ECRI Calls for Revival of US Economic Growth

The Economic Cycle Research Institute, ECRI - a New York-based independent forecasting group, upgraded their projection for future economic growth. (More about ECRI)  ECRI's managing director and cofounder, Lakshman Achuthan, was on CNBC yesterday to discuss their upgrade of their Oct 28, 2010 prediction "The much-feared double-dip recession is not going to happen"  to "There will be a revival of US Economic growth in the near future."   

In this interview, Achuthan says the the recovery is persistent. If you have read their book, Beating the Business Cycle, you know the WLI indicators must be persistent, pronounced and pervasive before ECRI will call for a turn in the US economy.  The best news is once they declare an upturn, it means there is some margin for economic shocks.  The US economic recovery is not as "fragile" now as it was a few months ago when the WLI was flat.

Some key paraphrased points from the interview:

• "We are able to say with a lot of conviction, that there is a revival in growth right ahead of us."
• Our economic longest leading indicators are "locked on" a "soft landing track."
  
• "When you are at this stage of the cycle, a shock won't derail us and put us into a new recession."

Click to see full size Image

• "When you are at this stage of the cycle, a shock won't derail us and put us into a new recession."
• Almost impossible to jump to a recession track.
• This is telling us we will see a revival in US economic growth despite numerous headwinds including the current trouble in Europe.
• In October they said "no second recession."  Now they are saying economic growth COULD grow to 3 or 4% rather than drop to 1 to 2% from the current 2.5% GDP Growth rate.
• Unemployment: We lost 8.5 million jobs and have made back one million so we're about 7.5 million in the hole.  Even if things go great and we gain another million jobs we'd still be down 6.5 million so we "won't feel great."

Video: Positive news for investors, with Lakshman Acuthan, Economic Cycle Research Institute.

Airtime: Tues. Nov. 30 2010 | 3:16 AM ET

KEY ECRI Articles:

• Oct 28, 2010 "The much-feared double-dip recession is not going to happen"
• Oct. 28, 2010 ECRI Warns of High Inflation Nightmare From QE2
• Sept. 24, 2010 ECRI - Premature to Predict New Recession
• July 01, 2010 ECRI Weekly Leading Indicators Widely Misunderstood
• Dec. 04, 2009: ECRI Warns of Lasting High Unemployment Despite Economic Recovery
• July 31, 2009: ECRI Predicts End of Home Price Downturn
• July 21, 2009:  ECRI Predicts The End of the Recession is Imminent
• April 3, 2009: ECRI Says US Business Cycle Recovery Ahead
• March 28, 2008: ECRI Calls it "A Recession of Choice"

My 13 Favorite Investment Books - Holiday Gift Ideas

I first published my list of favorite investment books in the mid 1990 shortly after I built my first personal web site on the free pages that came with my "netcom" account.   I started with "Kirk's Investment Links" which listed my favorite investment sites.  Shortly after I built "Kirk's Reading List."   Over time, Netcom became Mindspring which became Earthlink but my web pages are still there at the original netcom.com URLs. Over time I added some books on my list but most of the classics remain.

Note:  I get a commission from Amazon.com if you buy these books using my links on the day you click the links.  Please use my links to support this blog.  Thanks.

Below is a photo and list of the 11 books I have on an improvised bookshelf for quick access  from my desk:

#1Technical Analysis of Stock Trends
By Robert D. Edwards,  John Magee and W. H. C. Bassetti

I keep "Edwards and Magee" on the top of my books because it is the one I use regularly. It is my Technical Analysis Bible. Originally written in the 1940s this 9th edition is updated and revised by Bassetti for today's markets. I have the expanded and revised glossary bookmarked to "Head and Shoulders" which I used to help me write the Head & Shoulders Bottom page for ForBestAdvice.com.

Chapter 3 "Dow Theory" is a must read for anyone wishing to understand technical analysis and its history. Chapters 29 and 30, "Trendlines in Action" and "Use of Support and Resistance," will help you understand how I trade around long positions in my "explore portfolio" to lower my cost basis and eventually get on "house money" for my positions.

