A Smaller Version Of Berkshire Hathaway: Markel Corporation

Markel Corporation markets and underwrites specialty insurance and have been doing business since 1930. They are not a big well known company except in the value investing community. This might be due to them being in a rather boring industry- insurance. Wall Street seems to push everything in vogue and the retail investor seems to follow along. Berkshire Hathaway was not well known either 25-30 years ago, and Warren Buffett had already been involved with Berkshire for nearly 20 years. I must admit when I first heard of Berkshire back in the mid 1980’s it was trading around 1500 a share. The only reason I noticed it, was that it had a high price tag or so I thought at the time. Hear it is almost twenty-five years later and another high priced insurance stock has got my attention. Well actually I’ve known about this one for a few years now. Did I say high priced at $342.00 dollars a share. Well for some of you new folks the stock price does not have anything to do with true value of the company. The reason why you see Berkshire Hathaway ((BRK-A: 106040.00 +1240.00 +1.18%),(BRK-B: 3499.00 +47.00 +1.36%)) and Markel (MKL: 346.83 -16.17 -4.45%) trading so high is because they don’t split the stock, like most companies often do.

As stated in the title Markel Corporation is a smaller version of a Berkshire Hathaway. It operates in the same fashion as well. That is it’s primary business is insurance. Most insurance companies have whats called float. Float is the money taken in (insurance premium) less the claims paid out. The difference or “float” is reinvested in fixed income and equities. Of course we all know that Buffett has been a master of this…taking the float and buying well known financially strong companies such as Coca Cola (KO: 49.37 +0.20 +0.41%), Johnson & Johnson (JNJ: 60.18 -0.27 -0.45%), Proctor & Gamble (PG: 53.44 -0.47 -0.87%), Wells Fargo (WFC: 28.46 +0.44 +1.57%) and Kraft Foods (KFT: 28.58 +0.25 +0.88%). Markel has also done quite well over the last twenty years by doing the same thing. Since August of 1990 Markel has risen over 2100% while Berkshire has risen over 1500%. Currently Markel is trading at (MKL: 346.83 -16.17 -4.45%) a share. They have over 132 million per share in cash and a debt/equity ratio .34. Markel has over 70 companies in its portfolio with Berkshire Hathaway, United Parcel Service (UPS: 53.28 -0.40 -0.75%), Diageo (DEO: 62.25 -0.14 -0.22%), and Carmax (KMX: 16.51 +0.21 +1.29%) being some of the larger holdings.

India Stock Market: Sensex Down 389.80 Points On Thursday

Sensex down 389.80 points on Thursday (August 6, 2009)
-Heavy profit booking in frontline stocks

Sensex (^BSESN: 15514.03 -389.80 -2.45%) fell 389.80 points or 2.5% to 15514.03.
Nifty (^NSEI: 4585.50 -108.65 -2.31%) fell 108.65 points or 2.3% to 4585.50.
Mid Cap index fell 2.5%. Small Cap fell 1.3%.
BSE 500 was down 2.3%. Sensex losers: 28

All 13 BSE Sectoral indices posted losses.
Advancers: 1080, Decliners: 1614, Unchanged: 73
Advance/Decline ratio: 5:8

Sensex Day’s Range: 15969.81 - 15443.22
Nifty Days Range: 4718.15 - 4559.20
52-Week Range: 15973.10 - 7697.39
52-Week Change: -2.8%
All Time High: 21206.77 (10 Jan 2008)

Sensex losers included Tata Motors -6.9%, Hindalco -6.5%, JP Associates -5.5%, Maruti Suzuki -5.3%, Hero Honda -5.3%, ACC -4.9% and Sterlite Ind -4.8%.

Sensex gainers were: Sun Pharma +1.5% and Wipro +0.04%.

Auto index fell 4.4% led by Escorts -7.8%, Tata Motors -6.9%, Ashok Leyland -6.3%, Maruti Suzuki -5.3%, Hero Honda -5.3%, Amtek Auto -4.4% and Mah & Mah -4.1%.

Realty index plunged 3.7% helped by Indiabulls Realty -8%, Anant Raj Ind -7.6%, Sobha Developers -3.6%, HDIL -3.5%, Omaxe -3.4% and Phoenix Mills -3.3%.

FMCG tanked 3.3% supported by United Breweries -5.6%, ITC -4%, HUL -3.8%, Dabur India -3.7% and Colgate -3.4%.

Metal index tumbled 3.1% aided by Hindalco -6.5%, Ispat Ind -5%, Jai Corp -4.8%, Sterlite Ind -4.8%, Jindal Saw -3.9% and Tata Steel -3.9%.

Power index declined 2.3% assisted by Suzlon Energy -4.4%, Torrent Power -3.9%, Crompton Greaves -3.4%, Siemens -3.4%, GMR Infra -3.2% and Rel Infra -3%.

Other sectoral losers were: Consumer Durables -2.1%, Capital Goods -2.1%, IT -2.1%, Teck -1.9%, PSU -1.9%, Bankex 1.7%, Oil & Gas -1.6% and Healthcare -0.7%.

Volume shockers on the BSE:
Ispat Ind 25.30 million shares, FirstSource 20.25 mln shares, Mahindra Satyam 16.70 mln shares and Suzlon Energy 11.59 mln shares

Turnover:
Volumes crossed the Rs 1 lakh crore mark; total traded turnover was at Rs 1,02,020.54 crore as against Rs 87,766.43 crore on Wednesday. This included Rs 21,045.46 crore from the NSE cash segment, Rs 73,819.40 crore from the NSE F&O and the balance Rs 7,155.68 crore from the BSE cash segment.

Buzzers:
Roman Tarmat +20% at Rs 49.20, TTK Healthcare +20% at Rs 152.80, Jindal Photo +15.6% at Rs 139.20, TVS Electronics +14.8% at Rs 25.95, Hind Oil Exploration +14.4% at Rs 187.15, India Gelatine +12.5% at Rs 49 and Archies +11.6% at Rs 89.

Heavy Losers:
Saint Gobain -16.5% at Rs 20.45, REI Six Ten -13.1% at Rs 827.65, Arvind Chemical -11.6% at Rs 39, Pritish Nandy -11% at Rs 25, Subros -10.4% at Rs 34.95, Delton Cables -9.2% at Rs 69 and Galaxy Multimedia -9.1% at Rs 34.30.

Mid Caps gainer/losers:
In the midcap space, Hindustan Oil Exploration surged 14%. Sun Pharma Advanced, Shriram Transport, ING Vysya Bank and J&K Bank were up 5-7.5%.

However, REI Six Ten, Indiabulls Real, Anant Raj Industries, Sterling Biotech and IBN18 Broadcast were down 7-13%.

Small Caps gainer/losers
In the smallcap space, DCB, Shriram EPC, Vishal Info, Selan Exploration and VIP Industries went up 7.7-11%.

However, Escorts, Aegis Logistics, Kirloskar Ferro, Eveready Industries and ABG Shipyard were down over 7%.

Bharti Airtel fractionally steady:
Bharti Airtel, which is in exclusive talks with South Africa’s MTN aimed at a merger to create the world’s third-biggest telecoms firm, dropped 0.5 percent to Rs 399.30.

Tata Power in for Capex of $4.9 billion:
Tata Power Co plans to spend 236 billion rupees ($4.9 billion) in capital expenditure over the next three years, Chairman Ratan Tata said on Thursday at the annual shareholders meet. The stock ended lower 2 per cent to Rs 1286.85.

Government to release Rs 2546 crore under TUFS:
The government has released Rs 25.46 billion of subsidies to textile firms to upgrade their technology, the textile minister said on Thursday.
Minister said the fund under the technology upgradation fund scheme would reach beneficiaries in three working days. Maran also said a committee to formulate a national fibre policy has been set up and would submit its recommendations in three months.

Asian Markets:
Asian markets ended mixed. Shanghai Composite fell 2.11% and Straits Times was down 0.2%. However, Hang Seng gained 2% and Nikkei rose 1.3%. Jakarta Composite gained 1.85%. Kospi and Taiwan Weighted gained 0.3% each.

BOE extends bond purchases after recession deepened:
The Bank of England increased its bond purchase program by 50 billion pounds ($84 billion), saying the U.K.’s economic recession is deeper than policy makers expected.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, kept the key interest rate at 0.5 percent and said it will increase its assets purchase program to 175 billion pounds.

European Markets:
European markets were quoting: FTSE 100 was +1.2%. The CAC 40: +0.7% and the DAX was +1%.

Crude:
Oil for August delivery was $71.70 a barrel on the NYME.

Concern:
Today’s fall worry analysts about the sustainability of the bull run in the near future.

The Recession Is Over: Bloomberg U.S. Financial Conditions Index Reaches 21-Month High

(WFMI: 28.33 -0.37 -1.29%) - Whole Foods Market, Inc. - Shares of the natural and organic foods retailer exploded higher by more than 20% to $29.95 after reporting better-than-expected third-quarter profits and raising its full-year earnings forecast. The upward revision for full-year profits to about 80 cents per share from a previous estimate of 65 cents, sent the stock soaring right through the old 52-week high of $25.14, attained on July 30, 2009. Option bulls, hoping for the rally to continue, looked to the August 30 strike price to purchase approximately 1,900 calls for an average premium of 93 cents apiece. Shares of WFMI would need to climb just 3% higher in order for these call-buying investors to break even at a price of $30.93 by expiration. Other investors were seen picking up put options, perhaps in an attempt to lock in gains enjoyed during the rally. The August 29 strike had about 1,100 puts purchased for 95 cents each while the in-the-money August 30 strike had 1,200 puts coveted for 1.40 apiece. Finally, bullish traders with an appetite for call options scooped up 1,400 calls at the September 30 strike for an average premium of 1.67 per contract. Profits will begin to amass by expiration if shares climb at least 6% to $31.67. Implied volatility imploded following earnings, contracting nearly 33% from yesterday's reading to 44% this morning.

