“The squalls never matter until they hit”

As we await Alan Abelson’s return from Timbuktu, the formidable Randall Forsyth continues to fill in, looking askance at the markets run up in the face of Oil and Interest Rates arisin’.

He can turn a phrase:  "Yet those who have heeded the warning flags have lagged behind those who headed out with sails unfurled."

For those who like your truthiness straight up, here is this week’s Up & Down Wall Street:

"MEANWHILE, THE TRANSITION OVER AT THE FEDERAL Reserve has been so seamless you’d hardly think there’d been a change at the top. At the first Federal Open Market Committee meeting chaired by Ben Bernanke, the panel chose to stick with much of the deathless prose of that Hemingway of the policy directive, Alan Greenspan. The FOMC did elaborate a bit on the outlook (about which Mr. G was uncharacteristically taciturn in the committee’s policy announcements).

While the committee notched the funds target up another quarter, to 4¾%, as everybody expected, it dashed the hopes of those who thought it might be done raising rates, or nearly so. Fed-funds futures are betting a 5% overnight rate is a virtual lock at the May 10 meeting. But the panel also said its decisions will depend on incoming data, so the market has placed a 40% probability on the FOMC going to 5¼% on June 29. A week earlier, however, the odds of a June hike were virtually nil.

What’s somewhat puzzling is the alacrity with which the stock market continues to soldier ahead in the face of rising interest rates. Indeed, for the first quarter, it turned in a performance worthy of an estimable 12 months. That especially was true of small stocks, with the Russell 2000 returning 13.9%, including reinvested dividends, according to Bloomberg’s calculations. Nearly as good was gold, which soared 13% in the quarter, and the Philadelphia Gold and Silver stock index, which was up 10.6%. But gold’s surge wasn’t just a play on the weaker greenback, as the dollar index slipped only 1.6% in the quarter.

Notwithstanding forecasts from the best and brightest, the big names continued to trail the little guys. Both the Dow Jones industrials and the Standard & Poor’s 500 returned a none-too-shabby 4.2% for the quarter, including reinvested dividends, while the Nasdaq composite returned 6.4%. Bonds? The iShares Lehman Aggregate exchange- traded fund (ticker: AGG) lost about 0.77% for the quarter, including income. Yet, despite higher rates, real-estate mutual funds returned a sturdy 13.8% for the quarter, according to preliminary data from Lipper.

What’s striking is that, even as the big, boring stocks that dominate the major indexes lumber on, the speculative small fry continue to race ahead. Not just the real, respectable companies that make up the Russell 2000, but the ones found on the Bulletin Board and the Pink Sheets, where activity is cooking these days. The froth also can be seen in the ongoing rush into foreign mutual funds and the rising volume at online brokers.

Somehow, aggressive trading while interest rates and oil prices are rising seems like a dangerous combination, like heading out for a sail when the white caps are whipping up and the sky is turning dark. Yet those who have heeded the warning flags have lagged behind those who headed out with sails unfurled. The problems have hit in places far removed, from Iceland to the Middle East bourses to New Zealand. The squalls never matter until they hit."  (emphasis added)

Good stuff.


Hey, Snow Problem
Randall W. Forsyth

Barron’s April 3, 2006   

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  1. SINGER commented on Apr 1

    thanks B Real…

    lost my barron’s sub ever since they went pay….

    can’t wait for abelson….

  2. calmo commented on Apr 1

    the deathless prose of that Hemingway of the policy directive, Alan Greenspan.

    This is Hemmingway. It’s short. Blunt even.

    This, on the other hand, at the other extreme, far removed from the business of short and blunt, pontificating like your life depended on nothing else, is not unlike the inestimable Greenspan whose articulation never fails to miss the first scent of an opportunity to provide expansion, contraction , provisos, addendums, and if the case warrants it, and some do, subtendums.

    Greenspan would die in a housefire from the inability to yell “Fire”.

  3. wcw commented on Apr 1

    That Gross piece has a telling sentence: “[s]uccessful money management has always depended on riding the wave of the crowd until it crests and crashes to the ocean floor.” Small-cap and non-US equities were up over 10% on the quarter. Were you taking a big risk being in the market last quarter? Yes. But if you remember the late ’90s the way I do (losing money in puts for month after painful month until the eventual, sweet deluge hit) you’re trying to ride the wave as long as it lasts right now, while preparing for it to crest.