#2 Beating the Business Cycle

By Lakshman Achuthan and Anirvan Banerji

I consider this a "must easy read" for anyone considering adding the "explore" component to their "core and explore" strategy.

“Would it help you decide when to leave a job, buy a house or step up your investing, if you had a good feel for when business was about to turn up (or down)? It sure will help me. This easy-to-read book tells you how the respected ECRI calls turning points, and how you can, too.”

—Jane Bryant Quinn, Newsweek columnist

#3 Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns (Little Books. Big Profits)

By John Bogle

This short, little book is a MUST READ book that explains why I used Index funds from Vanguard for the "core portfolios" I recommend for 80 to 95% of your assets with my "core and explore" approach to investing.

"It's an easy read that will, I suspect, quickly join Burton Malkiel's A Random Walk Down Wall Street and Charles Ellis's Winning the Loser's Game as one of the indexing crowd's favorite books."—Jonathan Clements (Wall Street Journal)

#4 Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor

by John C. Bogle, Founder of Vanguard Low Cost Mutual Fund Family

A terrific book that makes its points over and over. Low cost funds, passive investment strategies, etc. His statistics, and we know they can always lie, are irrefutable that high cost, front-end load funds can never, as a group, match funds that use his proven strategies. There are always exceptions, but you think you are smart enough to pick those funds in advance?? Index funds give you a shot of at least matching the market, which as they say, ain't bad over time.  Add in my use or rebalancing to take profits in the winners and buy what lags and you get reduced volatility and usually even better returns as my own "core and explore" results show.

#5 Contrarian Investment Strategies: The Next Generation: Beat the Market by Going Against the Crowd
by David N. Dreman

This is one of my favorite investment books!  It helped me articulate my strategy of buying what is out of favor for my history of index crushing returns for over 30 years of success.

All stock-market investors embrace the motto "Buy low, sell high." Few act accordingly. This book teaches you how. Your job is to execute!  Some great historical charts of returns inside.

#6 Extraordinary Popular Delusions & the Madness of Crowds
By Charles Mackay and Andrew Tobias (Foreword)

This book helped me gain confidence in my contrarian strategy of going against the crowds.    Amazon.com's review says it well: "We may think that the Great Crash of 1929, junk bonds of the '80s, and over-valued high-tech stocks of the '90s are peculiarly 20th century aberrations, but Mackay's classic--first published in 1841--shows that the madness and confusion of crowds knows no limits, and has no temporal bounds. These are extraordinarily illuminating,and, unfortunately, entertaining tales of chicanery, greed and naivete. Essential reading for any student of human nature or the transmission of ideas.  

"This is the most important book ever written about crowd psychology and, by extension, about financial markets..." -- Ron Insana, CNBC


#7 The Intelligent Investor
by Benjamin Graham;
Forward by John C. Bogle, Founder of The Vanguard Group

Graham's Intelligent Investor sets about educating the average person as to what makes an investment, what makes a speculation and how this knowledge can be applied to build wealth in the most risk-averse way possible.  A VALUE Investor's MUST HAVE book!

#8 Investors and Markets
By William F Sharpe, 1990 Nobel Prize in economics recipient for "Capital Asset Pricing Model" along with Markowitz and Miller.

This is a personally autographed book with a personal note sent to my by Professor Sharpe.  This is the most advanced book on my list.

"In this book, Sharpe changes that by setting out his state-of-the-art approach to asset pricing in a nonmathematical form that will be comprehensible to a broad range of investment professionals, including investment advisors, money managers, and financial analysts. Bridging the gap between the best financial theory and investment practice, Investors and Markets will help investment professionals make better portfolio choices by being smarter about asset prices."

#9 The Lazy Person's Guide to Investing 

by Paul Farrell.

Paul offers many great core portfolios that all should consider before they consider anyone’s newsletter.

In Ch 25 Paul talks about having "two brains" where you put 90% in what I call "core" and 10% into a "Mad Money" portfolio or what I prefer to call "explore."
For more, read about my "core and explore" approach to investing.