(PG: 53.52 -0.39 -0.72%) - The Proctor & Gamble Company - The world's largest household-products maker has experienced a share price decline of 3% to $53.84 today after its fourth-quarter earnings slipped 18%. The Cincinnati, OH-based firm blames shrinking profits for the quarter on declines in consumer spending on higher-priced detergents and skin care products in the current recessionary environment. PG reported that sales fell 11% to $18.7 billion as cash-strapped consumers make the switch to less-expensive generic goods to save money. Looking ahead a few months, it looks as though some option traders are gearing up for a recovery in PG by expiration in October. The sale of approximately 5,000 puts at the October 47.5 strike price for an average premium of 52 cents apiece, and the purchase of some 5,000 calls at the October 60 strike price for 33 cents per contract, suggests optimism. We note that not all of the contracts were spread against one another. However, the pattern for the most part mimics the bullish reversal strategy. Investors who have shed puts to buy calls on PG are perhaps hoping to see the stock recover in the next few months.

(FXI: 42.23 +0.44 +1.05%) - iShares FTSE/Xinhua China 25 Index Fund - The Chinese exchange-traded fund jumped onto our 'most active by options volume' market scanner this morning after one bearish investor was observed binging on put options. Shares of FXI have surrendered approximately 3% to arrive at the current price of $41.39. The September 38 strike price had 28,000 puts purchased for an average premium of 1.21 per contract. Maybe the investor responsible for the transaction holds a long position in the stock, and has gobbled up the protective puts in case shares continue to head south by expiration. Downside protection would kick in given an 11% decline in the stock to the breakeven price of $36.79. Otherwise, the trader is short the stock and has simply engaged in plain-vanilla put buying in an attempt to profit from bearish movement in the price of the underlying shares.

(UNG: 13.99 -0.05 -0.36%) - U.S. Natural Gas Fund - Natural gas prices have been a sad underperformer despite the fervor displayed in other energy markets. Unlike the resurrection for crude oil or heating oil prices so far this year, natural gas has missed out on a price gain. Despite a 2.1% gain to $14.04 today for the fund prices are still pretty close to the $11.91 low achieved three weeks ago. It would appear that one option trader expects this pattern to be maintained and today used the rally in the underlying to trade in more expensive calls for cheaper premium puts. The investor sold around 3,000 October expiration calls at the 15 strike to buy the same amount of puts at the lower 13 strike. Of course the investors could be long the underlying shares in the gas fund and is taking a 10 cent credit to establish protection on the view that the rally doesn't hold.

(DVA: 50.49 -0.72 -1.41%) - DaVita Inc. - The U.S. provider of dialysis services for patients suffering from chronic kidney failure, also known as end stage renal disease (ESRD), reported that profits jumped 11% in the second-quarter on higher treatment volume. The bullish earnings news pushed shares of DVA higher by 1.5% to $51.80 during today's trading session. Option traders looking to lock in gains targeted the August 50 strike price where some 5,100 puts were picked up for 93 cents per contract. Investors holding the put options are now protected in case the stock slips beneath the breakeven point to the downside at $49.07 by expiration this month. We note that the 7,547 option contracts exchanged on DVA today represent 45% of the existing open interest on the stock of 16,759 lots.

Home Affordable Mortgage Program HAMPered…

According to The New York Times, the Home Affordable Mortgage Program (HAMP) is pretty much a failure. HAMP is the Treasury plan to get banks to modify mortgages of people who cannot afford their current mortgages and are in danger of being foreclosed upon.

So far only 15% of those eligible have been offered help and only 9% have actually been helped. The biggest mortgage servicers are some of the banks that were major TARP recipients. At Bank of America (BAC: 17.05 +0.39 +2.34%) only 4% of eligible mortgages have been modified and at Wells Fargo (WFC: 28.46 +0.44 +1.57%) only 6% have been. Citibank (C: 3.7099 +0.1299 +3.63%) and J.P. Morgan (JPM: 41.27 -0.51 -1.22%) have done a somewhat better job at 15% and 20%, respectively.

The apparent reason for the very slow progress is that the program was all carrot and no stick. The program offered banks $1000 for each mortgage they modified, and paid part of the difference between the old and new payments. Congress made sure that there would be no consequences for banks dragging their feet when it killed the proposal to let bankruptcy judges modify mortgages on primary residencies (they already have the ability to do so for the mortgage on the beach house or the ski chalet, but not on houses people actually live in year-round).

Thus if you are falling behind on your mortgage, and find the bank is not very receptive to a modification, you can blame the 13 democratic senators (almost all “Blue Dogs”) who went along with virtually the entire GOP senate delegation in siding with the banks versus the individual homeowner.

Another reason is the change in the mark-to-market rules, which were a result of FASB caving in to congressional pressure. If a bank modifies a mortgage, it will have to reflect this in their financial statements…but they can extend and pretend that a loan is still good if they don’t.

From the borrower’s perspective, the backlog of pending foreclosures is so large that banks have also been very slow to actually take possession. Thus there have been thousands of cases where people simply stop paying and live rent- and mortgage-free for a year or more. That will certainly free up cash for other uses, and is often the most rational course of action for the homeowner, especially if the bank is not interested in modifying the terms of the mortgage. Of course, the homeowner has to live with the uncertainty of not knowing when the sheriff might show up at the door to evict them.

Fair And Fraudulent Mortgage Lending

To think that fraudulent mortgage lending practices will simply go away because regulators want them to would be the height of naivete. In fact, given the challenging economic times, I think one could make a case that fraudulent mortgage practices may actually increase on a relative basis. How so? Desperate people will always do desperate things, including fraudulent and criminal acts.

Where can one go to receive a fair deal in the process of getting mortgage financing? What parts of the mortgage market may represent the next wave of fraud? Which firms may currently be involved in these frauds?

Major “high five” to KD and our friends at 12th Street Capital for providing tremendous perspectives on these topics this morning. KD writes:

From the Fair Mortgage Collaborative website . . .

The Fair Mortgage Collaborative is a nonprofit membership organization whose members are individually and collectively committed to providing low and moderate income and minority homeowners and homebuyers access to mortgages with the consumers’ best interests at its core, at a fair rate of compensation. Our approaches and standards work for all homeowners and homebuyers.

KD’s comment: While I certainly applaud their effort, I would make the friendly suggestion they should be looking at FHA lenders and Reverse Mortgage lenders in particular..for those are the bastions of future (and current) abuses.”

Sense on Cents will also not unilaterally bless this organization, but it may be a decent place to start in hopes of finding fair lending practices. Speaking of which, an organization you may care to avoid is Taylor, Bean, and Whitaker Mortgage as the following story from Bloomberg highlights. Obviously TBW, as with any individual or organization, is entitled to due process but until this case is adjudicated, consumers may fare better going elsewhere. KD highlights the Bloomberg story as follows:

Aug. 4 (Bloomberg) - Taylor, Bean and Whitaker Mortgage Corp., the Florida home lender that offered $300 million to save Colonial BancGroup Inc., was barred from making new loans guaranteed by the Federal Housing Administration.

The FHA, citing concern about possible fraud, plans to sanction two top officials at Ocala-based Taylor Bean for providing “false” information to the agency, according to an FHA statement today.

Agents bearing federal warrants searched Colonial’s Orlando offices yesterday, and the Ocala, Florida Star-Banner reported a similar search at closely held Taylor Bean. The firm ranked 12th among U.S. mortgage originators (KD’s comment: I think they were 3rd in FHA lending behind B of A and Wells) in the first half of this year with $17 billion of loans, according to industry newsletter Inside Mortgage Finance.

Taylor failed to submit a required annual financial report and “misrepresented that there were no unresolved issues with its independent auditor,” the FHA said. The auditor discovered “irregular transactions that raised concerns of fraud,” according to the FHA statement.”

KD’s comment: Here is the official HUD News Release on this topic. It is probably even more painful that TBW will be losing their $25bln FHA servicing portfolio and the word on the street is that it will be moved to Bank of America.

Thank you KD and 12th St. Capital for providing these awesome insights and helping us collectively navigate the economic landscape.

Dollar Closes Weaker In Choppy Trade

Today’s trading in the Forex markets featured choppy, two-sided trading. Early in the New York session the Dollar strengthened as a pair of bearish U.S. economic reports sent the Dollar higher and the stock market lower. Later in the session, the Treasury announced another $75 billion auction. This news triggered a late session sell-off in the Dollar.

Today’s U.S. ISM report fell more than expected indicating that the economy may not be as strong as previously estimated. In addition the ADP employment report showed a loss of 350,000 jobs in July which is an indication that Friday’s Unemployment Report will show a further rise in the jobless rate. Both of these reports contributed to the early strength in the Dollar as traders cashed in their long higher yielding currency positions.

The GBP USD was the strongest currency pair. This market was buoyed by speculation that the Bank of England would most likely announce the end of its asset buyback program. This five month program provided liquidity and economic stimulus when needed, but now that the economy is turning around may not be necessary.