    Getting non-dollar exposure has been good advice for a while, mind you, completely aside from foreign market performance. Cf http://minneapolisfed.org/research/data/us/charts/exc1.cfm

  4. B commented on Apr 1

    Not a worry. All is well on Wall Street. You know, I believe Elliott Wave analysis is the most overused, misused, misunderstood, incorrectly applied, rearview mirror looking piece of technical analysis ever to grace Wall Street. But I’m looking at two charts which have led this market. Transports and Broker/Dealers. Two indices which will surely not lead the next cycle higher. Transports won’t because the commodity boom will likely bust and Broker/Dealers won’t because in this cycle excess corporate cash went to M&A activity in lieu of capital spending. A simple yet logical analysis reveals there was still too much excess capacity from an economic blow off up through 2000. Still seen today in the capacity utilization numbers. A better use of cash was simply to buy other companies while they continued to rationalize their excess capacity and infrastructure including technology.

    Anyone who believes in EW, even just a tad, and I do when it is used properly, should look at the $XBD and $TRANS indices on a weekly chart from the start of this cycle. There is simply the most perfect five wave analysis you could hope for. And the length of each wave falls beautifully into the rules of EW analysis.

    It just so happens that both indices have been bumping up against the entire bull market resistance line over the last month as well. Resistance line goes a little higher over time, the indices follow a little higher over time. But basically topped a month or so ago. There is absolutely zero doubt and I am so, so confident that this is the fifth blow off wave for this cycle. Now, what would really scare me is if the Transports rose through this resistance to rise another ten percent to a resistance line going back to……….1929! Ominous? A correction in the Transports of earthquake magnitude?

    This coupled with the weekly average true range of both copper and oil increasing dramatically over the last six months is signaling a top in imminent in commodities. God knows when but it is a classical pattern repeated throughout history. Be it the 1929 equity crash or the 1974 copper crash.

    I was certain the top was in when Goldman hit a level of buying pressure not seen since September of 2000. That happened in December. Only it did something it has never done before. Reach this level of buying pressure and go even higher to where it sits today.

    The best shorts in the market will likely be the blow off leaders of today if you’ve got the stomach. Exactly, specifically, conclusively when is that day? Uhhhh……

  5. thecynic commented on Apr 1

    i like the way you think (hope that’s not jinx). i’ve been looking for an opportunity to get short transports as i believe when the consumer retrenches and quits buying all that shit that’s imported from asia, the transports (namely trucks) will be one of the main caualties.. for a little preview of what the other side of the advance will look like, check the chart on YRCW (the old YELL). it’s 5th wave hit this time last year and has been on the ABC wave down ever since (not sure what stage). FDX will likely look like YRWC this time next year..
    also note WMT’s SSS data released this morning… dismal. if consumers aren’t shopping at WMT they probably aren’t shopping at all..
    the broker dealers deserve to be shorted but having worked for a few in my younger years i know how good they are about finding new ways to make money.. i would note that many of their blow out earnings this past Q were due to trading revenues and that GS had like double the VAR. this could get very ugly if we see a meaningful correction. imagine if you are capital research looking to unload a big position in XYZ stock and you call up GS to obtain a bid or work the order, the only problem is their prop desk is long/puking the same position. sorry no bid here, you might try bear stearns. oops sorry, same problem.. this is fine when the vix is at 10.50 but if it pops up and liquidity is tight, bids will be scarce. those rosy trading revenues will vanish…

  6. B commented on Apr 1

    Don’t jinx me! The Transports have hit this level of oversold ten prior times since 1986. (All the farther back I cared to check. Takes 5 mins.) All ten times we saw a correction within weeks to a few months. That’s 100% historical accuracy. Will we go 11 for 11? How can you get any better odds than that?

  7. B commented on Apr 1

    Duh! Overbought.

  8. Bastiat commented on Apr 1

    Hi All,

    This is one of my favorite sites. The great group in the comments section is a real bonus.

    RE this article and the Kirk Report:
    What asset classes are undervalued at the moment? Everything seems to be a bit overbought; stocks, commodities, bonds?, foreign indices?
    Are Gov bonds a good play in the face of a cresting stock market?

    Thanks and cheers!

  9. Mark commented on Apr 1


    Like I’ve said before, love your posts. Some very good stuff there. I’m not an Elliott Waver, but there’s a bit of truth in everything. That one smacks me as true (no jinx).


  10. john commented on Apr 2

    The commodity boom is coming to an end? I guess that is possible but let me understand the issue.

    There are these folks who don’t live in the USA who are coming into their own as far as money is concerned. That makes them consumers.

    How many of these folks are there? About 3 billion. That makes them about half of the world’s population. They are going to buy cars. That is going to require a road system that is about 200 times the size of our Interstate. They are going to be building things along those roads. Things like McDonald’s and gas stations and neat stuff to see.

    If we were to go back to say 1947 in this country what do you suppose we would see re commodities? Industries that were played out as a result of the war. If we had the means to track them back then as we do now we would probably say – end of show – they are going down – put a fork in ’em they’re toast. Yet the next 30 years would have brought lie to that prediction.