#10  The Millionaire Next Door The Millionaire Next Door: Surprising Secrets of America's Wealthy

By Thomas Stanley and William Danko
By focusing on those with a net worth of at least $1 million, the authors show surprising results that reveal fundamental qualities of this group that are "diametrically opposed to today's earn-and-consume culture, including living below their means, allocating funds efficiently in ways that build wealth, ignoring conspicuous consumption, being proficient in targeting marketing opportunities, and choosing the "right" occupation"

After reading this book, you may never laugh at your friends who use coupons or shop Black Friday Sales again!


 #11 The Oil Factor: Protect Yourself and Profit from the Coming Energy Crisis
 By Stephen and Donna Leeb

This book has some great research that shows the stock markets usually have terrible performance after the price of oil surges.  It is worth buying just for the table on page 17 that shows the stock market was between 17% lower and 4% higher after any time the price of oil changed by 100% in any 18 month period between 1973 and 2003.

This helped me know it was prudent to take profits and cut back on my asset allocation when the price of oil skyrocketed just before the last 2008 to 2009 bear market that saw the market crash by 57%.

My Investment Library

I recommend these other two books to complete your investment library

 #12 The Complete Idiot's Guide to Social Security and Medicare, 3rd Edition
By Lita Epstein (Nov 2, 2010)

Lita used to write for my "Investing and Personal Finance" group that I led at Suite101 before it was sold, they changed direction and I left to build my own web sites.  Her "Complete Idiot's Guides" are well written and easy to understand.  This is my one of my favorites and one I find myself recommending the most to others.

#13 The Bond Book, Third Edition: Everything Investors Need to Know About Treasuries, Municipals, GNMAs, Corporates, Zeros, Bond Funds, Money Market Funds, and More - Hardcover (Oct. 27, 2010)
By Annette Thau

This is a great book that includes:

• Buying individual bonds or bond funds
• The ins and outs of open-end funds, closed-end funds, and exchange traded funds (ETFs)
• The new landscape for municipal bonds: the changed rating scales, the near demise of bond insurance, and Build America Bonds (BABs)
• The safest bond funds
• Junk bonds (and emerging market bonds)
• Buying Treasuries without paying a commission

Note:  I get a commission from Amazon.com if you buy these books using my links on the day you click the links.  Please use my links to support this blog.  Thanks.

ECRI's WLI Surges to Six Month High

ECRI's WLI and WLI Growth Rate Continue Higher

The Economic Cycle Research Institute, ECRI - a New York-based independent forecasting group, released their latest readings for their proprietary Weekly Leading Index (WLI) this morning. (More about ECRI) 

For the week ending November 19, 2010

• WLI  is 126.4 up from the prior week's revised lower reading of 124.2.  (Last week we reported WLI was 124.3)  
• 126.4 marked a 6-month high for WLI. WLI was higher for the week ending May 14, 2010 at 127.0.
• The lowest reading for WLI this year was 120.4 for the week ending July 16.
• Since apparently bottoming at -10.3 for the week of August 27,  WLI growth moved higher or was flat for the 12th consecutive week to minus 3.1% from minus 4.5% a week ago.  
• The last positive reading for WLI growth was for the week ending May 28, 2010 when it stood at positive 0.1%.

Yesterday the Bureau of Economic Analysis announced they increased their estimate of Q3 GDP from 2.0% to 2.5%.  They kept their estimate for Q2 GDP at 1.7%.  My charts below reflect this revision.

Given the higher GDP estimates with surging WLI numbers, it appears that ECRI's October proclamation  "The much-feared double-dip recession is not going to happen" is on track.

Chart of WLI and WLI growth vs GDP Growth  

click to view full size charts

Since ECRI releases their WLI numbers for the prior week and the stock market is known in real time, you can often get a clue for next week's WLI from the weekly change in the stock market.

Chart of S&P500 vs ECRI's WLI 

Note that the chart above of the S&P500 vs. WLI shows a breakout above the dashed green line that represents the neckline for a "Head and Shoulders Bottom" pattern.  This is a very bullish development.  A correction to test the pattern from above with a bounce to a higher high would be even more bullish, but not necessary for a continued market advance.

