 Loss=$3214 gross profit: average signal=+48%
YTD=31 Wins & 16 Losses=68% accuracy=$29,318 profit=+147% per $20,000 account
August results: 3 Wins & 0 Losses=$2790
08-20-14 Sell E6U 13334 08-21-14 13256 975 51%
08-06-14 Buy ZNU 126-01 08-15-14 126-24 375 26%
07-09-14 Sell ZLZ 3771 08-11-14 3527 1440 114%
Open positions:
10-15-14 Sell NGZ 3876 Exit 3560
Pending Signal using Buy or Sell Stops only:
Sell ZLZ 3154 Exit 2970
Exec Spec by Kurt Kallaus
Subscribe@ ExecSpec.net
Disclaimer and Notice: Nothing herein, including any attachments, should be construed as an offer to sell or as a solicitation of an
offer, or a recommendation, to buy any interest in any investment or other product. This email may contain information on invest-
ments that are high risk and have substantial risk of principal loss. It is for informational purposes only. Statements in this commu-
nication that are not statements of fact are merely opinions or forward looking statements from a potentially biased source(s) that
involve known and unknown risks, uncertainties and other factors that could cause actual future results to differ materially from
any prior or projected results. Statements in this communication may be inaccurate and/or unsuitable for you. You must perform
your own due diligence. Your investment decisions should always be made based on your specific financial needs, suitability, ob-
jectives, goals, time horizon and risk tolerance. Any decision is at your sole discretion and at your sole risk. You are advised to
consult with your individual investment and tax professionals before making any investment. Past performance is no guarantee of
future results.