Market Rally Review

Markets took off yesterday, climbing gradually all day, and closing near their highs. While Oil, which traded down to 7 month lows below $64, gets the credit, there were several other factors impacting trade. These are:

Hedgie_20060912181222_1
Underperforming Hedge Funds:   Given all the market confusion — interest rates, earnings., geo-political issues and commodity prices, poor bets on emerging markets and housing-related shares — many of the larger hedgies have put in mediocre numbers for the year. With Q4 rapidly approaching, they have a narrow window to generate some alpha. Which leads to:

Sector Rotation Chasing Beta:  Fast money has fled materials and energy, and piled into semiconductors and tech. I am not sure if this is fundamentally warranted, given the decreasing margins in the chip space, and price wars between Intel and AMD, Sandisk and Samsung. DRAM prices continue to plummet. Regardless, once the sector heats up like this, quick gains are possible.

Quadruple Witching Expiry:  With options hedging against long positioned portfolios, there is natural pressure the other way. Expiration will explain some of the activity in stocks with a large open interest.

Key Technical Levels:  The recent September 5th highs have been beaten on most of the indices. Given the improving — but unimpressive — volume, one has to wonder how far this can run.  I would expect a legitimate dash for the May highs as the next target. While the September highs were easily breached, the May highs are much more
secure.

Oil_20060912194017
Recession avoidance odds improve: Given the major factor Oil
has played in recession fears , the drop into the low $60s raises the
odds for a soft landing from a "long shot" to "sleight chance." We are still likely to slow appreciably, but chatter about $100 oil will be stifled. An economic slowing is in the cards; If Oil stays relatively lower (note I
didn’t say cheap) for an extended period of time, expect recession fears to
recede, and consumer sentiment to improve.   

Cash Savings for Gasoline: Given that Mortgage Equity Extraction is trending lower this year — although not nearly as much as you might have expected in Q2 — this creates a potential improved cash postion for lower income shoppers at Walmart and Target.  One might also see some potential improvement of SUV sales at GM and Ford.

Geopolitics is another wild card, as are the US mid-term elections.

I would be remiss if I didn’t point out what the usually chipper Greg Ip noted in this morning’s WSJ:

"The falling price of oil also may be an ominous sign if it reflects decreased global demand, which would indicate decreased economic activity. The International Energy Agency yesterday revised down its forecast for oil demand growth world-wide this year, "largely due to revisions to North American preliminary data, flat consumption in Europe, and continued demand sluggishness in the Pacific."

So before you break out the noise  makers and champagen, understand the context of this price drop. Even the fall in gold implies a whiff of deflation, coming on top of so much Fed induced reflation and inflation.

As to Oil and consumer spending, some of the commentators on this have been wildly inconsistent, and I will have more on their flip flops, sometime later this week . . .

>

Sources:
Hedge Funds Miss Their Target
Some Prominent Names Are Coming Up Short Of Benchmarks
GREGORY ZUCKERMAN
September 13, 2006; Page C1
http://online.wsj.com/article/SB115810665470761357.html

Falling Oil Prices May Spell Relief for Consumers
More Pocket Money Helps Economy Overcome Trouble
On Housing, Inflation Fronts

GREG IP and CHRISTOPHER CONKEY
September 13, 2006
http://online.wsj.com/article/SB115810435050661294.html

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What's been said:

Discussions found on the web:
  1. RS commented on Sep 13

    Hey, Barry, what do you mean exactly by saying “flip flops later this week?

  2. JGarcia commented on Sep 13

    The four year cycle become concensus, and as crowded as buying the “stuff stocks”. I believe the key tell will be the yield curve. The Commercials have made a clear bet on curve steepening (long the 2 yr and short the 10 yr). If they’re right, the “good” groups will lead the market for a new bull run (banks, tech, retail). If it inverts further, we stay muddled, imho.

  3. Cherry commented on Sep 13

    Once again, enough about “Oil”. The drop in demand and prices should be seen as bad, not good. It hasn’t effected the economy much as it has “normalized” over the last 7 years.

    Matter of fact, the way the “Modest” bubble burst, indicates growth has shut down in recent weeks. How stupid we have become. Let “Oil” go, it hasn’t been that big of deal, nor will it be in the future.

  4. Michael C. commented on Sep 13

    Best Buy (BBY) is rallying on hopes of the reinvigorated consumer from lower gas prices?

    That’s just the typical mentality of our non-saver economy I suppose. A little money comes our way, and we immediately think about spending it.

    Personally, I like every other consumer welcome the drop in oil, but I still hate paying >$50 at the pump even if it has come down. And I’m not any more eager to go out and buy an iPod than I was one month ago, two months ago, or three months ago.