    I say that the world is now where the US was then. And instead of 30 years it could stretch out 10 times that.

    But I’m just like everyone else – I just guess. And on Monday I guess I’m going to buy more gold.

  11. B commented on Apr 2

    Ok, I’m more interested in the NCAA finals at this point. This is an awesome match up. Since Barry lives near the gambling mecca of the east, can we all send him a big stash and he places bets for us? Winners meet at the Borgata for a weekend of entertainment?

    John, I am assuming that comment was directed at me. :) I am not a swami. Nor is anyone else. I will say that trends never last forever and there is zero historical precedence for your statement and 100% historical precedence for the contrary. The boom always ends. Someone always takes away the punch bowl. “Periods of stability create instability” – Hyman Minsky. How many people do you know who reached the pinnacle of their career, personal life, or whatever only to self destruct? It is a statement of the human condition. Economcs are simply a reflection of human behavior applied to markets. Economics might as well be called capitalistic psychiatry. That is why cycles repeat themselves. Not because of some magical mathematical formula created to measure GDP. But because we, collectively, never change.

    If global growth continued unabated over time since the forming of this nation and modern democracies, we’d have a global GDP magnitudes larger than it is now. I don’t know that I have any insight that many other seasoned people don’t, but if I am confident of one thing. We are in a metals bubble and NO ONE in the mainstream is talking about it. In my estimation, that makes it even more likely to be a reality. Nickel, silver, platinum, copper, aluminum, paladium, GOLD, etc. These scenarios have never ended pleasantly in modern times. That being the last 150 years. The higher they go, the bigger the mess.

    Now, here is what really scares me personally. IF gold does not abate, what message is it sending us? Personally, I think it is telling us that global inflation is likely getting out of hand and ALL central banks need to raise rates at a FASTER pace. Maybe smooth and steady at 25 basis points a pop is not what the markets needed. Too predictable? Too transparent? Too easily understood so that people felt comfortable piling on more and more leverage? Remember, each successive rate increase is taking a much smaller accomodation out of the liquidity pool. ie, Are we in a possible global inflationary melt up caused by global synchronized growth? Who knows. 1/4 point at 1% was a much bigger swipe than 1/4 point at 5%. So, there is always the possibility that we might actually get one of these super spikes Goldman pointed to. But, it would likely not just be oil but actually all metals as well.

    That scenario would really cause me to lose alot of sleep and kick myself repeatedly for not selling my house a year ago. At that point, I might actually start to believe the Ted Kaczynski types.

    Just the opinion of someone who leads a boring life with nothing better to do.

  12. Mark commented on Apr 2


    I agree that the commodities bull has been let out of the pen. I don’t know that that qualifies it as a “bubble” though. Certainly the non-correlated asset classes each have their day in the sun. For commodities, this run of the last few years seems to me just the beginning of a normal cycle that marks the termination of an equities bull. Has some of the action been overblown? Yes, it looks so to me. Seems that the speculators have gotten ahold of a few of the metals and driven them up. Why? There ‘s little return in the “normal” equities so this is the logical playground.

    I don’t think gold abates here. Takes a step back, yes, but moves forward. Action in this market is as good a signal as any that something is not right, even discounting its action for the speculative premium I mentioned. The twin culprits are uncertainty (fear) and inflation. Too much global strife; too much liquidity sloshing around. So the hard assets are having their day and then some.

    Now, do they all settle back a little should the equity markets take a dive here? Sure they do. But then I think they reassert themselves as the marginal demand from the emerging economies is seen not disappearing when the Great American Consumer can no longer support this Monster we’ve created. Anyway, that’s my thesis and that’s how I’ll be trading it.

  13. B commented on Apr 2

    No charts in front of me so going from memory.

    NDX blow off run into 2000 350%
    Copper rise this cycle 400%
    Paladium rise this cycle 1000%
    Platinum rise this cycle 400%

    Biggest metals blow off in over 100 years. They never recovered in past cycles. Look at what happened to copper after every single meteoric rise. The crushing corrections were fast and hard. Not decades. Months to a year. Just like equity bubbles. Has nothing to do with supply and demand for the product.

    Btw, if America slows down, who’s going to buy the world’s products? Export driven economies in China and India and Japan. Consumption in those countries without export demand from America would lead to a massive global slowdown. IF that happens.

    Bubbles are not driven by consumption dynamics. The central banks are taking away the punch bowl. Different this time? We’ll see.

  14. Mark commented on Apr 2


    I see that you are pushing back this top by a few months. What is Paul Desmond saying, if you are aware?

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