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Sept 14 2013 Weekend Market Comment

Sept 14 2013 – Everything that was true last week is truer this week. Markets are gaining momentum and from a technical analysis stand we look in great shape. The Dow in the past week was up 3 percent, to 15,376, its second best week of the year. The S&P 500 was up 2 percent at 1687, its best week since July, and the Nasdaq was up 1.7 percent at 3722, despite a 6-percent decline in Apple. The stock market is trading as if Goldilocks is in charge, and the few bears left may be headed home soon.  In fact on September 11th I even put out a special posting announcing we have a “Green Arrow”!
(as always click on graphic to enlarge)

I put out a Green Arrow on this graph when it appears we are in a confirmed upswing. This is 8 out of 10 times a great time to put new money to work and to move to risky assets like juiced ETF and volatile “high Beta” equities. Of course 2 out of 10 times you get your butt handed to you. I took off some conservative dividend ETF and traded them for MVV the juiced Midcap 400 fund. Juiced ETF funds are dangerous and over the long term a bad idea -- but for a quick run up they are liquid and diversified -- perfect for a quick grab.

Of course as fears quell and markets rise the VIX index reflect the optimism. 

The NASDAQ summation index continues to hold up as the market rebounds. 

On Balance Volume (OBV) measures buying and selling pressure as a cumulative indicator that adds volume on up days and subtracts volume on down days. OBV was developed by Joe Granville and introduced in his 1963 book, Granville's New Key to Stock Market Profits. It was one of the first indicators to measure positive and negative volume flow. We can look for divergences between OBV and price to predict price movements or use OBV to confirm price trends.

Of course we have a very positive divergence here as the red line OBV races ahead of the market. Indicating a strong demand for equities. 

Here is what the Markets are happy about:

Syria – It looks like the Russians have given the U.S. a way out of having to bomb another Arab state. This is good because with no-boots-on-the-ground stance and the US uninterested in a lengthy no-fly-zone policy, whatever they were going to do would be limited and could emboldened Syria when they see how painless it was. Also it would certainly involve leveling a few chemical weapons stores, which is problematic in that it will release the gas they don't want released and some of the weapons in part will be hidden in new locations - proving the strikes ineffective. Under this new deal, America looks like it is apposed to chemical weapons, well OK apposed to chemical weapons for everybody but the super powers. Plus they can step around the mess of responsibility for toppling another government only to replace it with some scary Muslim clerics issuing Fatwas for death to the infidels (that us baby) and enforcing Sharia law. As you know Sharia law is a brutal, backward and oppressive system of religious control. Still it is sad that Assad will not be at a war crimes trial anytime soon for the brutal killing of his own people. 

Taper Shmayper – The Federal Reserve is expected to announce its first move to taper its $85 billion in monthly bond buying when its two-day meeting ends Wednesday. While the Fed is seen curbing bond purchases by an initial $10 to $15 billion — a relative baby step compared to the massive amount of stimulus applied — it sends an important message that the Fed is moving toward a normalization of rates and expecting a more normal economy.

Traders believe much of the market moves around this first step in unwinding policy may have already taken place. On CNBC Peter Boockvar, chief market analyst at the Lindsay Group said the success of the Treasury's 10-year and 30-year bond auctions this past week shows the bond market has priced in the tapering. The fact that everyone expects the taper and the markets hit new highs is proof enough, the market expects the taper and even is starting to welcome it.

World Markets - There are three reasons to feel more hopeful about the world economy. The economic bleeding that had dogged the euro zone economy appears to be slowing which is a particularly welcome development for Europe, the global economy and financial markets. The European Union is still the largest economic entity in the world, accounting for just under a quarter of global GDP. If the euro zone can in fact start registering economic growth from about now, it could help the world economy to a solid growth outlook in 2014. Europe’s politicians have shown themselves determined to save the single currency. A second reason for cheer comes from central banks’ activism. In September the European Central Bank promised unlimited bond-buying to keep the euro together. Germany continues to shine and in this week’s Economist Magazine Chancellor Merkel is held out as the saviour of Europe, with powerful German able to keep afloat Greece, Spain and Italy. One thing is for sure the Europeans stemmed their financial crisis with words but without buying a ton of debt like the US did.

It's time to play China's cyclical rebound, Goldman Sachs said, suggesting a general tilt toward North Asia and away from South Asia following "unambiguously positive" data from the mainland in August.

"This offers the clearest way to gain exposure to the dominant theme of improving global growth," while limiting exposure to the monetary policy risks that are pressuring markets such as India, Indonesia and Thailand, Goldman said in a report Wednesday.

Goldman's call follows encouraging Chinese economic data, which suggests that the world's second-largest economy is on track for a recovery. Industrial production rose 10.4 percent on year in August to reach a 17-month high, while exports rose 7.2 percent on year, beating Reuters' forecast for a 6 percent rise.

One sign this time the recovery in Asia is real and not wishful party thinking is the Baltic Dry Bulk Index of shipping. The Baltic Dry Index (BDI) is a number issued daily by the London-based Baltic Exchange. Not restricted to Baltic Sea countries, the index provides an assessment of the price of moving the major raw materials by sea. Taking in 23 shipping routes measured on a time-charter basis, the index covers Handysize, Supramax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain. The Graph below shows many years of results, as you can see the recent upturn in volume is very  impressive.

One way to play the upturn is to buy Dry Ships (DRYS). DryShips Inc. is an owner of drybulk carriers and tankers that operate worldwide. What a pop! This stock is up 30% in September alone.

A brighter economic outlook has already helped lift Chinese shares, with the benchmark Shanghai Composite stock index hitting a three-month high on Wednesday.

