The Commodity Party – Time to Leave

Experience has taught me one thing for certain about investing – that is when something is certain, it us usually not certain. What I mean is, when we all know for sure – the “for sure” thing is not for sure. Right now we all know the U.S. dollar is going to zero and commodities are going to the moon – so keep selling the dollar and keep buying those commodities.

Experience has taught me to avoid over-crowed trades – to always be on the lookout for sheep-like investment behaviour. Right now too many sheep-like analysts love Baah Baah Rick Gold (TSX-ABX) and so I bailed last week at $47.

Our very long term chart below illustrates the cyclic path of the current secular advance in two of the important commodities – gold and crude. A secular trend (up or down) is a long term advance – usually 12 years – that is interrupted by shorter bull and bear cycles. The structure of the secular advance can be seen when broken into 5 cycles

Cycle (1) is the recognition of survival cycle wherein the market anticipates the survival of many smaller O&G producers and mining companies. The fundamentals are still weak. Cycle (2) is the big “money” cycle wherein anything you own in the sector goes up. Cycle (3) is the disappointing cycle when investors discover some headwinds such as squeezed profit margins and environmental concerns. Cycle (4) is the sheep cycle, the speculative bubble. The fundamentals are strong but divergences appear as not all components enjoy the bullish stampede. Cycle (5) can be a bull trap or a bear market rally that may or may not make new highs. Clearly the lower fruit has been picked – leave the higher stuff for the sheep.

Why Business Writers Love December

December more than any other month is loaded with seasonality folklore which is recycled annually in the business dailies.

It all begins with the U.S. Thanksgiving trade wherein you buy at the beginning of the week and then sell into strength on the Friday. We then move on to the December “free lunch” and then the Santa Claus Rally which is followed by the January Effect and finally the January Barometer.

The seasonality bible is the Stock Trader’s Almanac. Jeffrey Hirsch is editor-in-chief of the Stock Trader's Almanac and Almanac Investor newsletter. He started with the Hirsch Organization in 1990 as a market analyst and historian under the mentorship of his father Yale Hirsch the founder of the Stock Trader’s Almanac. Drawing on years of market study, Yale created the unique Stock Trader’s Almanac, in 1966. It was first published in 1967. This book allowed Mr. Hirsch to distil his lifelong interest in stock market history, cycles and patterns into a practical working tool for the average investor. It was the first compilation of the market’s seasonal trends and tendencies combined with a calendar and laid out for use by non-institutional investors. It also brought to the general public many “statistically predictable” market phenomena that have since become well known, such as the impact of the four-year Presidential Election Cycle, plus discoveries such as the “January Barometer” and the “Santa Claus Rally.”

Unfortunately only a few seasonal trends are supported by technical analysis – the most important of which is the January Effect – a period beginning mid December through the following January where the smaller companies may outperform the larger companies. A weak January Effect is a bad omen and could be a negative for the next twelve months.

A must read - The Stock Traders Almanac – visit: www.stocktradersalmanac.com

Managed Exchange Traded Funds?

Whatever happened to the actively managed mutual fund vs. the passive index or sector exchange traded fund (ETF) battle?

Several years ago investors began to flee active mutual fund managers because for the most part, they failed to match the performance of their benchmark index or stock sector. The investment industry responded with cheaper passive ETFs that tracked the performance of the major stock indices (index funds) and sectors such as Financials, Energy, Materials and so on. Now the manufactures of ETFs have a problem – there are just too many – too much competition and so they have invented a new product – the actively managed ETF. So now we go full circle – from actively managed mutual funds to passive ETFs and now back to actively managed ETFs.

