Measuring Speculation and Pricing Risk

With the end of the quarter, it is helpful to look at where the market has been. This could be helpful next week when the quarter is over and it will be time to analyze the money flows coming into the market with the new quarter. The trend of the Russell 2000 Index can be helpful in measuring the appetite for speculation in the market. The index is made up of smaller companies that often hold the growth stories of tomorrow. This index has struggled while the S&P 500 and the Nasdaq 100 indexes have recovered. Below is a chart of the Russell 2000 and the S&P 500.

Russell 2000 Index


S&P 500 Index


Another chart which points to some signs that the economy and not all the stocks are having a party with the recent interest rate cut is the Dow Jones Transportation Index. This is a good barometer for the expectations of the economy in the future.

Dow Jones Transportation Index


An important ratio to watch is the difference between the Federal Funds Rate and the 3month Libor rate. The Libor rate is the rate that more closely reflects loans between banks. When this rate doesn't drop in step with the Federal Funds Rate, it is a sign that there is still risk aversion and fear is governing business decisions. A Bloomberg page that covers these rates and changes can be accessed HERE. This difference in rates needs to narrow before the market will be out of the woods.

Canadian Dollar


U.S.Dollar / Canadian Dollar

Interest Rates - The U.S. Dollar Index - S&P 500 Thoughts

Recently while going through some older charts from April 1995 it was interesting to note that interest rates on the 10 year Treasury were around 7% and the U.S. Dollar Index was at 80.05. During the time frame from 1988 to 1995 the S&P 500 Index basically doubled in value from 250 range to 600. This all happened when interest rates were range bound between 6 and 9 percent. Below is a chart of comparing the S&P 500 Index with the yield on the 10 year Treasury.

(click charts to enlarge)


One potential difference between now and then is the psychological perception of interest rates. In 1984 interest rates on the 10 year were 14%. It almost seems impossible to think of the crying that would go on by companies today that are so use to low interest rates and cheap money. Great companies were formed under the environment when interest rates were high. Great companies still executed their business plans with great success with rates double what they are today. Great ideas and great companies can flourish under any business environment. It does not take low rates for companies to succeed. If rates are too high to make borrowing fiscally efficient, they will seek capital other means. In a recent interview Alan Greenspan was asked about CEOs of General Motors and Ford requesting and begging for the Federal Reserve to cut rates, he mentioned they should focus on making better products and selling cars. Our economy has become so obsessed with interest rates it is almost insanity. There are times the talking heads on TV can make it sound that if interest rates were 6-8% that the world would come to an end. It might feel like it at first because as a country we are so leveraged and in debt, but the initial pain would eventually fade and life would continue.

Below is a chart that of the U.S. Dollar Index and the S&P 500 on a monthly basis. As the dollar goes lower, will it act as fuel for the market? At what level will it cause foreign investors to think twice about investing in our markets? It is possible to hedge, but there is a cost in doing that. If the decline maintains an orderly sell off, is that enough to keep things from turning awful?



Below is the current chart of the S&P 500 Index with support and target levels. It seems that with all the turmoil the solution is to just close your eyes and buy. It won't last.



Some triangles that showed up on a recent scan. Some of them look a little heavy and a break to the downside could make for some decent moves. The middle pane shows the M1 indicator which is based on pivots and volume.

DNB - Dun & Bradstreet


BAC - Bank of America


BMY - Bristol Myers


The action is still in commodities. Because of the leverage used, the sell offs in this group can be so much more volatile compared to stocks. It feels like things are going to zero, and with leverage of 10 or 20 to one zero comes fast. Look for 15-20% retracements, and then technical set ups should start appearing.

CRB Index


Economics on the Daily Show!

Loonies And The Great White North

While the loonies above are entertaining, they are not the Loonies everyone is talking about. The Loonies making the news is the Canadian Dollar and its exchange rate reaching parity with the U.S.Dollar. The strengthening of the Canadian Loonie has not been an overnight event. Two books sitting here within reach of my computer show how the exchange rate has reversed course. One book published in 2003 has a price tag of $26.95USD with the corresponding price of $41.95Canadian Dollars. Another book published in 2005 has a price of $23.95USD compared to $32.95CAD. The chart Below shows the move over the past few years.