Additional support for the British Pound came from a better than expected industrial production report and the news that home prices had risen. Both of these reports indicate that the U.K. economy may be well on its way to recovery.

The EUR USD also rose late in the session following a weaker trade early. The Euro made a new high for the week, but was unable to attract any fresh buyers. Speculators may be lightening up ahead of the August 6th European Central Bank meeting. Early talk is that the ECB will announce that interest rates will remain the same. The surprise could come in the commentary. Since the Euro Zone economy has shown improvement since the last meeting, many traders expect a hawkish commentary from ECB officials.

The USD CAD confirmed yesterday’s closing price reversal bottom but still managed to close lower for the day. Weak energy and equity markets helped trigger an early session rally, but buying quickly dried up when these markets could not follow-through to the downside. This market may still be in a position to form a short-term bottom. Speculators seem worried that the Bank of Canada is getting concerned about the rapid rise in the Canadian Dollar and its possible negative effect on the Canadian economy.

Trading in higher yielding Forex markets was mixed today. Traders seemed confused as to which side of the market to take as stock and commodity markets had a two-sided trade. Speculators in the AUD USD and NZD USD who were not certain as to whether they should book profits after the rapid rise, put these markets in overbought territory. It seemed at times today that traders were also not sure as to what was driving equity markets off the lows.

Late in the session, the Aussie and Kiwi strengthened after the Treasury announced another auction and the Dollar sold-off, but the inability of the equity markets to close positive weighed more on the AUD USD and NZD USD than the bearish Treasury news.

DISCLAIMER: Forex (off-exchange foreign currency futures and options or FX) trading involves substantial risk of loss and is not suitable for every investor. The value of currencies may fluctuate and investors may lose all or more than their original investments. Risks also include, but are not limited to, the potential for changing political and/or economic conditions that may substantially affect the price and/or liquidity of a currency. The impact of seasonal and geopolitical events is already factored into market prices. Prices in the underlying cash or physical markets do not necessarily move in tandem with futures and options prices. The leveraged nature of FX trading means that any market movement will have an equally proportional effect on your deposited funds and such may work against you as well as for you. In no event should the content of this correspondence be construed as an express or implied promise or guarantee from B.I.G. Forex, LLC and Brewer Investment Group, LLC or its subsidiaries and/or affiliates that you will profit or that losses can or will be limited in any manner whatsoever. Loss-limiting strategies such as stop loss orders may not be effective because market conditions may make it impossible to execute such orders. Likewise, strategies using combinations of positions such as "spread" or "straddle" trades may be just as risky as simple long and short positions. Past results are no indication of future performance. Information contained in this correspondence is intended for informational purposes only and was obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted.

Intel Chart Arc Art Resistance

I’ve been slipping in some of my behind the scenes “Chart Art” posts that have been received well so I thought I would share another simple Arc and Andrews Pitchfork “advanced technique” analysis on Intel (INTC: 18.80 -0.06 -0.32%) which appears to have come into a possible inflection point.  Let’s take a look.

(Click for full-size image)

Without divulging too much of the logic behind this chart, I’ve drawn Fibonacci arcs (standard TradeStation tool which is available on most platforms) off the first swing up off the November lows to the December highs.  I’m using a Fibonacci 2.618 ratio as well as Pi (3.1416) for the arcs (using “pi” is no different than using ‘mystical’ Fibonacci ratios, particularly when dealing with arcs/circles).

I’ve also drawn a standard Andrew’s Pitchfork Tool off the same vector which is drawn to the February lows.

The 3.14 arc worked well in the past (notice how price ‘rode’ this arc through most of 2008 - odds are it should ‘work’ in the future… though there are never guarantees with any method).  Looking back to verify arcs prevents you from drawing random arcs on price charts - the same logic works with advanced Fibonacci grids.

The point of this chart is to show that price rallied up into the 3.14 ratio arc as well as the middle line (50%) of the Andrews Pitchfork tool, and more importantly, a reversal (long upper wick) candle has formed at this confluence level, signaling that it might be an important inflection point to which we should pay attention.

The Andrews Pitchfork took has been confirmed in April and mid-2009 to contain price, which also gives it relative importance (instead of just drawing a random pitchfork).

Main idea - let’s watch to see if the $20.00 high holds as resistance and the downswing that appears to have formed off this level continues - if so, that would be negative for the stock market.

Remember, there’s no magic in the stock market - this is just one of the advanced methods to uncover potentially hidden resistance areas other traders aren’t seeing.

Whole Foods Market Outperforms

Whole Foods Market (WFMI: 28.33 -0.37 -1.29%) recently reported better-than-expected third quarter 2009 results with low single-digit growth in both the top-line and bottom-line. EPS came in at 25 cents, surpassing the Zacks Consensus Estimate of 19 cents, and up 4.2% year over year compared to 24 cents reported in the prior-year quarter, driven by stringent cost-control measures and improved store-level performance.

On account of the better-than-expected results, management raised its full-year earnings outlook. The company now expects fiscal year 2009 EPS in the range of 80 cents to 82 cents, up from 65 cents to 70 cents forecasted earlier. For the fourth quarter 2009, EPS is expected to be in the range of 16 cents to 18 cents.

Whole Foods’ total revenue climbed 2% to $1,878.3 million, after falling 0.5% in the second quarter of 2009, and increasing 0.4% in the first quarter, showing signs of revival with higher sales of organic products. The comparable-store sales dipped but at a slower rate, falling 2.5% in the reported quarter, as it improved sequentially over 4.8% decline in the second quarter of 2009, and a 4% decline in the first quarter. Comparable-store sales in the prior-year quarter increased 2.6%.

Identical-store sales also fell, down 3.8% in the quarter under review compared to 1.9% increase in the prior-year quarter but improved sequentially over 5.8% decline in the second quarter of 2009, and a 4.9% decline in the first quarter.

The uptrend in comparable- and identical-store sales was due to improved transaction counts and basket size.

Comparable-store sales and identical-store sales for the first four weeks of fourth quarter 2009 declined 1.1% and 2.7%, respectively. Based on the trend to date, along with the weak economic environment the company has exercised caution in its outlook. The company expects sales growth of 2.9% for the fourth quarter and 1% for the fiscal year 2009.

However, driving bottom-line growth is the company’s cost reduction initiatives, which boosted EBITDA to $148.2 million, up 21.6%. The company also generated free cash flow of $92.7 million during the reported quarter.

Management raised its fiscal year 2009 adjusted EBITDA guidance to a range of $565 million to $570 million up from $525 million to $545 million earlier expected. For the fourth quarter 2009, adjusted EBITDA is expected in the range of $123 million to $128 million.

Whole Foods Market is engaged in the operation of natural and organic foods supermarkets primarily in the United States, and competes with Kroger Co. (KR: 21.49 -0.02 -0.09%) and Safeway (SWY: 18.69 +0.08 +0.43%).

We have a Neutral rating on Whole Foods Market.

Historical Returns Of The S&P 500

the S&P 500 Index is arguably the most widely-followed U.S. stock market index. The S&P 500 Index is a market cap-weighted index of U.S. equities of 500 large companies. The Standard and Poors 500 index is typically used as a great illustration of how the stock market is performing as a whole since there are a multitude of companies and industries represented.

However, being the history buff that I am, I am always curious how stock market indices have performed in the past. In this article, we will explore the true market returns, along with the market returns when taking divident reinvestment into consideration.

Total Return of the S&P 500 Including Dividends

According to Standard & Poor’s, the dividends were responsible for 44% of the total return over the last 80 years of the S&P 500 index. To make a relatively competent comparison, it is vital that we include this data. It is interesting to graph and average the total return (the increase in stock market value if all dividends were reinvested) instead of just the rise in securities values over time. The following graph shows the total return of the S&P 500 index since 1950:
.

Standard & Poor’s introduced its first stock market index in 1923 and created the S&P 500 Index in 1957. Prior to 1957, Standard & Poor’s utilized a different index, the S&P 90 Index, that tracked performance of large company stocks. Accordingly, market returns for the S&P 500 Index and it predecessor index are available going back to the 1920s.

The Chart Below shows how the S&P 500 Index has performed over the past 35 years. Surprisingly enough, the good years tremendously outweigh the bad ones. This is probably due to the fact that we are so far off of the historical highs currently!

Year over Year Stock Market Returns

CFTC and Commodity ETF Provider Face Off In Washington

Ever since oil prices came withing spitting distance of $150 a barrel, commodity exchange traded funds (ETFs) have been the subject of bogeyman suspicions. Will the CFTC hearings in Washington answer the question once and for all?

ETFs are fairly simple index-tracking investment tools. Their low cost and transparency have made them versatile and popular with all types of investors. Don Dion for TheStreet reports that the unique structure of ETFs has allowed issuers to help investors gain exposure to previously inaccessible parts of the market.

United States Commodity Funds Chief Investment Officer John Hyland spoke in front of the CFTC to defend both United States Natural Gas (UNG: 13.99 -0.05 -0.36%) and United States Oil (USO: 37.9901 -0.2099 -0.55%). Asjylyn Loder and Tina Seeley for Bloomberg report that he said the claims about their funds were “self-serving statistical gibberish.”

Hedge funds and institutions have used leveraged and commodity strategies for a long time. But now these strategies are available to anyone, thanks to the “bona fide hedging exemption,” which allows ETF issuers to buy as many components as they want.

