Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

NO MORE BEARS! THE BARE FACTS

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so. (Mark Twain)

Lance Roberts recently pondered in Bear-ly” Extant that

The extraordinarily low level of “bearish” outlooks combined with extreme levels of complacency within the financial markets has historically been a “poor cocktail” for future investment success.

The “proof in the pudding” is apparently this Investors Intelligence chart showing the near extinction of the bears:

To support his implicit thesis, Roberts adds this quote from one Pater Tenebrarum:

It is a bad sign for the market when all the bears give up. If no-one is left to be converted, it usually means no-one is left to buy.

Roberts’ chart only goes back to 1995. Had he gone back another four years , he might have noticed the false signals of 1991 and 1992. But no worry, John Hussman made sure you got this other “crucial” info:

Last week, Investors Intelligence reported that the percentage of bearish advisors has dropped to a 27-year low of 13.3%, a level last seen in 1987 a few months prior to the market crash of that year.

Hussman stopped at 1987. Had he gone back another four years, he might have noticed the 1983, the 1984, the 1985 and the 1986 false signals which, for those who sold on the shortage of bears, carried inconvenience of making them miss a doubling in the S&P 500 Index, in spite of the “fact” that no-one was left to be converted.

Not to dismiss the market risk suggested by the current hibernation period, the fact is that the II bear reading, though interesting and highly mediatized, is incomplete and historically not an infallible indicator. It is in fact (somewhat) better to look at the II bull/bear ratio (or bulls minus bears ratio) which I have previously analysed back to 1980:

I have easily identified 11 periods when the “contrary” indicator rose to cross the extreme level (bearish) which were followed by strongly rising markets

For complete disclosure, also called thoroughness, and your own analysis, here’s the chart (courtesy of Ian McAvity) that I used for my analysis, this one going back to 1980:

image

My red arrows identify the extreme positives (bearish) signals while the red circles show the rare negatives (bullish) occurrences. As I observed in my 2010 analysis

Overall, never mind the extreme positives [bearish], they are essentially useless. The extreme negatives (bullish) are few but generally very good although some require patience and staying power.

Ed Yardeni has the up-to-date charts:

image_thumb5

image_thumb7

image_thumb10

I would rather have my ignorance than another man’s knowledge, because I have so much more of it. (Mark Twain).

NEW$ & VIEW$ (12 SEPTEMBER 2014)

Today (post internet outage): Strong retail sales, oil windfall? U.S. housing.
U.S. Retail Sales Rose 0.6% in August

Retail and food sales rose a seasonally adjusted 0.6% from July, the Commerce Department said Friday. Sales in July advanced 0.3% from June, up from an initial estimate that said spending had been unchanged. The revision largely dispelled earlier fears of a summer lull.

Hot smile I was right on that.

Friday’s report showed relatively broad-based gains. Even after excluding sales of cars, sales rose 0.3%. Retailers and restaurants also benefited from declining gas prices. Excluding both autos and gasoline, sales advanced 0.5%.

Total retail sales were up 5% from a year earlier, the largest such gain in more than a year.

The report showed sales grew across a range of retail sectors during the back-to-school season. Sales of building materials rose 1.4%, the largest monthly gain since April, while sales at furnishing and appliance stores rose 0.7%.

Pretty strong report, unsurprising given the strengthening consumer fundamentals. Read on. 

U.S. Import Prices Fall on Cheaper Oil Prices of imported goods fell sharply in August, a sign cheaper oil is helping keep a lid on inflation in the U.S.

Import prices fell 0.9% from July, matching the biggest decline since June 2012, the Labor Department said Friday. The drop fell in line with the forecast of economists surveyed by The Wall Street Journal.

Compared to a year earlier, prices fell 0.4%, ending three months of year-over-year gains.

Excluding petroleum, prices fell 0.1% but were up 0.8% from a year earlier. That marked the largest 12-month advance since the year ended in March 2012.

Oil Glut Ignites Gasoline Price Swoon Gasoline prices have tumbled 19% since June and markets are signaling further relief at the pump for consumers.

(…) The average retail price for a gallon of regular gasoline was $3.42 on Thursday, down 3.8% from the same period in 2013, according to motor club AAA. For this time of year, gasoline prices are at their lowest level in four years. (…)

Oil prices have broken the $100 floor that existed since 2010. Weak Chinese and Euro demand coupled with increased supply (U.S., Lybia) explain the recent slip from $115 to $100. However, the break below $100 is because Saudi Arabia has seemingly decided to preserve market share rather than protect its budgeted price level.

In the U.S., gasoline futures have plunged $0.28 to $2.50 since Labor Day, meaning that retail prices should drop to the $3.20 area over the next six weeks, another 6.4% decline. In all, gasoline prices are $0.35 (-10%) lower than at this time last year. This equates to a $37.5B quarterly saving for consumers, potentially boosting expenditures by 1.2% annualized.image

U.S. HOUSING

New applications for purchase mortgages declined another 2.6% w/w last week and are now down -11.7% Y/Y. That is in spite of mortgage rates being down 53 bps Y/Y. Raymond James notes that

(,,,) credit availability has seen little change since the beginning of the year, creating a meaningful deterrent to a more robust housing recovery. We note, relative to credit standards prior to 2007, mortgage availability is roughly seven times more difficult today according to this index. In a recent Federal Reserve Bank of New York survey, 65.6% of renters in the sample said it would be somewhat or very difficult for them to get a mortgage while only 5.5% thought it would be very easy.

Americans have no problem borrowing for cars and credit card offerings have been rising rapidly lately. Yet, mortgage availability remain significantly constrained. It must be just a matter of time given rising employment and incomes and improving bank balance sheets. Developers must be praying for a change given the rise in their inventory of unsold homes as this BloombergBriefs chart illustrates:

image

CURRENCIES
Dollar’s Rise Starting to Have Far-Reaching Effects After a lengthy period of inaction in currency markets, things have become interesting.
Ready or not – currency volatility is back

(…) But now the fortunes of major economies are diverging and a long-awaited rally in the dollar is shaking the market back to life. Since the start of July, the greenback has gained 5.5 per cent against the euro, as European Central Bank easing finally curbs the strength of the single currency. It has climbed 5 per cent to a six-year high against the yen; and gained 5.5 per cent against sterling as doubts grow over the timing of UK rate rises and the campaign for Scottish independence gains traction.

Just what the world needs now:  a weak yen and a weak euro where growth is too low, and a strong dollar to keep commodities and inflation contained.