One of the original active ETF entries was PowerShares FTSE RAFI US 1000 Portfolio (NYSE:PRF) which seeks investment results that correspond generally to the price and yield of an equity index called the FTSE Research Affiliates Fundamentals US 1000 Index. The Index is designed to track the performance of the largest United States equities, selected based on four fundamental measures of firm size: book value, cash flow, sales and dividends. The 1000 equities with the highest fundamental strength are weighted by their fundamental scores

Here is the shocker – on November 18, 2009 -- Research Affiliates LLC announced that the United States Patent and Trademark Office has approved the issuance of U.S. Patent No. 7620577 for the company's innovative Research Affiliates Fundamental Index® ("RAFI®") indexing methodology, which selects and weights securities using fundamental metrics of company size rather than by market capitalization.

In other words a large cap value fund has a patented managed methodology – all very stimulating because if the methodology is patented - it must be good. Right? Well, let me now compare the “patented” managed fund to another large cap value fund, its called the Dow Jones Industrial Average, a basket of America’s biggest value companies – most of them multinationals. The best way to compare the difference is to use a simple spread or ratio chart. The inception of the fund is December 2005 and the Dow (now over 100 years old) recently had two components vaporized in the 2008 financial crisis. Our simple spread clearly the passive Dow out performed the managed ETF through 2006, 2007 and 2008 with the ETF posting an out perform only from March 2009 to October 2009.

The other problem with the managed ETFs is their poor liquidity and low volume. For example at the close of November 19 the PRF was bid 46.67 and ask 47.80 with total volume 28,240 The competing Diamonds Trust (NYSE:DIA) was bid 103.63 and ask 103.77 with total volume 12,739,200

Now if anyone out there knows of a managed ETF that works I am all ears

Research In Slower Motion

One of the rules of successful investing is to not get distracted by the noise served up on a daily basis by the business media. When we focus on stuff like auto sales, housing starts, consumer spending, Chinese growth and forecasts by TV personalities like Dr. Doom and the Raging Bull we overlook what the markets are telling us

Did anyone out there notice the new 52-week high posted last Friday by the Technology Select Sector SPDR Fund (NYSE-XLK). Yes – the tech stocks are attracting money – we seem to have another technology boom - probably driven by the global economy.

The Canadian peer - the TSX listed Information Technology Index (XIT) is lagging because if the heavy-weight component Research In Motion problems. There is growing concern about increasing Smartphone competition and the potential for longer-term declining ASPs (average selling prices) and profit margins.

The reality is RIM, the corporation is going through transition from a youthful risky enterprise into a middle age cash cow - basically a fourth Elliott Wave – a long period of transition - unless RIM an do an Apple and re-invent itself. By the way, Elliott fourth wave periods are confirmed when the original innovators are distracted by self-serving irrelevant hobbies such as collecting art, professional sport franchises and kite surfing.

Fear mongering

Do you grow weary of the persistent use of fear mongering as a tool by the financial media to attract an audience?

According to http://en.wikipedia.org/wiki/Fear_mongering - fear mongering (or scaremongering) is the use of fear to influence the opinions and actions of others towards some specific end. The feared object or subject is sometimes exaggerated, and the pattern of fear mongering is usually one of repetition, in order to continuously reinforce the intended effects of this tactic.

Inciting fear is a technique to gain notoriety and influence. Some financial advisors and money managers use fear mongering as a means to prospect for new clients - to attract investors to the safely of their enterprise and away from their current and dangerous advisor.

I recall a "Night With The Bears" April 7, 2009 in Toronto, a speaker's series organized by Sprott Asset Management. Guests include Eric Sprott, Meredith Whitney of Meredith Whitney Advisory Group, Nouriel Roubini of New York University and Ian Gordon, author of The Long Wave Analyst newsletters. My invitation said this is the first time these "four spectacular Bears", (Roubini, Sprott, Whitney and Gordon) will be together on stage discussing the economy

A packed house gasped as "lunatic fringe" cycle expert Ian Gordon predicted the Dow Industrials would hit 1000 before this downturn is over. Gordon's analysis is based on the Kondratiev long wave or K-wave which spans about 50+ years as measured from trough to trough.