In traditional funds, Dion explains, the creation and redemption goes unnoticed. In commodity funds, those components are futures and swaps. A large amount of buying and selling from a big player could influence prices.

This has led to the potential for an overhaul in the commodities creation system, and the CFTC is toying with the idea of creating limits.

Hyland said that such caps imposed by the government would ultimately lower the liquidity his funds deliver to the futures markets, because the existing funds would need to be broken off into smaller funds.

CFTC Chairman Gary Gensler said that they should “seriously consider” setting limits on positions, and that they should be applied consistently to all markets dealing with physical commodities, writes Moming Zhou for MarketWatch. Only limits on agricultural commodities exist.

Hyland did say in his testimony that while current regulations generally suffice, he noted that limiting speculation by large banks would be a good idea, says Brian Baskin for The Wall Street Journal.

Speculation In The Commodity Markets

The first thought of some regarding the word, speculation in the commodity markets is of total risk or cowboy mentality. More so, the term speculator is looked down upon by the idea of trying to control the crude markets or selling short last year. All of these are inaccurate.

What really is Speculation in the Commodity Markets? If the speculation is done correctly with risk & money management rules then one might say Trend following is a form of speculation. Let’s face it. Everything we do in our lives is speculation due to the uncertainty of everything. Every business venture is uncertain. Buying a piece of real estate is uncertain. Even getting into your car and driving to work is uncertain. The idea of trend following is that one realizes and accepts the uncertainty and manages the risks. Without managing the risks… any speculation or even trend following is a gamble. This is not our goal to gamble but rather to compound money over time.

Some of the premises of a successful trend follower (Speculator) or characteristics of a successful commodity trading advisor are as follows:
1. Confident in the face of uncertainty
2. Self Reliant and does not seek out the advice of others. The successful commodity trading advisor has developed his/her strategy and knows it is all a numbers game and what to expect. Small losses.. Small profits.. Rare large profits…and the commodity trading advisor makes sure he/she does not have large losses.
3. Flexible- The successful commodity trading advisor has no opinion and is flexible to go long or short as price dictates. He/She knows that opinions do not translate into profits. Rather they trend follow and let price dictate which direction to trade if at all.
4. Patience- Trend following CTAs know that draw downs will occur with great regularity and that the durations of some are extensive.
5. Discipline- Trend following commodity trading advisors don’t change their methods or systems in the midst of a draw down. They are always testing ideas and researching to improve however they are disciplined to take every trade their trend following systems gives them. There is not a second thought…should I take this trade or not?

The connotation of a speculator has been slighted. Too many look to blame those that are successful. Fortunes were won by trend followers in the oil markets…and in shorting the stock indices last year (besides so many other markets). The losers were the buy and hold mutual fund owners or those that believed they knew better than the markets themselves. One stand out was T Boone Pickens the oil expert who saw his energy hedge fund implode because he did not follow price. Nothing ever really changes. Fear..Greed..Panic!

This is why trend following a large basket of commodity markets are an essential part of anyone’s portfolio. Human nature never changes!

Intel Fibonacci Confluence

A reader brought to my attention from my last “Chart Art Arc” post on Intel (INTC) that price also reflects a large-scale 50% Fibonacci Retracement.  He’s right, but I also wanted to show a second important Fibonacci Confluence at the $20.00 price level that also adds an interesting twist to the price chart.  Let’s take a look:

(Click for Full-Size Image)

What I’ve done this time is draw two Fibonacci Grids off the $12.05 lows both at the end of 2008 and beginning of 2009 to two separate price highs as shown on the chart - from December 2007 and August 2008.

What we see is a simple (no frills) Fibonacci grid that comes down off of both of these levels.

What is interesting is that two levels intersect at the $20 level - the 50% Fibonacci Retracement from the 2007 highs also corresponds with the 61.8% (shorter-term) Fibonacci grid from the 2008 highs.

Generally - though certainly it is not guaranteed - when we develop long-scale Fibonacci confluences at a certain level off of two separate price highs to a single low, this level provides resistance when challenged as we have done currently.

We’re seeing a downswing that appears to be forming off this level as mentioned in my prior, more esoteric “Arc Post” on Intel.

Let’s see if the $20.00 does indeed hold as expected resistance… or if the bulls just can’t be stopped at all.

Thank you to all readers and commenters on the blog - it’s so helpful to share insights that others might miss (like the Fibonacci grid above - I didn’t think to draw one!).

Consumer Bankruptcies Soar

According to the American Bankruptcy Institute, or ABI consumer bankruptcies soared to their highest level since the bankruptcy laws were changed back in September of 2005. That change made bankruptcy much more painful for the individual debtor, and was responsible for the huge spike in filings shown on the graph below (from http://www.calculatedriskblog.com/).

Note that the third quarter number shown in the graph is estimated at 3x the July filing rate of 126,434. This is probably a conservative estimate. The July rate was 8.7% higher than June, and up 34.3% from a year ago.

Since the start of the year, 802,000 individuals have filed for bankruptcy. The July rate would equate to 885,000 people going bankrupt, so clearly we are still in an uptrend, and historically the number of bankruptcies peaks well after a recession is over.

The report did not specify the causes of the bankruptcies, but clearly the rapidly rising unemployment rate and uninsured medical expenses are likely to be significant factors. The ABI is predicting there will be 1.4 million filings this year.  I suspect it will be higher than that.

One of the major problems in the economy is that the consumer has too much debt. If there is not enough income to service and repay the debt, then debt will come down through bankruptcy. Rising levels of delinquencies on all forms of consumer credit, such as mortgages and credit cards indicate that there will be more filings in the future.  This is not good news for the credit card heavy banks like Capital One (COF: 32.41 +0.96 +3.05%) and American Express (AXP: 31.80 +1.44 +4.74%).

Stock Investing: The Thrill Of A Lifetime?

Anyone looking for thrills these days should forget roller coasters and skydiving. Instead, simply buy a few shares of U.S. stock. The past year has reminded us how truly stomach-churning the financial ride can be. And after a white-knuckled drop in 2008, investors who held on are now enjoying a dizzying ascent. In the past five months alone, the S&P (^GSPC: 998.20 -4.52 -0.45%) has risen by 22 percent and the NASDAQ (^IXIC: 1983.68 -9.37 -0.47%) by 33 percent. Emerging markets are back almost to their pre-recession levels. Even individual American stocks have performed in a stellar manner. Apple (AAPL: 164.97 -0.14 -0.08%), Cisco (CSCO: 21.96 -0.21 -0.95%) and Oracle (ORCL: 21.27 -0.17 -0.79%) have all risen by over 200 percent. Ford (F: 8.35 -0.09 -1.07%), an aging relic once given up for dead, has risen by 268 percent!

But what we have seen is more than just a lesson in physics. Stocks are not going up only because they previously went down. We are witnessing a return of hope. While the change is heartening, it is sadly based on the flimsiest of evidence.

The current rally has been sparked by some modestly good news: the Purchasing Managers’ Index is up, GDP has retracted by only 1 percent, and the fall in home values appears to be leveling off. Taken together, the appearance of these ‘green shoots’ has many, such as Larry Summers and Tim Geithner, convinced that the recession is over.

Somewhat more guarded than his colleagues within the Administration, Fed Chairman Ben Bernanke testified to Congress that he foresaw a “jobless recovery.” One is left to wonder how an economy burdened with double-digit unemployment can recover without new jobs. In recent decades, there have been some jobless recoveries from mild recessions, but they were built upon asset booms. Today, we face a very deep recession. The asset boom has collapsed. A jobless recovery in an economy based on 72 percent consumer spending is an oxymoron.

Unless our economy can go through a needed and painful reorganization, in which the industrial sector is revitalized, recovery from this recession will have to be based upon consumer demand. With unemployment increasing at over 500,000 workers a month, wages dropping, and hours worked declining, it is hard to see consumer demand rising convincingly enough to provide the engine for a rebound.

Meanwhile, U.S. Treasury debt is exploding, the U.S. dollar falling, and unemployment rising. In such circumstances, how can the stock market rise be trusted? What is the reality?

Added to this conundrum, credit remains tight, despite the injection into the banks of vast amounts of Fed funds at zero percent. And, for the first time, banks are being paid interest on the reserves required to be held at the Fed. Paradoxically, this hidden taxpayer boost to banks’ earnings is one of the prime reasons for tight credit. What bank would lend to corporations or individuals, incurring risk, when it can lend to the Fed - at considerable profit - without risk?

With the consumer still in shock and denied credit, why do some indicators appear positive?

The short answer for this is massive deficit and stimulus spending by the federal government. More than $3 trillion alone this year. That’s nearly $10,000 for every citizen of this country. Little wonder that some consumers have ‘handout’ money to spend. And it’s no surprise that after a massive sell-off, certain retailers are refilling their inventories, causing the Purchasing Managers’ Index to rise. Likewise, now the threat of a banking collapse has passed, albeit temporarily, the rate of job cuts can be expected to fall.

Looking ahead, there is a $3.4 trillion commercial mortgage problem due to face the banks in September. This most sobering prospect, combined with the various pressures on consumers, would appear to indicate that the American economy is in the ‘eye’ of an economic hurricane. When jobs fail to materialize and credit remains frozen, look for corporate earnings to remain depressed. This reality can only be ignored for so long.

Any investor in U.S. stocks and bonds should be extremely wary, particularly as autumn may well herald a rise in interest rates and, as a result, another round of collapses. The ride up may have been fun. But remember last year before you dare to hold on for more.