U.S. Dollar vs. Canadian Dollar


For the first time in nearly 31 years, it look less than one Canadian dollar to buy one U.S. dollar. The rise in value of the Canadian dollar is an energy story. With crude oil futures trading at more than $83 U.S., investment capital is pouring north to help extract oil from so-called tar sands, also known as oil sands, in the province of Alberta. The average cost to produce a barrel from tar sands is $40 to $45. Regardless of currency exchange rates, investing in Alberta is a bullish trend, boosting demand for the loonie. With rumors that Saudi Arabia could seek to abandon its U.S. currency peg only making things worse. It seems like a perfect storm for the U.S. Dollar and the Federal Reserve stepped right into it when they cut rates 0.50%.

Below is a chart comparing interest rates of the 5,10,and 30 year interest rates. As can be seen, rates have actually gone up since the Federal Reserve cut the Fed Funds and the Discount Rate. This happens because the rate cut caused weakness in the dollar and causes selling in the longer term treasury bonds. With rates on the 30 year going up, it seems that the rate cut is not going to help the housing market. It is however helping the carry-trade and has money flowing into emerging markets.

Interest Rates vs U.S. Dollar


If this decline in the U.S. Dollar continues, it is going to make it hard for foreign investors to hold U.S. debt and equities. The countries that are doing well have strong exports and strong commodity based economies. Below are a few charts of ETFs and currencies that show some of these countries. Today is option expiration and once out of the way should lead to some interesting moves next week. It won't be boring.

EWA - ishares Australia


Australian Dollar


EWC - ishares Canada


New Zealand Dollar


Following the currency markets overnight can give a clue to what the equity markets might hold for the day. There are many free demo trading forex accounts, but the charts posted here are some of the better ones I have come across. They are available through fx solutions. There is a link to their site just under the Blog Archive to the right of this article. The free demo account is worth doing just for access to charts and the 100 or so indicators they offer.

The Market's Deal With The Devil - Bernanke Sells His Soul

The markets are elated with the 50 basis point rate cut by the Federal Reserve. In as little as a few weeks the stance of the Federal Reserve, targeting inflation, has changed its colors, and now has attempted to put a band-aid on a bullet hole. The change has shown a clear weakness in the Fed and Ben Bernanke. This 50 basis point cut is not going to solve the sub-prime mortgage problems or solve the fear of U.S Banks to lend to the "shadow banking industry", it will take a long time to filter down to the folks who actually need it. The market cried for its latest fix to its low interest rate addiction, and Ben gave in and the party started at 2:15pm yesterday. There will be a price to be paid in the future, and who will actually pay it will be those who can least afford it.

The bet that is now being made is that the Federal Reserve can lower rates and stimulate the economy out of this self inflicted slump before inflation will start to effect consumers in the United States. Inflation is not just a result of the U.S. economy the way it was a decade ago. Inflation is now a global factor, and as much as U.S. consumers have the capacity to leverage up and spend, there are new players in Asia and India that are aiding inflation. The rate cuts are being made with the idea that they will keep the economy in growth mode, but with growth comes inflation. Inflation is a fact of life, it is not the end of the world, but like almost anything in life, when making decisions out of fear there are usually consequences that are not readily viewed in the correct light.

Below is a chart of the U.S.Dollar Index compared to a basket of commodities in the lower pane of the chart. Most commodities are traded in U.S.Dollars, so as the dollar declines in value the price of commodities must rise. As an example, OPEC is reluctant to cut production in order to keep the price of oil high in order to make of for the currency effects of a falling dollar.

Dollar Index vs CRB Index


Some longer term charts of Nickel,Lead, and Copper.

Nickel


Lead


Copper


Below is the chart of the S&P 500 Index with the levels based on the opening range marked with the red dashed lines. 1524.10 is the next target, if the momentum continues there could be an attempt at the 1547.77 level. The first pull back after this initial rally will be very valuable in accessing the quality of this rally. It should be on low volume.

S&P 500 Index


The chart below shows the S&P 500 as above with the indicator that shows the percentage of stocks above their 40day moving averages.



The Nasdaq 100 Index, NDX, broke out of a tight triangle yesterday. Calculating the width of the triangle gives a target of 2057.13. Investing in companies with global exposure is a safe bet with a weakening dollar. Technology fits this idea perfectly.

Nasdaq 100 Index


Following some of the currency charts can give a great clue as to the velocity of the dollar decline. It is also helpful to watch the currencies from countries that have a strong commodity base and vast natural resources. They have strong customers in Asia and India to go along with the traditional buyers.