  5. Michael C. commented on Sep 13

    As far as oil reflecting decreased global demand, it’s interesting because the action in the transports and the Baltic Sea Index go against that notion.

  6. lurker commented on Sep 13

    Think I read somewhere about large short interest, which if accurate, might also help explain the current rally just a bit. High quality posting here should be praised. There, did it. Thanks Barry for blogging.

  7. Brian commented on Sep 13

    Anybody catch the “Is now the time to buy SUVs?” segment on CNBC?

    Urge to buy XLE . . . rising . . .

  8. DWr commented on Sep 13

    Cherry
    You have been the only person in this world who thinks oil has had ABSOLUTELY NO effect on the economy or markets

    you have been completely off base on this

    what are you smoking ?

  9. Michael C. commented on Sep 13

    First off. Kudos to Barry for continuing to make this a great blog. Even with the start of his other service, you still manage to keep this a meaningful and high quality site. Thanks!

    Now…this rally seems to be in part due to the fact we went a little too much to the downside the last couple weeks. Since the only “real” bad data we had was weak housing and consumer sentiment numbers. That was evident in that the bond market was actually beginning to price in odds of a rate CUT by Jan 2007.

    Now that those fears are alleviated. We rally. But just like things weren’t THAT bad. Things are also not any better. Except oil of course. But then again, at the beginning of the year we were rallying into $70 oil because of the “strong” economy it indicated. Now that oil is coming down people are cheering for the opposite reason, in that it will restrengthen the economy. So which is it?

    So the Dow is breaking 11, 500. Thoughts?

  10. jmf commented on Sep 13

    hello from germany,

    more on hedge-funds

    Goldman hedge fund lost 10% of its value in August:

    Goldman Sachs’10 billion Global Alpha hedge fund lost nearly 10% of its value in August, according to a report in the Wall Street Journal, citing a draft of a letter sent to the fund’s investors. The newspaper said the loss likely had an effect on the investment banks results, in particular at its asset management unit, where third-quarter net revenue dipped 4% from the second quarter to $918 million. The Journal added that the loss occurred across many different trading strategies, including negative bets on 10-year U.S. Treasuries and Japanese government bonds, both of which rallied in August after the Federal Reserve paused its series of interest rate hikes.

    http://www.immobilienblasen.blogspot.com/

  11. Cherry commented on Sep 13

    Sorry DWr, don’t agree and those setiments are not mine along. Overhype is overhype.

  12. tjofpa commented on Sep 13

    Gee, another Triple digit gain for the DJIA on “Wacky Tuesday”. What a surprise.

    9/12/2006 101.25
    8/15/2006 132.39
    7/18/2006 51.87
    6/13/2006 -86.44
    5/16/2006 -8.88
    4/18/2006 194.99
    3/14/2006 75.32
    2/14/2006 136.07
    1/17/2006 -63.55

    Avg Gain = 59.22

  13. lurker commented on Sep 13

    tjofpa—are those all option week Tuesdays??!!! You may be on to something here. I have no clue what, but some wise head posting here might. thanks for counting Tuesdays…

  14. snook commented on Sep 13

    GM/ Ford already pushing SUV’s on TV. let’s see how the pick me up trucks do into year end. Will China settle down to a 15% avg. GDP next year or so? Why is Jack Welch commenting on global slowdown?? Chasing beta….watch out, once they make their buck, they’ll call an option play. Talk about a non-linear market…

  15. BDG123 commented on Sep 13

    Cherry isn’t right in the head. I figured that out in a post of a few months ago where she/he blamed Zionists for world disorder and when I asked she/he to explain the comment, there was no reply. Since I absolutely have zero tolerance for racists, I figure her/ his other posts are similarly worthless with likely rationale of some pea-brain-minded conspiratorial meaning.

    We never get any kind of explanations behind the posts. They are one liners with no supported understanding or detail to sometimes bizarre statements.

    There seems to also be a basic lack of comprehension applied to language, mathematics and grammar. I mean WTF is normalizing oil prices up 700%? Are you shitting me? Is that mumbo jumbo? “modest” commodity bubble posted a few days ago? How about the biggest rise of metals in over 100 years? There’s never any intelligent postings because there isn’t an intelligent life form behind the posts.

    Anyone who states that a 700% increase in oil has had no affect on the global economy, well………..is a f8&%$ng moron.

  16. darkroth commented on Sep 13

    [… “long shot” to “sleight chance.” …] – wondering if the second last word was a typo. If so, it might end up being appropriate (as in “sleight of hand”, as opposed to the expected “slight”). Or did you type in the word you wanted? ;)

  17. Michael C. commented on Sep 13

    This rally seems like a bull trap to me.

    On the other rallies (ie. June), we were very oversold. Not this time.