Midday Morning Update: Stocks Retreat On Discouraging Economic Indicators

Markets and exchange traded funds (ETFs) take a dive as investors remain wary on the health of the overall economy, thanks to a gloomy report about private sector jobs.

The Institute for Supply Chain Management reported that business at service companies was weaker than expected in June.  The index fell to 46.4 from 47, marking the tenth straight month of declines.  The disappointing news offset a more upbeat report from the Commerce Department, which said factory orders rose in June for the fourth time in five months. The 0.4% increase came after a 1.1% increase in May. Economists had been expecting a decline of 1%.

Unemployment numbers continued to increase, but at a slower rate as the U.S. private sector shed 371,000 jobs in July.  The number was higher than the 345,000 estimated by analysts, but much lower than the 463,000 drop in June.

In the earnings arena, conglomerate Procter & Gamble (PG: 53.52 -0.39 -0.72%) reported a quarterly decline in profits of 18% and expects more declines around the globe as consumers continue to keep a tight grip on their wallets. Despite revenue declines and a drop in demand, PG beat Wall Street’s expectations.  The news sent the Consumers Staples Select SPDR (XLP: 24.37 -0.06 -0.25%) down nearly 1% in morning trading; PG is 15.6%.

In the automotive industry, the “cash for clunkers” program received a little extra push and extended the program an extra month.

Overall, the Dow Jones Industrial Average was down 0.8%, the S&P 500 gave up 0.8% and the Nasdaq dropped 1.2%.

US Home Construction Moving Forward

The Sacramento Bee article highlights some of the upticks that are occurring in the new home construction market. First, and interesting pickup by Lewis Homes in Reno, NV.

A Lewis venture - Lewis Investment Co. of Nevada - paid $6.6 million for lots that fell into bankruptcy court after the original developer, affiliated with CalPERS, invested more than an estimated $20 million readying them for homes. . . . .CalPERS lost nearly $1 billion on its investment in the partnership, which filed for bankruptcy in June 2008.

This seems to be a case of smart money coming in after thing have blown up and picking up good assets for pennies on the dollar. The 800 lot parcel will take 5 years to build out and sell.

Another interesting quote for a California homebuilder:

Multiple offers have spread now to vacant land for new homes, said Mark Rowson, Northern California president for Agoura-based Warmington Homes. He said, “A year ago nobody was talking. Now, there is movement.

An increase in construction activity will go a long way to stabilizing the employment market. There continue to be more signs that housing, both existing and new construction are starting to recover in California. Historically, builders in California build and average of about 150k new homes per year. This year they are on pace to build about 30,000. There is a lot of room for upside growth. If buyers and homeowners start to believe things are turning positive again, prices will start to increase in spite of the overhang of foreclosure properties.

Wall Street vs Main Street: The Great Divide Widens

1. used car salesmen
2. lawyers
3. bankers/brokers
4. dog catchers
5. burglars
6. politicians

Plenty could argue that dog catchers would command the most respect, with burglars a distant second. How so? At least you know exactly what their intentions are, admirable or not, and manage accordingly.

With all due respect to quality individuals in the other professions, those industries as a whole have always suffered from a very poor public perception.

Moving to the fully serious part of my writing this morning, I would venture to say that the chasm which has always existed between Wall Street and Main Street has never been wider and is widening by the day. How so?

I am being inundated regularly with comments and questions as to whether the market is truly representative of the fundamentals in the underlying economy. Others have asked me how an industry that is supposedly once again making sizable profits can shamelessly impose credit card rates of upwards of 30%!!

It is my sense that the American consumer and investor feels woefully neglected at this point in our country’s history. As such, I have little doubt that many people have exited the markets with the intention of NEVER returning.

I would not pretend that I can appreciate the level of anxiety and disgust of everybody in our country today, but I share your contempt for a crowd both in Washington and on Wall Street that has done little to nothing to protect your interests.

This contempt welled up this morning as I read The Wall Street Journal’s, Geithner Vents at Regulators as Overhaul Stumbles:

Treasury Secretary Timothy Geithner blasted top U.S. financial regulators in an expletive-laced critique last Friday as frustration grows over the Obama administration’s faltering plan to overhaul U.S. financial regulation, according to people familiar with the meeting.

The proposed regulatory revamp is one of President Barack Obama’s top domestic priorities. But since it was unveiled in June, the plan has been criticized by the financial-services industry, as well as by financial regulators wary of encroachment on their turf.

While I could wax poetic on the topic of regulatory reform, I will abbreviate my remarks with a very succinct and direct statement. I strongly believe “THESE PEOPLE DON”T GET IT!”

The fact remains, “Future Financial Regulation: Not a Question of Sufficiency, but of Transparency and Integrity.”

Does the American public understand how thay have been abused by both their political and banking representatives? I strongly believe they are gaining a greater awareness of this phenomena every day.

In coming full circle, my respect rankings from top to bottom would be:

1. dog catcher
2. burglars (at least you know their intentions)
3. used car salesmen
4. lawyers
tie for 6th between politicians and bankers/brokers

How about yoWall Street vs Main Street: The Great Divide Widensu? Please share your thoughts and rankings!!

Tuesday’s Futures Outlook: Stocks Are Due For A Much Deserved Breather

Overnight action indicates a slight reversal in yesterday’s direction. Although it is too early to represent a change in trend to down or even an indication of a serious top, equity, currency, and commodity markets are called lower this morning while Treasuries and the Dollar are expected to open higher.

Profit-taking is the most likely reason for the decline in equity prices overnight. These markets have had a tremendous run since the second week in July and are due for a much deserved breather. Some traders feel that it is time for the S&P 500 to take over the leadership of this tech driven rally. A two to three day break in the trading action may allow this shift to take place.

The September E-mini NASDAQ is the market to watch for clues as to how deep the developing break may cut. The almost 4-week rally in the NASDAQ has taken place with a series of daily higher-highs. One important clue that this market is forming a short-term top will be the taking out of the previous day’s low.

Overnight weakness in the equity markets is leading to the call for a better opening in September Treasury Bonds and Treasury Notes. Last week both of these markets produced closing price reversal bottoms. Although both are highly unlikely to confirm their reversal bottoms with a follow-through rally through last week’s highs unless the stock market drops sharply lower, last week’s action does indicate sustained buying interest.

Less demand for risky assets is leading to a recovery in the U.S. Dollar and September Japanese Yen overnight. Today’s expected weakness will allow the September British Pound, September Euro and September Canadian Dollar an opportunity to cool off after a tremendous run to the upside since last week. With the Bank of England and the European Central Bank meeting on August 6th, do not be surprised if the Pound and Euro revert to a sideways trade until the central bank meeting results are released. Preliminary thoughts are for the BoE to leave rates unchanged and to drop its asset buyback program while the ECB will most likely turn hawkish in its commentary.

The rally in the metals complex is also expected to show signs of cooling before it retools for another rally. December Gold and September Silver are called lower this morning because of the stronger Dollar. September Copper has reached an overbought level and a key retracement zone which should curtail gains and apply downside pressure.

Energy markets are also called lower. Traders are still worried that the current supply and demand scenario cannot support crude oil prices at current levels. Although a weaker Dollar and demand for higher risk assets supported the recent run-up in prices, many traders feel that speculators may have driven this market too far too fast over the short-run.

DISCLAIMER: Futures and options trading involves substantial risk of loss and is not suitable for every investor. The valuation of futures and options may fluctuate, and, as a result, clients may lose more than their original investment. The impact of seasonal and geopolitical events is already factored into market prices. Prices in the underlying cash or physical markets do not necessarily move in tandem with futures and options prices. In no event should the content of this correspondence be construed as an express or implied promise, guarantee or implication by or from Brewer Futures Group, LLC, Brewer Investment Group, LLC, or their subsidiaries and affiliates that you will profit or that losses can or will be limited in any manner whatsoever. Loss-limiting strategies such as stop loss orders may not be effective because market conditions may make it impossible to execute such orders. Likewise, strategies using combinations of options and/or futures positions such as “spread” or “straddle” trades may be just as risky as simple long and short positions. Past results are no indication of future performance. Information provided in this correspondence is intended solely for informational purposes and is obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted.

S&P 500 Economic Sectors Tell Bullish Tale

Many global stock market indices yesterday recorded fresh highs for the year, spurred on by better-than-expected economic and earnings reports, and a fair bit of momentum buying from latecomers to the rally that commenced five months ago. Notably, the ISM Manufacturing Index recorded its seventh straight gain in June. While the reading of 48.9 is still below 50 - indicating ongoing contraction in the manufacturing sector - the data point provided encouragement.

As far as the US markets are concerned, the S&P 500 Index (^GSPC: 1002.66 +0.03 +0.00%) reached the psychological mark of 1,000 for the first time since November and the Nasdaq Composite Index (^IXIC: 2009.94 +1.33 +0.07%) eached the roundophobia 2,000 level not seen since October.

All the economic sectors of the S&P 500 Index posted gains, confirming a pattern of the cyclical sectors like materials, consumer discretionary and industrials outperforming the defensive-oriented sectors such as utilities, health-care and consumer staples. The chart below shows the performance of the sectors since the low of the S&P 500 Index on March 9 and displays the relative pattern one would typically expect during a bullish phase. Although financials outperformed since March, the sector still lags for the year to date (+7.6% versus S&P 500’s +11.0%) as a result of its dismal performance during the first two months of 2009. “If the rally continues, look for the outperformers to continue to do well and the defensive sectors to underperform,” said Bespoke.

