David Fuller and Eoin Treacy's Free (Abbreviated) Comment of the Day.
Wednesday 4th January 2012
Malcolm Gladwell Test Has Japan Turning Chinese - This is an interesting column by William Pesek for Bloomberg. Here is the opening:
If you want to silence a room filled with Japanese politicians, suggest they should learn from China (CNGDPYOY).
If Hong Kong could flourish with the light tiller of Britain's benign and laissez faire governance, and if Singapore could prove equally successful under the paternalistic leadership of Lee Kuan Yew (another great leader), then Deng and China had little to fear and everything to gain from capitalism.
What Japan achieved during forty-five years following World War II was remarkable for its economic success, high educational standards, its civility and inclusiveness among Japanese people. Unfortunately, Japan has yet to recover fully from what was arguably one of the biggest bubbles of all time in the late 1980s.
Bubbles come in all different sizes and the damage which they cause is inevitably in proportion. To date, few economists would agree on an ideal template for recovering from the bigger bubbles. The best plan is to curb their expansion before they soar out of control.
The festive season offers an opportunity to do some serious thinking as well as relax. Liz and I had a wonderful vacation at the best resort hotel in Cambodia, La Résidence d'Angkor, where we were delighted and proud to find that the general manager is a fellow South African, Karin van Zyl. I had the time to consume some excellent brain food, such as John Mauldin's book Endgame.
Looking forward, here's how I see the major factors that are likely to influence values this year in the principal asset classes:
My view - Experienced observer Martin Spring provides as good a summary of major markets - stocks, bonds, currencies & commodities - as you are likely to see at this time of year. And he includes some bold forecasts.
The second half of On Target is an informative section on "Investment Traps for Expats to Avoid." Highly recommended.
"But now for the final exam: if you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?
"Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying.
"This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices."
There is one caveat to Mr. Buffett's otherwise excellent analogy. For those investors who are reliant upon a fixed pot of capital - call it permanent capital, if you will - and who have no means of 'topping up' that pot by way of further earnings from employment or income from other sources, then the hamburger metaphor is no longer entirely valid. Savers drawing upon a fixed pool are right to be wary of bear markets if they face the realistic possibility of outliving that capital pool. But for investors with the luxury or flexibility to add to their pool, Buffett's analogy holds.
My comment - Austrian School readers are likely to be interested in Tim Price's comments on economist Richard Koo's two books.
Raw-Materials Rebound Seen as Economy Skirts Slump – This article by Nicholas Larkin and Maria Kolesnikova for Bloomberg may be of interest to subscribers. Here is a section:
“The biggest thing driving commodities is the emerging world,” said James Paulsen, 53, the Minneapolis-based chief investment strategist at Wells Capital Management, which oversees about $330 billion of assets. “The emerging world slowdown bottoms out in the first half of the year and by the second half it's accelerating again. You've also got the U.S. economy not just avoiding recession, but growing again.”
My view – The unweighted Continuous Commodity Index (Old CRB) remains in an 8-month medium-term downtrend. However it is currently rallying to unwind a short-term oversold condition relative to the 200-day MA. A sustained move above 615 will be required to break the progression of lower rally highs and suggest a return to demand dominance beyond the short-term.
Across a number of global indices miners have been among the strongest performers over the last week. BHP Billiton has held a progression of higher reaction lows since October and is now testing the upper side of the six-month range and the 200-day MA. A sustained move above 2100p would indicate a return to medium-term demand dominance. Rio Tinto has a more uniform progression of lower rally highs within its 4-month range. At a minimum it will need to sustain a move above the MA, currently near 3600p to suggest a return to medium-term demand dominance. VALE has been the weakest among the major iron-ore miners. It is also rallying to unwind a short-term oversold condition and will need to sustain a move above $27.50 to break the yearlong progression of lower rally highs.
Elsewhere in the industrial metals mining sector Anglo American has unwound an oversold condition relative to the 200-day MA and is testing the upper side of its four-month range. A sustained move above the psychological 2500p would likely indicate a return to medium-term demand dominance. Xstrata, Glencore International and Kazakhmys are also rallying towards the upper side of their respective four-month ranges and challenging their MAs.
Antofagasta is one of the few large miners to have pushed back above its 200-day MA. It now needs to hold above 1100p to confirm a return to medium-term demand dominance.
Freeport McMoRan was quite overextended when it found support in the region of the 2010 lows from October. It has held a progression of higher reaction lows since and unwound most of the oversold condition relative to the 200-day MA. A sustained move above the trend mean, currently near $43 would break the progression of lower rally highs and suggest a return to medium-term demand dominance. Teck Resources and Southern Copper have a similar pattern.