New Zealand Dollar


Australian Dollar


Pimco article worth reading by Paul McCulley.

S&P 500 Index And Diversified Technological Services

S&P 500 Index With % Stocks Above 40Day Moving Average Divergences (click to enlarge)




This chart shows the triangle-wedge formed in the S&P 500 Index. The battle between the 200 day and 50 Day moving average has finally given way to a move above the 50 day moving average. This would be more significant if were accompanied by greater volume and if the shorter term down-trend line were broken. It seems to be a waiting game until the Federal Reserve tips its hand next week to its intentions with regards to interest rates. This is the topic the market is obsessed with at the current time. It will not make a lot of difference if the Fed takes strong action and cuts rates, other than the comfort of putting a band-aid on the problem and giving the market some of same medicine that caused this situation.

The chart below shows the S&P 500 on a weekly time frame. It shows how significant sell-offs are worth looking into when they are accompanied by divergence in the % of stocks trading above their 40period moving averages. Some of the divergences are marked. These have proved to be profitable times to look for entries in strong stocks.



Below is a chart of the NYSE Composite Index with the advance/decline moving average in the top pane. This indicator is also worth watching to confirm short term bottoms in the market. With the Fed meeting coming up next week, it is a time that could cause more exaggerated moves in the market. It is a time to have a list of stocks that have diverged or performed better than the market in recent weeks, and look for these stocks if we get large sell off in the coming weeks.

NYSE Composite Index(click to enlarge)



One group that showed up on a scan of stocks closing with volume in the upper part of their daily range over the past few weeks, is a group of engineering companies referred to as Diversified Technology Services. These companies deal with sectors from the oil&gas industry, infrastructure, and defense aerospace. Below is a sample of these stocks.





JEC - Jacobs Engineering Group, Inc. provides technical, professional, and construction services to industrial, commercial, and governmental customers worldwide. It offers project services, including engineering, design, and architectural services. The company designs and engineers modern process plants, including projects for clients in the chemicals and polymers, pharmaceuticals and biotechnology, oil and gas, refining, food and consumer products, and basic resources industries; buildings, such as facilities in the health care, education, and criminal justice markets, as well as other buildings for clients in the private sector; infrastructure projects, including highways, roads, bridges, and other transportation systems, as well as wastewater treatment and similar facilities; technology and manufacturing facilities for clients in the aerospace, automotive, defense, semiconductor, and electronics industries; and pulp and paper plants. It also provides traditional field construction services, environmental remedial construction services, and modular construction technology services. In addition, Jacobs Engineering Group offers operations and maintenance services, such as management and support services, including subcontractors and other on-site personnel; and plant maintenance services. Further, it offers consulting services, such as performing pricing studies, market analyses, and financial projections in determining the feasibility of a project; performing gasoline reformulation modeling; analyzing and evaluating layout and mechanical designs; analyzing automation and control systems; analyzing, designing, and executing biocontainment strategies; developing and performing process protocols with respect to Federal Drug Administration-mandated qualification and validation requirements; and performing geological and metallurgical studies. Jacobs Engineering Group was founded in 1947 and is based in Pasadena, California.

JEC


This chart of JEC shows the strong inflows in the M1 indicator, and how this stock has performed exceedingly well in a choppy market.

KBR - KBR, Inc. operates as an engineering, construction, and services company supporting energy, petrochemicals, government services, and civil infrastructure sectors worldwide. It operates in three segments: Energy and Chemicals (E&C), Government and Infrastructure (G&I), and Ventures. The E&C segment engages in the design and construction of energy and petrochemical projects, including onshore and offshore oil and gas production facilities, such as platforms, floating production, and subsea facilities; pipelines; LNG and gas-to-liquids gas monetization facilities; refineries; petrochemical plants; and synthesis gas. This segment provides engineering, procurement, construction, facility commissioning, and start-up services, as well as program and project management, consulting, and technology services. The G&I segment delivers on-demand support services from contingency logistics and field support to operations and maintenance on military bases; and operates in transportation, waste and water treatment, and facilities maintenance sectors. It provides program and project management, contingency logistics, operations and maintenance, construction management, and engineering to military and civilian branches of governments and private customers. This segment also holds ownership interest in Devonport Management Limited, which owns and operates Devonport Royal Dockyard. Its shipyard operations business primarily engages in refueling nuclear submarines and performing maintenance on surface vessels for the U.K. Ministry of Defense, as well as limited commercial projects. The Ventures segment develops, provides assistance in arranging financing for, makes equity and debt investments in, and participates in managing entities owning assets generally from projects in which one of its other business segments has a direct role in the engineering, construction, and/or operations and maintenance. The company was founded in 1901 and is based in Houston, Texas.