Chart of WLI from 1973 to 2010

 Chart courtesy of ECRI

Notes: 

1. The WLI for the week ending 11/26/10 will be released on 12/3/10
2. Occasionally the WLI level and growth rate can move in different directions, because the latter is derived from a four-week moving average.
3. ECRI uses the WLI level and WLI growth rate to HELP predict turns in the business cycle and growth rate cycle respectively. Those target cycles are not the same as GDP level or growth, but rather a set of coincident indicators (including production, employment income and sales) that make up the coincident index. Based on two additional decades of data not available to the general public, there are a couple of occasions (in 1951 and 1966) when WLI growth fell well below negative ten, but no recessions resulted (although there were clear growth slowdowns).

Disclosure:  I am long the exchange traded fund for the S&P500, SPY( charts and quote,) in my personal account and in the "Explore Portfolio" in  "Kirk Lindstrom's Investment Letter."

KEY ECRI Articles:

• Oct 28, 2010 "The much-feared double-dip recession is not going to happen"
• Oct. 28, 2010 ECRI Warns of High Inflation Nightmare From QE2
• Sept. 24, 2010 ECRI - Premature to Predict New Recession
• July 01, 2010 ECRI Weekly Leading Indicators Widely Misunderstood
• Dec. 04, 2009: ECRI Warns of Lasting High Unemployment Despite Economic Recovery
• July 31, 2009: ECRI Predicts End of Home Price Downturn
• July 21, 2009:  ECRI Predicts The End of the Recession is Imminent
• April 3, 2009: ECRI Says US Business Cycle Recovery Ahead
• March 28, 2008: ECRI Calls it "A Recession of Choice"

ECRI WLI Moves Higher; Growth Revival Ahead Says ECRI

ECRI's WLI and WLI Growth Rate Continue Higher

The Economic Cycle Research Institute, ECRI - a New York-based independent forecasting group, released their latest readings for their proprietary Weekly Leading Index (WLI) this morning. (More about ECRI) 

For the week ending November 12, 2010

• WLI  is 124.3, up from the prior week's revised higher reading of 124.2.  (Last week we reported WLI was 123.9)  This level marked a 25-week high.
• The lowest reading for WLI this year was 120.4 for the week ending July 16.
• Since apparently bottoming at -10.3 for the week of August 27,  WLI growth moved higher or was flat for the eleventh consecutive week to minus 4.5% from minus 5.5% a week ago.  This marked a 23-week high.
• The last positive reading for WLI growth was for the week ending May 28, 2010 when it stood at positive 0.1%.

On November 17 in The Wall Street Journal article "Burlap Hints at Inflation" Lakshman Achuthan, managing director of ECRI, said "Global industrial growth is going to revive around the end of this year or early next year." 

Chart of WLI and WLI growth vs GDP Growth
 

click to view full size charts

Since ECRI releases their WLI numbers for the prior week and the stock market is known in real time, you can often get a clue for next week's WLI from the weekly change in the stock market.

Chart of S&P500 vs ECRI's WLI 

Note that the chart above of the S&P500 vs. WLI shows a breakout above the dashed green line that represents the neckline for a "Head and Shoulders Bottom" pattern.  This is a very bullish development.  A correction to test the pattern from above with a bounce to a higher high would be even more bullish, but not necessary for a continued market advance.

Chart of WLI from 1973 to 2010

 Chart courtesy of ECRI

Notes: 

1. The WLI for the week ending 11/19/10 will be released on 11/24/10, the Wednesday before the Thanksgiving Holiday.
2. Occasionally the WLI level and growth rate can move in different directions, because the latter is derived from a four-week moving average.
3. ECRI uses the WLI level and WLI growth rate to HELP predict turns in the business cycle and growth rate cycle respectively. Those target cycles are not the same as GDP level or growth, but rather a set of coincident indicators (including production, employment income and sales) that make up the coincident index. Based on two additional decades of data not available to the general public, there are a couple of occasions (in 1951 and 1966) when WLI growth fell well below negative ten, but no recessions resulted (although there were clear growth slowdowns).

