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Aug 3 2013 - Weekend Market Comment

Aug 3 2013 – If you are in a hurry let me give you the bottom line. The momentum of the US markets is impressive. It is like every week the market hits a new high and the markets hit a new record high this week. You must be long this market -- but this is no time to put on a new high-risk position. We are ripe for a tiny pullback in an overall uptrend; you will be able to buy this a bit better price than this week.

First lets stop and look at the really big picture. Here is the market since 1960. As you can see the 2008 financial catastrophe sort of “shifted us over” but the angle of up trend (blue line)  is the same angle the market is currently rising on. The reason I look at this chart is a I want to see if the market is at a unsustainable price and right now it does not look it.
(as always click on any graphic to enlarge)

These are the long-term bull and bear lines; so long as the green is above the market you should be bullish.

The NYSE Stocks above 50 day moving average graph looks like it has a few more days to run up. 

So looking at these indicators above the message is, we are in a secular bull market that appears to have along way to run. You can read my prediction of this in The New Momentum.

Blip on the Horizon 
Bull markets “climb a wall of worry” as things get better and better complacency slips in. As worries dissipate exuberance and hubris become the investors enemy. So it is important that we have some reality check to worry about. Here are two:

1.     The US economy nears full employment this is no time to keep stimulus on.
In the non-farm payroll graph U.S. employment is reaching the 2006 boom levels where workers were very hard to come by. In other words the September fed taper of bond buying is probably only 3 to 5 weeks away.

2.     The VIX is very low. The VIX is an index, constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge." Last week I built a gauge for you showing that you can predict near term pullbacks by drawing lines where the VIX current range is over bought or oversold. Or as I called them over greedy and over fearful. So as we pass my red line here speculators are too complacent, this means that the “last to the party” buyers are loading up. Of course once they finish buying there is no one left to buy, result a pull back until prices are again compelling.  In a strong bull market like this that is a 3% to 5% pull back.

Another Commodity Bites the Dust
This week the interesting story was that the global potash cartel blew up when Canada’s rivals in Russia said Nyet and are now starting a global price war rather than reduce supply coming onto the market. Uralkali, a key Russian partner in an informal cartel which has helped to keep prices of the fertilizer artificially high, broke ranks this week, sending shares of the main producers crashing and leading to predictions of a fall in the price of potash of up to 30 percent. Uralkali did so after accusing a partner of selling outside an agreement, but also after users proved resourceful in sourcing alternatives and, importantly, before the completion of huge new projects which would bring on new supply in coming years. For Western Canada this set off  the cancellation of proposed new projects – notably BHP Billiton Ltd.’s $14-billion Jansen potash project in Saskatchewan. Here is a graph of Potash corp stock tick POT, it kind of says it all:

In Pop Goes the Commodity Bubble I said that the run up in price was purely due to speculation and financial manipulation. So far only big oil continues to manipulate prices creating artificial highs. But in other areas many investment banks might be daydreaming of an alternate reality where they didn't build the huge, now tenuous, commodities portfolios, which are drawing, increased scrutiny.

Such scrutiny as the July 20th The New York Times story that accused Goldman Sachs of using its aluminium warehouses to manipulate the price of the commodity — an assertion the bank emphatically denies — costing consumers billions.

Then there's JP Morgan, which just agreed to pay a $410million fine for using trading strategies to manipulate energy markets — the bank neither confirms nor denies the manipulation charges.

In September, The Fed will rule on whether or not to allow Wall Street banks — specifically JP Morgan, Goldman Sachs, and Morgan Stanley — to keep the physical commodities they purchased during a five-year, post-financial-crisis shopping spree.

This could be The Fed's chance to correct mistakes it made while it was asleep at the wheel, allowing the commodities businesses at Wall Street banks to get bigger and more interconnected than anyone in American history ever intended.

This is a very old story; Andrew Jackson was a farmer, he originally crushed the national bank because he didn't want it to centralize commercial and financial power to manipulate commodity prices. You can almost hear him turning in his grave.
How to Trade This
Of course these are long term plays, but when the Fed tapers bond buying then bond yields will increase. You are ideally positioned because you own TBT on my recommendation and it will go up along with yields on the 10-year Treasury note. I bought some more this week. 

As for commodity price dropping this should aid the manufacturing tigers of the world and as you read in the New Momentum -- America. The losers are the commodity banana republics of Brazil, Australia, Russia and Canada.

I hope you still have your Germany ETF -- EWG hitting new highs this week.

Industry Focus – Web Travel
As the baby boomers get older they need less stuff but they like to buy experiences. One big-ticket experience is travel. The Internet has supplanted the Newspaper travel section and the travel agent with e-commerce.

Microsoft subsidiary pioneered the online travel agent market and the stock has been a market leader for the last three years. Recently Expedia reported a profit far short of Wall Street estimates for the second quarter on Thursday, hit by rising competition in its home market and poor performance in its discount travel website Expedia's shares were down 25 percent at $48.45 on Friday afternoon on the New York Stock Exchange.

Rival famous for the cheesy William Shatner advertising campaign has been doing relatively well in part due to not being swept up to a loft price like Expedia but earning a nice return. But of course if you followed me into Trip advisor you are in happily counting your profits as the stock continues to outperform the market.

Nuclear Meltdown
Taiwanese lawmakers exchanged punches and threw water at each other today ahead of an expected vote that would authorize a referendum on whether to finish a fourth nuclear power plant on the densely populated island of 23 million people. Nuclear power has long been a contentious issue in Taiwan and became more so following the Fukushima nuclear disaster in Japan in 2011. While many Taiwanese consider nuclear power generation an unacceptable safety risk for the earthquake-prone island, economic analyses suggest disruptive power shortages are inevitable if the fourth plant is not completed. Watch Video here.

America You Are Entitled 
Finally a survey that shows just what Americans want. In a new report released Wednesday by the Pew Research center, Americans indicated that when it comes to what they expect from their country, all they really want is to be safe, happy, rich, comfortable, and entertained at absolutely all times. Click picture below to play video:

Nation Just Wants To Be Safe, Happy, Rich, Comfortable, Entertained At All Times

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