by Kevin Klombies, Senior Analyst TraderPlanet.com
Thursday, March 6, 2008
Chart Presentation: Manic Optimism
Aside from the fact that crude oil prices gained roughly 5% yesterday it wasn’t really such a bad day. Not, perhaps, a great day but better than we might have expected given the rise in energy prices.
At various points in the day as we develop chart-based arguments we move through emotional swings ranging from outright gloom to almost manic optimism. Keeping in mind that there is no such thing as a good or a bad day in the markets- only days when your thesis or positions are correct or otherwise- we definite manic optimism in terms of a recovering equity market coupled with a better dollar and at least a respite from the rampaging commodities trend.
At top right we show the Hang Seng Index from 1996 into 2000 along with 5-year U.S. Treasury yields. At bottom right we have included a comparison between Merrill Lynch (MER) and 5-year Treasury yields starting in 2006.
In terms of a starting point we have lined up the 1997 Hang Seng Index peak with the top for MER in January of 2007. The basic argument would be that the length of time involved in the correction of the U.S. financials is now similar to that of the Asian equity ‘bear’ that culminated in the 1998 Asian/Russian/LTCM crisis.
We have added 5-year Treasury yields to the mix to show that the lows for the Hang Seng coincided with a turning point of sorts in the bond market. While the ‘print’ lows for the Hang Seng were actually made a few months ahead of the bottom for Treasury yields the recovery rally that swung the Hang Seng Index all the way back to the 1997 highs by the end of 1999 began in earnest- almost to the day- once Treasury yields began to rise.
The argument goes something like this. By 1997 money was moving away from Asia as it did so it began to ‘crack’ various markets. The Hang Seng Index crashed in 1997 which, in turn, led to an acceleration of money away from Asia until the currencies and equity markets were in a state of crisis. Concurrent with this we see the slowing of cyclical growth pulling Treasury yields to the down side. At the end of the crisis yields turned higher once again and the Hang Seng Index recovered sharply. In the present situation the dollar is the weak currency and the financials represented the ‘weak link’ sector. A literal interpretation of the charts suggests that the projected pivot for yields and equities would begin right around the March 18th Fed meeting. Manic optimism indeed.
At top right we show a chart of Birch Mountain Resources (BMD). We actually have little to write about BMD per se but instead are going to use it as an example to hopefully make a much broader point.
In essence BMD supplies gravel and aggregate which is used to build and repair the roads in and around Fort McMurray in northern Alberta. For some time it was what we might call a ‘tout’ stock as various analysts recommended it as a play on the development of Canada’s oil sands. The stock rose from around 50 cents in 2004 to roughly 9 in 2006 and has recently returned to its original starting point. To the best of our knowledge Fort McMurray continues to expand, trucks still chew up the roads, and as of yesterday crude oil prices were remained strong.
In our darker moments BMD represents almost all that is wrong with the markets. In calendar year ending Dec. 31, 2006 the company (we believe) had revenue of about $1.3 million even as the market cap at one stage pushed above $700 million. This is basically what one would call a ‘bubble’.
We define a ‘bubble’, by the way, as any market where you start to hear or read about comparisons that make no sense. When an upstart internet company’s market cap exceeds that of many of the S&P 500 Index components, for example, or when the real estate value of Japan’s Imperial Gardens exceeds that of the states of California or Florida you can safely assume that one or markets are in the late stages of a bubble.
Interestingly enough we don’t recall reading or hearing such things about the U.S. housing market. We know that when ever people start lining up to buy and then flip unbuilt condos that the real estate cycle is close to ending and we are dead sure that the plethora of home reno and flip-this-house television shows indicated a bad ending to come but… aside from that we never really thought that U.S. home prices had reached bubble-like levels. Speculative certainly but not anything close to the internet in 2000, Japan in 1990, or even BMD into 2006.
In any event when a market makes a speculative or ‘bubble’ peak it takes a couple of years before prices finally clear. The larger the bubble, of course, the longer the correction but in general two years is about how long it takes for price to reach some form of bottom.
At right we show Beazer Homes (BZR) starting in 2004 and Cisco (CSCO) beginning back in early 1998.
We have lined up CSCO’s top in March of 2000 with the end of 2005 peak for BZR to make our point. Aside from the rather obvious fact that between 5 and 10 the stock price of BZR has substantially completed a price correction that began around 80 two years ago the charts argue that it is about time for the home builders to start to do somewhat better. The Cisco comparison suggests that ‘somewhat better’ may simply be a series of rather wild rallies and corrections that result in a flat stock price for a few years but that would be a marked improvement over the ‘death dive’ decline for this stock’s price. More than that, however, it also makes the point that if the home builders are leading the housing market and the home builders are starting to look somewhat better then in due course we should see a recovery in housing prices which would, in turn, do wonders for those companies who ultimately end up holding written off real estate-backed and levered paper. Who knows, perhaps later this year even BMD will start to look a bit better as well.