 

The Only Way Is Up It Seems For Stocks

The markets summer of love with stocks continued unabated yesterday as the S&P (^GSPC: 1002.66 +0.03 +0.00%) topped 1,000 and the Nasdaq (^IXIC: 2009.94 +1.33 +0.07%) pushed through the 2,000 barrier for the first time since October. Yesterday’s fresh catalyst was Ford’s (F: 8.445 +0.115 +1.38%) bullish sales report (up 2.4% YOY, their 1st monthly rise since Nov 2000) and a better than expected jump in manufacturing ISM (which was no clunker, see below), while renewed gains in commodities and oil (above $71 barrel) cheered producers.

The S&P is now 50% off its March 6th low of the number of the beast 666. The 1,005 level was the previous highs in both October and November and may provide some resistance for any future rallies. Above that there is little or no technical resistance until 1,100. An overshoot seems the more likely scenario now as investors chase the market higher.

Today’s Market Moving Stories

• Japan’s Nikkei share average rose 1.1% to a 10-month high overnight, driven by technology-related stocks. The MSCI index of Asia Pacific stocks outside Japan also climbed 1.1%, with the materials sector outperforming by a wide margin, up 2.9 %. Since March 9, when the global equity market rally began, the index has risen 77%, leading the world. Valuations have been ticking higher, but so far investors have been comfortable paying what they view as a growth premium. On a 12-month forward basis, the Asia Pacific index is trading at around 14.8 times earnings, below the last bull market peak of 16 times.
• No wonder crude prices are up. Reuters reports that China’s main ports received 25% more crude oil in July than a year earlier, signalling that total crude oil imports last month may have risen at the fastest pace in nearly two years to challenge record highs. The ports shipped in 16.27 million tonnes, or 3.83 million barrels per day (bpd), of imported crude oil in July, the Ministry of Transport said. The figure, which may vary from official crude import data due for release next week, does not take into account shipments by pipeline or railway from Russia and central Asian countries. China imported a record 4.02 million bpd of crude oil in March 2008 as it was preparing for the Beijing Olympics. The world’s second-largest oil consumer imported just 3.25 million bpd In July 2008. However in today’s FT we have a warning that the world economy cannot sustain any further rise in the oil price as oil prices rose toward a record high for the year.
• Australia and New Zealand Banking Group has agreed to pay about $550 million to buy some Asian units from British lender Royal Bank of Scotland (whose plans for world domination fell apart with the bridge too far crazy cash takeover of ABN). This follows the pattern of nationalised UK banks having to divest themselves of overseas assets due to government pressure. In other British banking news HSBC, Europe’s biggest bank, is in talks to set up a securities joint venture in China, a senior bank executive said, adding that acquisitions in Asia are currently too expensive and that the bank will focus on organic growth. “We have many networks in Asia so there is no push for us to buy expensive assets in the region,” said Vincent Cheng, HSBC executive director and chairman for Asia-Pacific. Shares of HSBC jumped 6.4% this morning after the bank reported a better-than-expected first-half profit.
• There are a number of key potential market movers for Irish financials this week. The battle for protection of Liam Carroll property empire continues in the Supreme Court today, the British banking results season gets into full swing and tomorrow we get AIB’s results. Results from AIB will be overshadowed by the potential impact of the NAMA roll out, with speculation centring on the level of AIB assets coming under the transfer category and also the “haircut”/discount to be applied. Having previously targeted bad debt levels of €4.3 billion for the full year, the market will be watching the level taken in the H1 period. The ball park figure for assets potentially under NAMA watch will be sought tomorrow but it is unclear if AIB have the information at this stage to give guidance on this figure.
• There are those who point to the current market being 10-15% over valued.
• Clearly sick of using dwarfs, the new Amsterdam craze is to toss Smart cars into the canals.

Data Continues To Point To ‘V’ Shaped Recovery, At Least For Now
Over the past year there has been much discussion about what ’shape’ the eventual economic recovery would take. Analysts and investors have posited a Sesame Street style alphabet soup of “L”, “U”, “W” shaped recoveries (and more besides). Given the troubles in global financial markets few have seen much prospect of a “V” shaped recovery, despite that being the norm.

If the latest round of factory sector indicators across the globe is any guide, the probability of a “V” shaped recovery is going to demand more attention - especially if financial markets continue to repair. So V-shaped for today as a temporary surge in vehicle production (cash for clunkers) is likely to pace a much stronger rebound from recession than was thought likely only a month ago. Of particular note, after a mixed set of regional manufacturing surveys, the US manufacturing ISM - which one ignores at one’s peril - easily beat expectations with a 4.1 point increase to 48.9. And the details were even more positive, suggesting to this writer that it is very likely that the next reading of the index will climb above 50. Importantly, new orders rose 6.1 point to 55.3, the highest level since July 2007. At present this is pointing to about as “V-shaped” a recovery as one could imagine. The production index rose to 57.9, the highest since June 2007. And with one eye on Friday’s non-farm payrolls report we noticed that the employment index rose 4.9 point to 45.6.

Of course, there is little doubt that this recovery has been substantially driven by the massive macroeconomic policy response undertaken by central banks and governments across the globe. And I think it is very likely that the recovery would falter quickly if that stimulus was removed any time soon. Over the coming months markets will need to pay renewed attention to both direct and indirect measures of inflation. Any sign of a rebound in pricing pressures would quickly lead to tighter financial conditions, as markets priced in a higher inflation premium and the likelihood of some monetary policy response. On that score I noted a further 5 point rise in the ISM prices paid index this month. At 55.0, this index has increased by 23 point over the past 3 months, presumably strongly influenced by the rebound in industrial commodity prices. Deflation doesn’t seem particularly likely at this point.

Whatever the medium-term prospects for the global economy, the near-term outlook seems likely to remain favourable for risk assets. Just as I was struck by the synchronicity of the global downturn, I also notice by the synchronicity of the upturn. The UK manufacturing PMI climbed back above 50 in July for the first time in 15 months, with new orders back into the mid 50s, suggesting that stability had returned to the UK factory sector (and casting further doubt on the BoE extending QE when it meets later this week). And Euroland manufacturing PMI is not too far behind (indeed the new orders index rose 5pts this month to fall just short of the crucial 50-mark). With the S&P 500 closing above 1000 overnight for the first time since November, one can imagine that there are plenty of cashed-up money managers being asked some hard questions.

Data Today
The main point of interest in the US today will be the June pending home sales report with markets looking for any signs that recovery was dampened by the rise in mortgage rates that took place from late May. Personal consumption spending for June will also be released.

Investment News Briefs: Nasdaq, S&P 500 Pass Key Milestones, Oil Eclipses $70

Nasdaq, S&P 500 Pass Key Milestones; BofA Settles with Government Over Merrill Bonuses; U.S. PMI Closer to Growth; Treasuries Fall on Manufacturing, Construction Data; Oil Eclipses $70; Google CEO Resigns From Apple Board; HSBC Profit Halved

• The Standard & Poor’s 500 Index (^GSPC: 1002.66 +0.03 +0.00%) broke 1,000 and the Nasdaq Composite Index (^IXIC: 2009.94 +1.33 +0.07%) climbed past 2,000 as stocks were boosted from positive news on U.S. manufacturing and auto sales. The S&P 500 closed at 1,002.63, up 15.15 points or 1.5%, and the Nasdaq saw an increase of 30.11, or 1.5% to close at 2,008.61. While it didn’t hit a key milestone, The Dow Jones Industrial Average also increased, gaining 114.95 points, or 1.3% to close ate 9,287.

• Bank of America Corp. (BAC: 15.64 +0.32 +2.09%) yesterday (Monday) settled charges filed by the Securities and Exchange Commission (SEC) pay a penalty of $33 million. The SEC accused the bank of misleading investors about billions of dollars in bonuses that paid to Merrill Lynch & Co. executives when it was the target of a Bank of America takeover last year. “Companies must give shareholders all material information about corporate transactions they are asked to approve,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Failing to disclose that a struggling company will pay out billions of dollars in performance bonuses obviously violates that duty and warrants the significant financial penalty imposed by today’s settlement.”

• While the U.S. manufacturing sector continues to contract, erosion of the Purchasing Manager’s Index (PMI) slowed in July, as the index registered 48.9, up from 44.8 in June. A reading above 50 represents expansion. “The decline in manufacturing was slower in July when compared to June, as the more leading components of the PMI - the New Orders and Production Indexes - rose significantly above 50%, thus setting an expectation for future growth in the sector,” said Norbert J. Ore, chairman of the Institute for Supply Management. New orders crossed the 50 threshold, up to 55.3, while the production index was up to 57.9.

• U.S. Treasuries fell after positive manufacturing reports and construction spending exceeded forecasts and a rally in stocks lured investors to more risky assets, Bloomberg News reported. The yield on the benchmark 10-year note rose 15 basis points, or 0.15% to 3.63%, according to BGCantor Market Data. The 30-year bond yield rose 10 basis points to 4.40%. “We’re seeing a catatonic economy showing some signs of not falling off further,” John Brynjolfsson, chief investment officer at investment firm Armored Wolf LLC told Bloomberg.

• Light, sweet crude for September delivery rose sharply yesterday (Monday) after further weakening of the dollar and positive manufacturing data. Benchmark crude rose $2.13, or 3%, to $71.58 a barrel on the New York Mercantile Exchange (NYMEX).