Disclosure:  I am long the exchange traded fund for the S&P500, SPY( charts and quote,) in my personal account and in the "Explore Portfolio" in  "Kirk Lindstrom's Investment Letter."

KEY ECRI Articles:

• Oct 28, 2010 "The much-feared double-dip recession is not going to happen"
• Oct. 28, 2010 ECRI Warns of High Inflation Nightmare From QE2
• Sept. 24, 2010 ECRI - Premature to Predict New Recession
• July 01, 2010 ECRI Weekly Leading Indicators Widely Misunderstood
• Dec. 04, 2009: ECRI Warns of Lasting High Unemployment Despite Economic Recovery
• July 31, 2009: ECRI Predicts End of Home Price Downturn
• July 21, 2009:  ECRI Predicts The End of the Recession is Imminent
• April 3, 2009: ECRI Says US Business Cycle Recovery Ahead
• March 28, 2008: ECRI Calls it "A Recession of Choice"

Kirk's DOW CLX Model with S&P500 Values

Kirk's DOW CLX Model with S&P500 Values for Nov 17, 2010

For "Don's students of CLX," here is today's DOW CLX 10s and 30s plotted against the S&P500 back to July 2007.

click for full size image

Note how we have a potential convergence of the dashed black and pink support lines with the bottoming in the clx10 a day after options expiration Friday.

If we get there and the phrase "hanging curve" comes to mind, then I'm with you.

For those who are not "students of CLX" this is an experimental timing model I've been playing around with the past decade to help me get better buy and sell points for my trading around core positions in my explore portfolio.

ECRI's WLI at 24-Week High - Bullish S&P500 Breakout

ECRI's WLI and WLI Growth Rate Move Higher

The Economic Cycle Research Institute, ECRI - a New York-based independent forecasting group, released their latest readings for their proprietary Weekly Leading Index (WLI) this morning. (More about ECRI) 

For the week ending November 5, 2010

• WLI  is 123.9, up from the prior week's revised reading of 123.1.  
• The lowest reading for WLI this year was 120.4 for the week ending July 16.
• Since apparently bottoming at -10.3 for the week of August 27,  WLI growth moved higher or was flat for the tenth consecutive week to minus 5.7% from minus 6.5% a week ago.  
• The last positive reading for WLI growth was for the week ending May 28, 2010 when it stood at positive 0.1%.

Commenting on today's data, Lakshman Achuthan, managing director of ECRI, said "With the WLI steadily gaining ground since the summer and now hitting a 24-week high, the much-feared 'double dip' has turned out to be a mirage."

Chart of WLI and WLI growth vs GDP Growth
 
click to view full size charts

Since ECRI releases their WLI numbers for the prior week and the stock market is known in real time, you can often get a clue for next week's WLI from the weekly change in the stock market.

Chart of S&P500 vs ECRI's WLI 

Note that the chart above of the S&P500 vs. WLI shows a breakout above the dashed green line that represents the neckline for a "Head and Shoulders Bottom" pattern.  This is a very bullish development.  A correction to test the pattern from above with a bounce to a higher high would be even more bullish, but not necessary for a continued market advance. 

I took some profits in Agilent (A charts and Quote) at $36.50 earlier this morning in both my personal account and my newsletter "explore portfolio."  I am looking at putting this cash back to work should the market correct to test that neckline breakout from above.

Chart of WLI from 1973 to 2010

 Chart courtesy of ECRI

Notes: 

1. >The WLI for the week ending 11/2/10 will be released on 11/19/10.
2. Occasionally the WLI level and growth rate can move in different directions, because the latter is derived from a four-week moving average.
3. ECRI uses the WLI level and WLI growth rate to HELP predict turns in the business cycle and growth rate cycle respectively. Those target cycles are not the same as GDP level or growth, but rather a set of coincident indicators (including production, employment income and sales) that make up the coincident index. Based on two additional decades of data not available to the general public, there are a couple of occasions (in 1951 and 1966) when WLI growth fell well below negative ten, but no recessions resulted (although there were clear growth slowdowns).