    Now all we need is just a little more grinding and a lot more cheerleading and then the setup is good for a real nasty and unrecoverable down leg. But, alas, I am dreaming.

  18. Cherry commented on Sep 13

    No, BD, it is YOU who isn’t right in the head, with your intellectualist mumblings.

    Listen bud, Oil prices DEFLATED in the late 90’s and we have been essentially catching up since then. YES, prices in 05/06 have been modestly above the norm, but not to the level that the cry-baby media whines about. Again, cry me a river when we do REALLY get shocky. Cause this ain’t it.

    BD, have you been out and about? The word “Zionism” and world affairs right now are interchangeable. If I hear the word “Zionist Crusade” to classify the Iraq war, I will scream, though it is true.

  19. sd3 commented on Sep 13

    $1 / bbl. of oil = $7B in consumer spending

    what are your thoughts for the last $14/bbl. change Cherry ?

    non-event there also ??

  20. JL commented on Sep 13

    Cherry’s just trying to advertise her website

    her comments are meant to annoy and she does

  21. yertlert commented on Sep 13

    Can’t recall the last time every other headline on my market data provider is an analyst buy recommendation. The vix making new lows and cnbc spewing the virtues of owning us equities.

    Oh yes I can. In the fall of ’00.

  22. Cherry commented on Sep 13

    sd3, your “numbers” are non-events. Try again.

  23. calgarycanada commented on Sep 13

    HELP!
    What is the definition of stagflation.
    Here in Calgary where we grow oil ,we can’t get enough
    labour to dig it up . In Ft. MacMurry where they grow it in sand( really big shovels), I’ve heard that they pay $20./hr to work in the local coffee shop.
    last night I asked my regular bartender /restaurant manager if prices for food ,cooking oil,ect have gone up in the last year. Her answer was yes ,some, but what really hurts are the fuel surcharges that the suppliers are tacking on separately.( I read that this is happening in the U.S. as well)
    I wonder if these surcharges are reflected in the inflation data.
    Real Estate jumped 56% here last year!
    THE PRICE OF OIL WENT DOWN.
    My other half works as a senior systems analyst whos salary rose 3% last year.
    Slowing wage growth + higher cost.
    Is that stagflation?
    or is it just a case of nasty inflation.
    Believe me the wages for oil workers are not falling with the price of oil.
    Is this some kind of separation within 1 economy where some people are stuck in stagflation and others
    are riding the inflation bubble?
    How do you shake that out of an economy?
    Any economists out there?
    Thanks in advance.
    Confused.

  24. Bob A commented on Sep 13

    It’s hard to extrapolate one boom town’s economics to the world in general.

  25. Mark commented on Sep 13

    “B” is back! Man, that was VINTAGE! Where are those damn Tony Montana Trader Award nomination forms? Ah, here they are. [ Works offline. Comes back in.]Okay, just did a bunch of ballot box stuffing to get you ahead of the field on the 2006 count! :)

  26. Mike_in_Fl commented on Sep 13

    yertlert — I’ve been contemplating the similiarities between fall 2000 and fall 2006 myself. Back then, we had the big tech burst in the spring and a rally through early September that got the S&P all the way back to within 20 points of its March high. This was accompanied by lots of “phew, guess the tech bubble will have a soft landing” talk. Then it was “look out below” time.

    This time, the bubble was in housing, the building stocks really started cratering in — you guessed it — the spring. And we’re hearing once again that since the Fed is done and housing will have a soft landing, it’s time to buy.

    Maybe it will all turn out differently. But with the VIX tagging its March low, and only a fraction above its December 2005 low, I think the rally’s days are numbered. The gigantic long position/bullish sentiment in bonds leaves us ripe for a reversal there, too, as far as I’m concerned.

  27. calgarycanada commented on Sep 13

    I’m selling everything and moving to Mexico to wait things out.
    good luck.

  28. Michael C. commented on Sep 13

    Thanks for pointing out that VIX.

    I’d be much more interested in the VIX if it were not for the put/call ratio which hasn’t come down all that much in this latest rally. Seems to indicate a wall of worry more than complacency.

  29. ~ Nona commented on Sep 13

    The idea of the four-year cycle seems to have gotten a little bit of a spanking here a bit ago.

    Actually, I think a better way to think of cycles is as “a reversion to the mean.” Sometimes there’s a longish stretch before the real reversion occurs.

    If so, that may explain what’s happening now. This time ’round we’re having a 55 to 60 month or (heaven forfend!) longer “cycle”. In due time, there will be that downturn.

    Always is.