• Google Inc. (GOOG: 449.895 -2.315 -0.51%) Chief Executive Officer (CEO) Eric Schmidt has resigned from Apple Inc.’s (AAPL: 164.965 -1.465 -0.88%) board of directors. Schmidt’s role on Apple’s board increasingly came into question as Google’s Android mobile operating system (OS) competed with Apple’s iPhone, as well as the announcement last month of Chrome OS, which will compete with Apple’s Mac OS in the latter part of next year. The decision for the resignation was mutual, according to Apple Chief Executive Officer Steve Jobs.

• HSBC Holdings PLC (HBC: 53.35 -1.15 -2.11%) saw its profit halved by rising bad debts in the United States, Europe and Asia. The lender reported a pretax profit of $5.02 billion for the quarter ended June 30, down from $10.2 billion in the same period last year. Analysts polled by Reuters were expecting a slightly lower profit of $4.9 billion. “It may be that we have passed, or are about to pass, the bottom of the cycle in the financial markets,” Chairman Stephen Green said. “Nontheless, the timing, shape and scale of any recovery in the wider economy remains highly uncertain.“

India Stock Market: Sensex Down 93.25 Points On Tuesday

Sensex (^BSESN: 15830.98 -93.25 -0.59%) fell 93.25 points or 0.6% to 15830.98.
Nifty (^NSEI: 4680.50 -30.90 -0.66%) fell 30.90 points or 1.7% to 4680.50.
Mid Cap index rose 2.4%. Small Cap rose 1.7%.
BSE 500 was up 1.6%. Sensex gainers: 10

Of 13 BSE Sectoral indices, 9 posted losses.
Advancers: 1478, Decliners: 1242, Unchanged: 72
Advance/Decline ratio: 7:6

Sensex Day’s Range: 16002.46 - 15669.13
Nifty Days Range: 4731.45 - 4642.60
52-Week Range: 16002.46 - 7697.39
52 Week High: 16002.46

Sensex gainers included Hindalco +4.3%, HUL +3.5%, Tata Motors +2.3%, Maruti Suzuki +1.3%, ACC +1.3% and Mahindra & Mahindra +1.1%

Sensex losers included Tata Power -4.4%, ONGC -3%, Rel Infra -2.8%, Bharti Airtel -2.6%, Reliance Comm -2.6% and JP Associates -2.3%.

Sectoral gainers were: Consumer Durables +1.4%, Auto +0.5%, FMCG +0.4% and Oil & Gas +0.2%.

Tech index fell 1.4% led by Patni Computer -3.4%, Mphasis -3.3%, Bharti Airtel -2.6%, Reliance Comm -2.6%, Sun TV -2.5% and Wipro -1.8%.

Healthcare index tanked 1.4% supported by Bilcare -7.5%, Biocon -4.5%, Cipla -3.4%, Divis Lab -2.4%, Dun Pharma Advance -1.6% and Ipcl Labs -1.5%.

Power index plunged 1.3% helped by Tata Power -4.4%, Crompton Greaves -2.9%, Reliance Infra -2.8%, Lanco Infratech -2%, Reliance Power -2% and ABB -1.8%.

Realty index tumbled 1.2% aided by Mahindra Life -2.4%, HDIL -2.1%, Ackruti City -2.1%, Indiabulls Realty -2%, DLF -1.8% and Orbit Corp -1.8%

Other sectoral losers were: IT -1.1%, Bankex -0.7%, PSU -0.5%, Metal -0.3% and Capital Goods -0.3%.

Volume Shockers on the BSE:
Satyam Computer 18.38 million shares, Ispat Ind 18.32 mln shares, Suzlon Energy 15.96 mln shares and Unitech 15.68 mln shares

Turnover:
Total traded turnover was at Rs 88,023.89 crore. This included Rs 20,573.2 crore from the NSE cash segment, Rs 60,859.86 crore from the NSE F&O and the balance Rs 6,590.83 crore from the BSE cash segment.

Buzzers:
Basant Agro +20% at Rs 38.10, Saint-Gobain +20% at Rs 24.70, Seax Leather +19.9% at Rs 30.75, Andhra Cements +19.9% at Rs 32.20, CHI Investments +13.9% at Rs 46.75, Wheels India +13.5% at Rs 209 and Datamatics Global +13.5% at Rs 29.80.

Heavy Losers:
Trent (W) -16.4% at Rs 24, Tips Ind -9.8% at Rs 44.90, Gloster Jute -8.9% at Rs 160, Nelcast -8.3% at Rs 50.25, DIC India -8% at Rs 167.10 and Ent Network -7.9% at Rs 179.05.

Bharti Airtel tumbles 2.6 pct:
Top telecoms firm Bharti Airtel fell 2.6 percent to Rs 400.45 on concerns it may have to sweeten its offer for a deal with South Africa’s MTN.

ONGC falls 2 pct:
Oil and Natural Gas Corp slid 2 percent to Rs 1,152.90 as oil edged back from the previous day’s 3 percent gains, with worries about a rise in U.S. crude inventories offsetting optimism from positive U.S. and Chinese manufacturing data.

RBI: will not slow down financial reforms
India will not slow down on financial reforms, but would recalibrate the roadmap for reforms given the backdrop of the global crisis, the Reserve Bank of India Governor Duvvuri Subbarao said on Tuesday.

Asian Markets:
On the global front, Asian markets ended mixed. Straits Times and Kospi fell 1.2-1.4%. However, Shanghai, Nikkei and Kospi were marginally in the green. Jakarta rose 0.9%.

European Markets:
European markets were quoting: FTSE 100 was -0.9%. The CAC 40: -0.9% and the DAX was -0.6%.

Crude:
Oil for August delivery was $70.70 a barrel on the NYME.

Optimism:
The benchmark’s rally over the past three weeks has been driven by strong domestic and global corporate earnings.

Concern:
The rally has boosted gains to more than 96 percent from a 2009 low in March and 65.1 percent this year, stoking concerns about rich valuations.

Focus In Forex Markets May Shift Toward Central Bank Activity

Monday’s better than expected manufacturing reports from China, the Euro Zone, the U.K, and the U.S. seem to indicate that investors have accepted the possibility that the global economy may have righted itself and is now poised to improve even further.

Because of these recent friendlier economic events, Forex traders may begin to focus on central bank activity this month rather than just the economic reports. On Thursday, August 6, the Bank of England and the European Central Bank each meet to discuss their current interest rate policies and to release their outlooks for the recovery.

The market seems to have already accepted the possibility that the Bank of England will announce the end to its asset-buyback program. The European Central Bank is likely to leave interest rates unchanged, but renew its hawkish economy. It seems that almost anytime there is talk of an economic recovery, the ECB reintroduces its stance on the possibility of inflation.

The U.S. Fed meets on August 12th. This will be its first meeting since June and there will be a lot to talk about including the recovery from the recession and possible discussion of an exit strategy. Recently Bernanke said an exit strategy is difficult to time but with new economic information to work with since the last meeting, he may offer more clarity at the next meeting.

Looking at the markets Monday, the GBP USD surged to the upside on a surprise increase in a key manufacturing report. While investor gains have been limited recently because of talk of the U.K.’s huge budget deficit, this currency pair continued to maintain a bullish tone until the buyers finally showed up the past week.

The EUR USD finally crossed its June top after holding in a range for almost two months. Appetite for risk helped encourage traders to buy the Euro to take advantage of the higher yield. Gains may be limited if the ECB comments on the high price of the Euro and its possible negative effects on Euro Zone exports.

The strong surge in energy products and equities helped drive the USD CAD sharply lower. Like the Euro, the Bank of Canada may issue a comment regarding the rapid rise in the Canadian Dollar and its possible negative effect on Canadian exports. The Bank of Canada does not meet this month so any statement from the BoC is likely to carry some weight.

Strong demand for higher yielding assets helped trigger an upside surge in the AUD USD and the NZD USD. Look for the trend to continue as long as there is an appetite for increased risk. Since Australia and New Zealand both rely on exports to drive their economies, watch the exports numbers to see if the high prices are having an adverse effect.

DISCLAIMER: Forex (off-exchange foreign currency futures and options or FX) trading involves substantial risk of loss and is not suitable for every investor. The value of currencies may fluctuate and investors may lose all or more than their original investments. Risks also include, but are not limited to, the potential for changing political and/or economic conditions that may substantially affect the price and/or liquidity of a currency. The impact of seasonal and geopolitical events is already factored into market prices. Prices in the underlying cash or physical markets do not necessarily move in tandem with futures and options prices. The leveraged nature of FX trading means that any market movement will have an equally proportional effect on your deposited funds and such may work against you as well as for you. In no event should the content of this correspondence be construed as an express or implied promise or guarantee from B.I.G. Forex, LLC and Brewer Investment Group, LLC or its subsidiaries and/or affiliates that you will profit or that losses can or will be limited in any manner whatsoever. Loss-limiting strategies such as stop loss orders may not be effective because market conditions may make it impossible to execute such orders. Likewise, strategies using combinations of positions such as "spread" or "straddle" trades may be just as risky as simple long and short positions. Past results are no indication of future performance. Information contained in this correspondence is intended for informational purposes only and was obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted.