Disclosure:  I am long  Agilent (A charts and Quote) and the exchange traded fund for the S&P500, SPY charts and quote, in my personal account and in the "Explore Portfolio" in  "Kirk Lindstrom's Investment Letter." 

KEY ECRI Articles:

• Oct 28, 2010 "The much-feared double-dip recession is not going to happen"
• Oct. 28, 2010 ECRI Warns of High Inflation Nightmare From QE2
• Sept. 24, 2010 ECRI - Premature to Predict New Recession
• July 01, 2010 ECRI Weekly Leading Indicators Widely Misunderstood
• Dec. 04, 2009: ECRI Warns of Lasting High Unemployment Despite Economic Recovery
• July 31, 2009: ECRI Predicts End of Home Price Downturn
• July 21, 2009:  ECRI Predicts The End of the Recession is Imminent
• April 3, 2009: ECRI Says US Business Cycle Recovery Ahead
• March 28, 2008: ECRI Calls it "A Recession of Choice"

Jeremy Grantham'a Market Outlook - Investments For The Next Asset Bubble

Jeremy Grantham'a Market Outlook - The Next Asset Bubble

Jeremy Grantham is Chairman of the Board of Grantham Mayo Van Otterloo (GMO), a Boston-based asset management firm with $107 billion under management as at December 2009.  GMO is one of the largest investment firms in the World. He built his firm and reputation by correctly identifying the tech bubble of 2000 and the asset bubble of 2007.

Jeremy Grantham's Quarterly Letter "Night of the Living Fed" is something all should read.  I posted Grantham's 18 summary points at the bottom of this article as a substitute from reading the rather long letter.

Today during a CNBC interview (transcript - see below to watch Video) with Maria Bartiromo, Grantham suggested investing in stocks with top franchise name, over weighting emerging markets and over weighting cash. Below are what I think are the highlights of the interview.

• And surely— emerging countries will go to a big premium on— every dollar of earnings that they make. And they're beginning to. But, I think they've got at least a few years left. The bad news for us, because we're fairly purest value managers for mainly institutional clients, is we don't like to play games with overpriced assets.  
• The Fed is driving the S&P, which is overpriced— the Standard & Poor's 500— a broad measure of the U.S. market, is driving it from already substantially overpriced into what I would call dangerously overpriced. This is about the boundary line. We expect on a seven-year horizon one percent only plus inflation from the U.S. market. And now, as you push it up another 20 percent perhaps in the next year, it becomes dangerously overpriced. A bubble territory and ready to inflate to considerable pain. 
• If— if you want to go with the flow, don't fight the Fed as they say— you should be prepared to speculate on very nimble feet. It's not our style as a firm. But, I think it's— probably a game that you could play with a pretty good chance of winning for— for a few more quarters.  
• Our institutional clients— sell very gracefully into this rally. We've already started to sell. We're not even— averagely weighted. We're modestly under weighted. And you must remember bonds are even worse than stocks on a seven-year forecast. So, you get caught in this paradox. 
• (The Fed) wants us to go out there and buy stocks, which are overpriced because bonds they have manipulated into being even less attractive. So, we’re being forced to choose between two overpriced assets. That is not always a terrific choice to make because there is a third choice, and that is don't play the game and hold money in cash. 

That is interesting because I too have a large position in CASH as I sold my bonds, hold good stocks for the long term, hold TIPS and IBonds but sold all my other bonds and bond funds not indexed to inflation.

• And what cash is is an available resource. It buys you the right to buy the U.S. market if the S&P drops from 1,220 today to 900, which is what we think is fair value.

Hold a gun to Grantham's head and he recommends:

• There's another complexity and that is that we believe that the old-fashioned, super blue-chip franchise companies like Coca-Cola are also much cheaper than the rest of the market. So, if someone put a gun to my head and said, "I've got to buy stocks. What should I buy?" I'd say, "Buy two units of the Coca-Colas. They're the cheapest group in— in the equity world. Buttress it with a fairly large dose of emerging markets. They're a little overpriced. But, they've got potential. And— a lot more cash than normal for opportunities should the bubble blow up."