US Coal miners have in general been among the slowest to recovery from the August sell off and recently retested their respective lows. Peabody Energy is reflective of the sector. The share found support in the region of $30 again last week and appears to be in the process of unwinding its oversold condition relative to the 200-day MA. A sustained move below $30 would be required to question that view. Master Limited Partnership, Alliance Resource Partners is a clear exception. It yields 4.98%, has held above the 200-day M A since late October and a sustained move below $70 would be required to question medium-term scope for additional upside.
There was a great deal of consolidation in the Australian coal sector in 2011 with Coal & Allied, Gloucester Coal and MacArthur Coal all being taken over. New Hope Corp is now the subject of a takeover attempt.
Whitehaven Coal appears to be building support above A$5 but needs to sustain a move above A$6 to indicate a return to medium-term demand dominance. As one of the few Australian coal miners still independent of the world's major miners, I wonder how long it will be before a takeover is attempted.
The NYSE Arca Gold Bugs Index posted a new 12-month low on Friday but rebounded impressively and a sustained move below 480 would now be required to question current scope for an additional test of overhead trading. (Also see Comment of the Day on December 29th). GoldCorp and Barrick Gold have both bounced from the lower side of their respective ranges. Newmont Mining and Randgold Resources both found at least short-term support in the region of their respective 200-day MAs.
In conclusion, the mining sector is enjoying at least a short-term rally. However, despite a small number of outperformers, most shares need to improve on their recent performance and sustain moves above their respective 200-day Mas to indicate returns to medium-term demand dominance.
China will expand 8.5 percent this year, the lowest pace in 11 years, the OECD forecast. Luxury-sales growth will ease in 2012 from a forecast of at least 20 percent in 2011, according to the Royal Bank of Scotland.
On Nov. 29, during its most recent earnings conference call, Tiffany cited “recent weakness” in Europe. Mark Aaron, a Tiffany spokesman, declined to comment for this story.
Sales will be unchanged this year at European stores open at least 12 months, according to Dorothy Lakner, a New York- based analyst with Caris & Co. She forecast a 12 percent sales gain in 2011. Same-store sales probably grew 26 percent last year at Tiffany's Asia-Pacific stores, she said. Lakner is calling for less than half that growth in 2012.
“There has been a reset of expectations,” said Lakner, who recommends buying the shares “given the strength of the brand.”
Weakening sales in Europe prompted Schick to cut his estimate for 2012 per-share profit to $4.01 from $4.10. Oppenheimer & Co.'s Brian Nagel reduced his estimate to $4.25 from $4.35. The average estimate of 22 analysts is $4.19.
Lakner dropped her Tiffany stock target price to $90 from $102 on Nov. 30. On the same day, Goldman Sachs Group Inc.'s Adrianne Shapira trimmed hers to $70 from $72. Tiffany closed on Dec. 30 at $66.26.
“For now, obviously the question is, ‘Does the softness continue?'” Lakner said. “Does it continue for a quarter? For several quarters?”
My view – For the newly wealthy, luxury goods offer the opportunity to display their success. Cars, watches, bags, shoes, jewellery and perfume are often prized as status symbols and coveted by those aspiring to a higher standard of living. However, many of China's newly affluent upper middle class are burdened with overweight positions in property. The government is intent on reducing prices. Most people are not heavily indebted but those who bought in the last couple of years are likely to suffer negative equity. This is not a situation that encourages profligate spending. As long as monetary policy remains skewed towards tightening demand for luxury goods is likely to remain on a slower growth trajectory.
In 2010 there was a high degree of commonality across the luxury goods sector and they exhibited some of the best performing, most consistent trends. However, a large number lost momentum from the middle of 2011 and have spent the last six months ranging.
Tiffany hit a medium-term peak in July and posted its largest reaction since 2008 before finding support near $60 in August. It has ranged in a volatile manner since. The trend has morphed from a consistent advance to a choppy, relatively lengthy range. These are Type-3 top formation characteristics. While prices have held in the region of the MA, the primary consistency characteristics evident since 2009 have been lost. The medium-term uptrend could yet be reasserted but the case remains for the bulls to prove and prices need to hold above the $60 area.
Polo Ralph Lauren remains a relative strength leader. However, it has pulled back to retest the 200-day MA and needs an upward dynamic to suggest demand is returning to dominance. Coach also needs to continue to find support in the region of the MA if the medium-term upside is to continue to be given the benefit of the doubt.
Essilor International rebounded emphatically from the August intraweek low. It rallied back to retest the high over the last three weeks. A sustained move above €59 would reassert the medium-term uptrend.
“May I request you to kindly add WGR.TO (Witterrsrand Gold) to the chart library? Thanks and regards”
I will be in southern California for approximately 10 days before driving up to San Francisco for The Chart Seminar. I will also be in New York for a few days before the New York Seminar. If you are a member of a local MTA chapter in those areas and/or a member of the TSAASF or AAPTA and interested in having me come speak to your association I still have space on my itinerary and would be happy to make time.