The chart below of KBR shows similar strong inflows along with levels derived from the initial opening range. These levels should act as price targets and support levels.

KBR


FRM - Furmanite Corporation, through its subsidiaries, provides technical services in the United States, Europe, and the Asia-Pacific. Its Technical Services segment offers online repairs of leaks in valves, pipes, and other components of piping systems and related equipment used in flow-process industries; and on-site machining, bolting and valve testing, valve repair, product distribution, heat treating, and repair on such systems and equipment. This segment also offers hot tapping, fugitive emissions monitoring, passive fire protection, concrete repair, heat exchanger design, manufacturing, and repair, as well as diagnostic services on valves and motors. It serves petroleum refineries, chemical plants, offshore energy production platforms, steel mills, nuclear power stations, conventional power stations, pulp and paper mills, food and beverage processing plants, and other flow-process facilities. The company's Government and Other Services segment offers information technology and other services to the government contracting industry. It provides services that support research, program and policy analysis, program implementation, and program evaluation in a range of focus areas, including early childhood education and development, and children, youth, and family services. This segment also offers research studies and services, training and technical assistance, conference and event management logistical support services, grant review services and support, and tailored solutions in Web site development and graphic design. In addition, its research services include evaluation, survey development, data collection, primary and secondary data analysis, report preparation, training, and technical assistance. The company was founded in 1952. It was formerly known as Kaneb Services, Inc. and changed its name to Xanser Corporation in 2001. Later, it changed its name to Furmanite Corporation in May 2007. Furmanite Corporation is headquartered in Richardson, Texas.

Below is the chart of FRM, it shows that is stock attracted significant attention back in May when volume and M1 strongly advanced.

FRM


URS - URS Corporation operates as an engineering design services company in the United States and internationally. It provides a range of professional planning and design; systems engineering and technical assistance; program management; construction management; and operations and maintenance services to the U.S. federal, state, and local government agencies, as well as private industry and international clients. The company's planning and design services include master planning; land-use planning; transportation planning; technical and economic feasibility studies; environmental impact assessments; analysis of alternative designs; and the development of conceptual and final design documents for the construction of new transportation projects and for the renovation and expansion of existing transportation infrastructure, as well as for schools, courthouses, hospitals, corporate offices, and retail outlets. It offers systems engineering and technical assistance to various branches of the U.S. military for the design and development of new weapons systems, and the modernization of aging weapons systems. The company also provides construction management services, including cost and schedule management, change management, document control, contract administration, inspection, quality control and quality assurance, and claims and dispute resolution services for transportation, facilities, environmental, and water/wastewater projects. URS Corporation's program management services include logistics planning, acquisition management, risk management of weapons systems, safety management, and subcontractor management services for military programs. In addition, it provides operations and maintenance services in support of military and other non-military installations and operations. The company was founded in 1904. It was formerly known as Broadview Research Corporation and changed its name to URS Corporation in 1974. URS Corporation is headquartered in San Francisco, California.

The URS chart blow also shows significant attention the last few months with money flows and increased volume.

URS


ACM - AECOM Technology Corporation and its subsidiaries provide professional technical and management support services to government and commercial clients worldwide. It operates in two segments, Professional Technical Services and Management Support Services. The Professional Technical Services segment offers consulting, planning, architecture, engineering, construction management, project management, asset management, environmental services, and design-build services. Its services are used in various areas and industries, including transportation infrastructure; research, testing, and defense facilities; water, wastewater, and other environmental programs; land development; security and communication systems; institutional, mining, industrial, and commercial and energy-related facilities. The Management Support Services segment provides infrastructure management and maintenance, training, logistics, consulting, technical assistance, and systems integration services primarily for agencies of the United States government. This segment's clients consist primarily of national governments; state, regional, and local governments; public and private institutions; and corporations. The company, formerly known as Ashland Technology Corporation, was founded in 1980 and is based in Los Angeles, California.

ACM news from September 12th, Bank of America holds a 20.68% stake.

ACM