So as investors we must fear the worst - avoid any type of risk - don't invest - don't buy a house - don't change jobs - don't trust anyone - don't borrow - don't believe in our way of life - hide or you get H1N1

The following is a quote from the classic publication, Reminiscences of a Stock Operator by Edwin Lefavre

Among the hazards of speculation the happening of the unexpected – I might even say of the un-expectable - ranks high. There are certain chances that the most prudent man is justified in taking – chances that he must take if he wishes to be more than a mercantile mollusc. Normal business hazards are no worse than the risk a man runs when he goes out of his house into the street or sets out on a railway journey. When I lose money by reason of some development which nobody could foresee I think no more vindictively of it than I do of an inconveniently timed storm.

Life itself from the cradle to the grave is a gamble and what happens to me because I do not possess the gift of second sight I can bear undisturbed.

I rest my case.

The pot calling the kettle black

Sean left a new comment on your post " For GT Blog October 25, 2009":

Kudos Bill. I love your site and subscribe via RSS on myYahoo. I also have a soft spot for your analysis because you - like me - still us Supercharts, even though there are far more fanciful packages available. I have made the same criticisms to colleagues and have not renewed for 8 years because of the chicanery. The last meeting I went to was "guest led" by a Montreal businessman that hounded me for a subscription for years. I would like to point out, however, that your site is not immune from vendorville, as you have Google ads (the latest one promises 700% stock picks) on your site. Remove these and your credibility goes up even further in my view.

GT's reply

Hello Sean

Some very good points - the Google ads on my blog site do have a "sleeze" factor and they will be removed along with other changes to GT's web site. I am going a step further and removing any links or connection to any site or blog posing to be independent and then acting as a shill for advisors trolling for clients. Unfortunately Don Vialoux and his daily reports on timingthemarket.ca has taken this unfortunate path in accepting sponsorship from Castlemoore Inc an advisor who is trolling for clients

Bill Carrigan

Cycle Summation

For GT Blog November 03, 2009

Hello fellow bloggers

The current corrective period that began with the cyclic peak of the TSX Financial Index on September 30, 2009 is frustrating the bulls and giving the bears more hope for the big down so they can finally get long and participate in the current bull market

Some cycle work of the late, great Ian S. Notley as set out in his May 1995 publication Cycles And Methodology may provide some clarity during noisy and confusing periods such as now – so let us look firstly at the longer term monthly cycle

The longer term cycle is monitored on the charts by investors using monthly observations with one cyclic bottom juncture approximately every 4 to 4 ½ +/- years. The bull phase generally persists for 28 + /- months duration and the bear phases are generally of 15 +/- months duration. The origin of the last juncture was a bear trough in most of the major stock indices on April 30, 2009 thus aging the current bull at only 6 months.

The shorter intermediate term cycle is monitored on the charts by traders using weekly observations. The intermediate trend cycles are measured trough to trough and are 20 +/- weeks apart. There are about three intermediate trend junctures per calendar year (one bottom and two tops or two tops and one bottom). The bull skew is 12+/- weeks and the bear skew is 8+/- weeks. The origin of the last juncture was the October 2 peak in most of the major stock indices – aging the current bear skew at 4 weeks.

The very short term cycle is monitored on the charts by speculators for trading OR by traders and investors seeking to time the entry and exit of the weekly and monthly top and bottom junctures. The very short term trend cycles as measured from trough to trough are about 39+/- days apart with the bear skew spanning about 14 +/- days. The origin of the last juncture was the October 23 peak in most of the major stock indices – aging the current bear skew at 8 days

Now with our three cyclic positions mapped out we can plot a course for the broader equity markets over the next several weeks

Over the next 4 to 6 trading days the very short term daily cycle will trough and exert upward pressure on the current bear skew of the intermediate weekly cycle. By mid November the intermediate cycle will trough and set up a condition we call summed cyclicality which is the sum of the movements of all three market rhythms – in this case upward for at least 12 weeks taking us to the peak of the next intermediate cycle sometime in mid to late January 2010

So get long and enjoy