  30. Bill commented on Sep 13

    Rising wedge in the S&P fueled by soft landing crowd which eventually leads to one big leg down-when? Sometime later this Fall when co’s and analysts take down ’07 estimates. CEO surveys indicate major pessimism for ’07 while the contractionary wave may be longer and nastier than most expect-why? Mayber because most of the demand the past several years was artificial due to mortgage fraud. Did you know that 80% of all mortgage originations were done by unregulated mortage brokers? Evidently, Senate holding hearing this month on the mortgage bubble-cake already baked?

  31. Estragon commented on Sep 13

    I’m not seeing much chatter about upcoming inflation numbers this month. Is this because it doesn’t matter if they’re high because everybody knows they’ll come down later anyway, or because inflation has slipped off the radar completely?

  32. bill the barber commented on Sep 13

    this market is rippin!!!!!!!

    the big 7 know every tom dick and harry is short looking for a collapse and they are putting the pressure on. as soon as they have all covered, that s when the big leg comes, in the meantime, go with the flow

  33. Michael C. commented on Sep 13

    Expiration week is totally jacking that VIX. It is at 11 and falling like a rock.

  34. Michael C. commented on Sep 13

    Slap me silly if there is not profit taking by the end of this session.

  35. tjofpa commented on Sep 13

    How about a 2-day “engineering job” in the Transports.
    Mon’s close thru Wed’s close(Today’s est.)

    9/13/2006 225.84
    8/16/2006 259.06
    7/19/2006 124.26
    6/14/2006 12.16
    5/17/2006 -175.38
    4/19/2006 138.72
    3/15/2006 137.74
    2/15/2006 143.96
    1/18/2006 -17.41

    Avg Gain over 2-day period – 94.33
    That’s over 2 % for those of u scoring at home.
    The last 2 months look almost desperate don’t they?

  36. yertlert commented on Sep 13

    Michael……. not sure if put/call is as reliable given the rise of ETF’s as another place to purchase insurance.

  37. Michael C. commented on Sep 13

    >>>Michael……. not sure if put/call is as reliable given the rise of ETF’s as another place to purchase insurance. <<< Point taken. However, it is still a ratio. While the volume of puts and calls may not be as large as it could be if ETFs weren't around, the ratio as an indicator still has validity is my guess.

  38. Michael C. commented on Sep 13

    Barry said,

    >>>Jim’s Best Buy Bonanza discusses BBY’s quarter as proof of the health of the consumer.

    I beg to differ.

    Every weekend, I get these Best Buy circulars running giant financings every week. Here’s what they look like: Buy any plasma tv more than $999, no interests and no payments for 3 years!.

    Heres’ their disclosure info on the financing — just Prime Rate + 14.4 percentage points!

    If anything, it shows that consumers are not being very frugal or responsible with their spending. This shows exactly why the savings rate has slid to a negative. <<< So, we not only have a record amount of ARMs readjusting in the future. We also have interest-free loans on Plasma TVs readjusting as well. It's great to live in the land of the great savers.

  39. Michael C. commented on Sep 13

    MSNBC has a headline today of the govt cutting back budget on obese programs while obesity in adolescents is at an all time high.

    So, not only are our homes and TVs getting larger. So are our asses. And nobody cares. In fact, the larger the better seems to be the de facto standard.

    Ain’t this country grand?…literally…

  40. joe commented on Sep 13

    the last thing our government should be doing is spending money on anti-obesity programs. that’s paternalism at its worst. if the fatties want to eat, i say pass the salt.

  41. Jdamon commented on Sep 13

    Michael C., your officially slapped :-).

  42. Incognitus commented on Sep 14

    “$1 / bbl. of oil = $7B in consumer spending

    what are your thoughts for the last $14/bbl. change Cherry ?

    That’s misleading. $1 of oil=$7bn in consumer spending is certainly for a whole year. The last $14 you are counting from the top, and it took one month to get here.

  43. Patrick commented on Sep 14

    Barry:

    Are you kidding about DRAM prices plummeting? Both DRAM and Nand flash prices are rocketing up.

    Patrick

  44. Pedro commented on Sep 14

    Barry,
    can I track the performance of your fund(s) on the NET?
    Guys, how can I check the value of hedge funds’ shares on the NET? SEC? where do I go?
    Thank you .
    Best, from chaotic Brazil,
    Pedro.

  45. jkw commented on Sep 14

    Hedge funds aren’t allowed to advertise their performance, so it is often difficult to track their performance. Barry cannot post his performance numbers here (unless I misunderstood what I’ve read about the regulations). There might be some website somewhere that lists performance by fund. There are some indices that track overall hedge fund performance, but I’m not sure how that is useful. In general, it is difficult to find out how well a hedge fund is doing.

    ps – I’ve never tried to track hedge funds, so maybe it is easier than I think. But I have read in many places that hedge funds can’t report their performance to the general public.

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