With A Small Pullback Behind Us, Precious Metals Are Ready To Shine

In the previous essay I mentioned that a brief consolidation is in the cards and is likely to take place immediately, or after additional few more days of rising gold, silver and PM stock prices, and a small dip in the USD Index. I stated that:

(…) if mining stocks break down from the triangle pattern, the following move should be rather insignificant - I don’t think that it would take the GDX ETF below 37 level.

This week GDX ETF (GDX: 41.3695 +0.5995 +1.47%) (proxy for PM stocks) moved to 37.02 and bounced sharply. The move to the 37 level that materialized on Tuesday and Wednesday was rather rapid and took place on relatively high volume, which means that many investors were shaken off the golden/silver bull. I doubt that these investors were nimble enough to get back in at the exact bottom, and are now wishing they had kept their positions intact. Fortunately, those who follow my analysis, knew about the coming correction ahead of many other market participants, and were prepared for this scenario.

Moving on to this week’s precious metals markets, let’s begin with gold (charts courtesy of stockcharts.com).

Gold

I would like to begin with a yearly chart in order to put things into perspective. The year 2008 saw disastrous nose-dives in many markets as hedge fund managers were forced to liquidate positions to raise cash. Consequently, many markets were hit that normally would have been expected to hold up well, including the gold market generally known as a safe haven during times of economic turbulence. As time passed, however, investors picked up investments with the best fundamental situations and prices resumed their previous trend. This is what happened with gold.

Although the situation for gold and other PM markets is favorable fundamentally and now, also technically, there are voices that doubt the existence of the PM bull market and wait for it to plunge once again. My interpretation of gold charts, the fundamental situation and recent news, tells me that higher prices, not lower, are in store in the coming months.

Silver

Last week I wrote:

During a similar breakout in May, silver has consolidated around the price level corresponding to the previous local top - the $13 - $14 area. The analogical price level today is several cents higher - around $14.

The small consolidation, which I mentioned further in the essay, took place this week, and now, technically speaking, silver is in a much more favorable juncture. The momentum traders have been shaken out of the market by this week’s correction and new buying power emerged. Momentum traders will be back once we move higher, adding more fuel to the rally. On the above chart we see this as a small consolidation. Many indicators react to such a consolidation by going out of the overbought territory, as you can see in the featured Stochastic Indicator.

Please note that when prices rose on a strong volume, a rally followed (marked with blue arrow), but when the same took place on relatively low volume, we have seen lower prices of silver (red arrows). Therefore, high volume during Friday’s upswing suggests that this day has most likely marked a beginning of a new rally.

Precious Metals Stocks

Precious metals stocks have also corrected the full 61.8% Fibonacci retracement level - to $34. Again, this signals that the correction is indeed complete.

Volume has been declining in the mining stocks since the beginning of June, but it is nothing to worry about, taking into account the reverse head-and-shoulders formation that has just emerged in the sector. In this formation, the volume declines as the formation is being shaped, until the price breaks out, at which time we want to see high volume as additional confirmation.

The particularly interesting feature to notice in the head-and-shoulders pattern is that it provides clear guidelines to the minimum range of the move likely to follow a confirmed breakout. The size of the rally should amount at least the “height” of the head. Here, taking the conservative approach towards rounding, it equals $40.5 - $35 = $5.5. After calculating this number we can add it to the neckline level, which is where the breakout would take place. Here it’s about the 41 level, so if we successfully break out of the pattern, the GDX ETF is likely to go to at least $46.5.

One thing that might concern us right now is the general stock market’s overbought condition, which makes a plunge rather likely.

Correlations

Previously, the USD Index has moved in tune with the general stock market and the precious metals market, which resulted in very strong correlation coefficients. This week, however, the situation has changed. During the last two weeks the correlation between the S&P 500 and the gold sector (gold, mining stocks) decreased significantly. The change has been less visible in the case of silver, as the white metal is generally more closely correlated with most stocks.

It’s important to notice that in the case of gold and gold stocks, the correlation turned from positive to negative. In essence, during the past two weeks, gold and PM equities have moved in the opposite direction to the main stock indices. I would not go so far as to say that a bearish situation in the general stock market would be positive for the PM sector in the short term, but the numbers are telling us that a possible downturn in most stocks will not necessarily mean the same for gold. From a purely statistical point of view, the 10-trading-day column is not significant. However, the change here is big enough to soon also make a difference in the 30-trading-day column. We will wait and see.

Summary

This week we have seen precious metals dip sharply, but briefly. Since the precious metals sector has moved higher rather rapidly in the middle of the previous month, such a correction is a healthy development and increases the probability of further gains. The existence of the bull market in gold is confirmed by the appropriate action in volume.

As far as short term is concerned, we have just seen strength in PMs and in corresponding equities along with high volume, which indicates that more gains are likely in the not-too-distant future. Additionally, mining stocks appear to have formed a reverse head-and-shoulders pattern, which also has bullish implications.

 

Are Gold ETFs In A Bear Market?

As equities remain strong and promising signs of an economic recovery begin to appear, investors regain their appetite for risk. That means that gold and its exchange traded funds (ETFs) could have lost some luster.

The outflow of assets from gold ETFs is on pace to be the most since April 2008.  The largest gold ETF, the SPDR Gold Trust (GLD: 94.59 +0.72 +0.77%), up 5.9% year-to-date, has seen its holdings dwindle down 47.68 metric tons from the end of June.  Many experts believe that investors flooded the gold market earlier this year because of macroeconomic concerns. Now many are leaving as things begin to stabilize, states Allen Sykora of The Wall Street Journal.

Although holdings in gold ETFs have started diminishing, it will still remain an option as the global economy starts to recover and inflation remains a question mark.

Another ETF to take a look at for exposure to gold is the iShares COMEX Gold Trust (IAU: 94.64 +0.65 +0.69%), which is up 7.9% year-to-date.

 

Misunderstanding The Fed Balance Sheet - A Costly Mistake

At “A Dash” our principal mission is identifying the real experts on various topics.

There are so many sources of information and analysis.  The business models for financial media depend upon ratings, so popularity rules.  The easiest way to connect with readers or viewers is via the anecdote, the dramatic chart, and analysis that can be explained in “pop economics” terms.

The Fed balance sheet provides a good example.  The bearish element of the punditry has highlighted the dramatic increase in the monetary base and the various Fed programs as a sign of incipient disaster.  At first, many suggested that we were about to have another Great Depression.  Some still maintain this position despite the improving economic indicators.  Arguing in the alternative, these same people argue that we have merely delayed the real consequences.  In particular, we have already sowed the seeds for a new inflationary bubble

We have recommended a more compelling viewpoint.  It is not popularly accepted, partly because it is difficult to understand.  It is not Pop Economics.

Our Take

We highlighted the monetary stimulus in our Summer Quiz.  We followed up with an analysis using a better long-term take on the Fed balance sheet.

Briefly put, the Fed has stepped in to provide lending in markets where the private market has dried up.  This was necessary to limit the impact of the recession.  Fed Chair Bernanke has explained the plan for an exit strategy, to be implemented when normal and sensible lending resumes.

We see this as wise and sensible public policy.  We understand that many disagree, and that is what makes a market.  In particular, we have highlighted the thoughtful and market-oriented analysis of Bob McTeer, former Dallas Fed President and analyst at a free market think tank.  His credentials and expertise are impeccable.  We strongly urge readers to consider his analysis of Fed policy.  Here are some highlights.

McTeer criticizes those who use a compressed time horizon to show the increase in the monetary base.  He thinks this is deceptive, and points out that the analysts have no clear causal reasoning for the prediction of an inflationary explosion.  He is modest in his analysis, accepting that there is room for some inflation protection.

His key point is that the Fed is filling in for a failure of private markets to do normal lending.  This is a process that started with the failure of Lehman and the temporary cessation in commercial paper.  There will be an end and an exit strategy.  He notes that the monetary base expansion occurred eight months ago and has leveled off.  He writes as follows:

Meanwhile, the time to shrink is not close. The velocity of money obviously declined dramatically as money growth accelerated months ago. Under those conditions, rapid money growth is needed to prevent deflation. Anticipating velocity changes may be hard, but seeing them after the fact is rather easy. Just divide GDP (P x Q in the equation of exchange) by M (whichever definition of money you fancy) and you get the income velocity of that measure of money. Having GDP growing slower (negative lately) than M is growing tells you that V is declining.

Put another way: Money doesn’t cause inflation; spending money may cause inflation. Money is not being spent at a sufficient rate lately to cause inflation.

and further..

The decline of nonbank credit leaves a large hole to be filled by bank credit until things return to normal. That’s what Chairman Bernanke is doing as he purchases debt (assets) other than treasury debt-commercial paper, mortgage-backed securities, packaged student loans, auto credit, etc. Focusing on these purchases and not realizing the hole he is trying to fill would lead you to believe, falsely in my opinion, that seeds of future inflation are being sowed.

and finally…

…(T)he inflationary impact of fiscal deficits depend almost entirely on how they are financed, i.e., whether new money is created in the process. Growing deficits without comparable monetary expansion will push interest rates up sufficiently to get the debt purchased. Higher interest rates are likely to crowd out private investment as the government commands more and more of the financial resources. This is not a good outcome, but it’s not inflation.

Conclusion

There is a time and place for various policies.  An ideological perspective that nothing will work is a losing investment strategy, as we have seen in the last several months.  Readers would be well advised to read the entire McTeer analysis.

There is a lot of buzz about what will be the “New Normal.”  We expect this to be a return to sensible lending practices, relying on private markets.  The Fed will withdraw as this takes place.a