The 10-year Treasury was yielding 2.89 percent late Friday, and traders are watching whether it will hit the psychological 3-percent level in the coming week. There are experts who have some compelling arguments for a 3% ceiling on rates, but no one can say where this will go. Certainly as the fed stops buying treasury the rates can go higher. Ben Bernanke himself said he felt that 4% was a more normal rate. So long as the market is risk on and the fed is tapering there is good hope for our TBT trade.

The World economy is clearly out of the Intensive Care Unit, American markets hitting new highs and as the US accepts the idea of the end of quantitative easing, as treasuries rise and the vix falls, the world is clearly returning to normal after the financial crises. It is hard to make a bull case for hiding gold under your mattress any more. (Unless you live in China).

Gold has maintained its value for centuries. It returns approximately nothing, after inflation. But that’s all it does. That’s all it should do. So when the price of gold rises well above its historic real (inflation-adjusted) price, you should expect a correction. We've already had one — gold is down about 30 percent since late 2011 — but you can make a strong case that there’s more decline to come.

I agree with Société Générale strategists who told clients earlier this week that the bounce in gold is over, and advised them to sell the metal with a $1200 price target. The number of $1,200 is what the gold industry say is the cost of production. However that cost number is based on some bad acquisitions, reopening old marginal mines, a lot of overtime pay and a sell off in mining equities value. The true cost of production is more like $400. So we may bounce at $1,200 this time, but the day will come when that resistance will not hold.   I purchase a mid size position in HDG in Canadian dollars as a hedge against the sell off. Yes a gambling man would have bet the farm on DUST this week, but I am not taking chance that big with my money.

The Nemesis of September
Of course if you want to worry about something, worry about the calendar. We all know that the worst crashes in the market have been in the 30-day zone after Sept 18, and that historically late September results in a sell off as money managers reposition for the last quarter.

The YP Primary Indicator  is still positive but is has picked up some put buying and a drop in calls. Probably no reason for alarm but worth watching. 

I hate to see bulls on the cover of magazines, it is the sign of a market top but at least it is in Barrons I get really worried if it was on the cover of USA today.

U.S Budget
The one looming problem that did not get better this week is the impending US debt ceiling. House Speaker Boehner is really a weary general right now in Washington, d.c. he's trying to corral his troops away from using a government shutdown to try to defund obama care and push them towards the debt limit. He believes that's a better way to wring concessions out of the white house. Boehner wants to have a limit at the same sequester levels, but democrats in the senate want to get rid of the sequester and would probably rather raise taxes instead. So what are they going to do here? They don't have much time with a Nov 1 deadline to keep the U.S. government funded. Boehner is not going to probably be able to buckle on the sequester levels. He knows the conservatives if his conference, they like those spending cuts. Some on the armed services committee, some of the republicans may want to replace those defence cuts, but broadly speaking within the republican conference Boehner does not have a lot of wiggle room to negotiate. They are still short 45 votes. The debt ceiling is even harder nut to crack. The question is to keep the government open; can they get the 45 votes?

Post Lehman
This past week marks an ugly anniversary. Lehman Brothers became the face of the financial crisis when it collapsed on Sept. 15, 2008, but the underlying ugliness was the near-implosion of the multitrillion-dollar money market industry.

But have we learned our lesson. Risk is coming back in to the financial markets. For starters the market for collateralized loan obligations, or CLOs, is on track to double in 2013 from last year, with $51.2 billion having been sold so far this year. These securities package pools of loans into bonds that are sliced up and sold to investors.

The precise size and number of middle-market credit funds is difficult to estimate, but many such funds have launched lately, or are raising money. Since the financial crisis, 232 hedge funds that perform direct lending have launched - 3.5 times as many as had ever launched before then, according to the research firm Preqin. Firms including Blackstone(ticker BX), Cerberus and Avenue Capital, have all raised or are in the process of raising sizeable middle-market loan funds. Business development companies, which make loans to small companies and have to pay little corporate tax, have also grown at a rapid clip since the financial crisis. Prospect Capital Corp, which makes $5 million to $100 million loans to middle-market companies, for example, had grown its assets to nearly $4.5 billion in June 2013 from about $500 million in June 2008, representing an annualized growth rate of over 50 percent.

What Works Now
OK so it is time to buy what looks good:. 

Safe Global Diversifcation:
iShares MSCI Emerging Markets ETF (EEM)
Germany (EWG)
Global Dividend (DVYE)

Rising Market Stars:
Celgene (CELG)

Growing retail cosmetics chain ULTA

Disney (DIS)
Pandora (P_)
GNC Holdings (GNC_)

As crude keeps climbing look at some Oil companies
Gibson Energy (GEI.TO)

Canadian Helicopters (HNZ) don't forget this graph does not show the 5% dividend:

Hope you followed me in to previously recommended Methanex (MX)

Equifax (EFX) has a lock on the Credit Bureau Business, it is like a toll on the highway that leads to every loan. This baby got tossed out with the bathwater when the big credit rating agencies Moody's and S&P were in trouble with the regulators. Expect this to be the bottom. 


Major Spill in Hawaii 
If you are worried about the idea of oil pipelines polluting the west coast perhaps you should look twice at what the food industry is doing. Thousands of fish — gasping desperately, then floating lifelessly — surfaced in Honolulu Harbor this week, suffering from oxygen deprivation caused by a massive molasses spill.  

The spill started Monday, when a faulty pipe that was supposed to deliver the molasses to a California-bound container ship owned by shipping company Matson instead discharged the stuff into the sea.

Read More at the Atlantic and see the TV NEWS in Hawaii