He recommends commodities for those with a very long (20-year) time frame. 

• I have an eccentric view on commodities not necessarily shared by my colleagues or by— almost anybody. And that is we're running out of everything.
•  ... locking up resources in the ground is a terrific idea. Or locking up— timber, agricultural land will do just fine. A great inflation hedge. You will win, in my opinion. Very high probability over a long horizon. Now, have these things gotten ahead of themselves in the short term?
• Quite possibly yes. And that— that's what makes investing so tricky. If they were to break for whatever reason at all in the next year, I— I would suggest that is a great buying opportunity.  

I have been keeping my eye on the commodity ETF CRBQ, GLD and Oil Prices.

Grantham likes individual companies that have reserves or minerals in the ground but not those who process them who have to go out and pay for these items.

• But— if they've got stuff in the ground. The oil industry since 2000 has doubled against the stock market. They didn't double because they got brilliant. They doubled because oil in the ground became worth four times what it was. And that is a wonderful thing for an oil company with good reserves. 
• But, the same if you had mineral reserve(s). That— that's the play, I think, on commodities.

 Back to the Federal Reserve:

• And what the Fed is trying to do is to make cash so ugly that it will force you to take it out and basically speculate.
• I think, therefore, under these conditions, low rates is actually hurting the economy. It's taking more money away from people who would have spent it — retirees — than are being spent by passing it on to financial enterprises and being distributed as bonuses to people who are rich and, therefore, save more.

On Market Valuation and targets:

• The trouble with bubbles is when they go, it's very hard to know how painful it will be. But, typically, they go racing back to fair value. So, if this market goes to 1,500 in a couple of years, by  then, fair value might be at 950— 950 is painfully below 1,500.  
• It's usually the case that it doesn't stop at fair value— 950. So, it might go to 700. And— and you're talking another market that halves. It halved in 2000, and we thought it would by the way. We predicted a 50 percent decline. It halved this time in— in '08, '09. And I think it might very well halve again if it gets back to 1500.

This is a very important comment from "Night of the Living Fed" that reflects what I've been writing and talking about. That is low interest rates punish savers and responsible people who pay their regular mortgage payments.

Pg 11 excerpts:  

The Underestimated Costs of Lower Interest Rates For all of us, unfortunately, there is still a further great disadvantage attached to the Fed Manipulated Prices. When rates are artificially low, income is moved away from savers, or holders of government and other debt, toward borrowers. Today, this means less income for retirees and near-retirees with conservative portfolios, and more profit opportunities for the financial industry; hedge funds can leverage cheaply and banks can borrow from the government and lend out at higher prices or even, perish the thought, pay out higher bonuses.

and

Yet the normal effect of low interest rates can be seen to be minimal if indeed they exist; if they do exist, they come packaged in this very dangerous game of asset price stimulus involving booms and busts. In a number of years, after academic wheels have turned, I suspect this policy approach will be totally discredited. And the sooner, the better! In the meantime, as far as I can see in the data, it is probable that an engineered low interest rate policy has no net benefit at all, even in normal times. It is quite likely in these abnormal times that it even has a negative effect – it holds back economic recovery!

Here is Grantham's summary of the rest of his letter that builds his case that lower rates stimulate the economy is a myth, it creates massive bubbles that in the end destroy he economy.

1.  Long-term data suggests that higher debt levels are not correlated with higher GDP growth rates.
2. Therefore, lowering rates to encourage more debt is useless at the second derivative level.
3. Lower rates, however, certainly do encourage speculation in markets and produce higher-priced and therefore less rewarding investments, which tilt markets toward the speculative end. Sustained higher prices mislead consumers and budgets alike.
4. Our new Presidential Cycle data also shows no measurable economic benefits in Year 3, yet point to a striking market and speculative stock effect. This effect goes back to FDR, and is felt all around the world.
5. It seems certain that the Fed is aware that low rates and moral hazard encourage higher asset prices and increased speculation, and that higher asset prices have a beneficial short-term impact on the economy, mainly through the wealth effect. It is also probable that the Fed knows that the other direct effects of monetary policy on the economy are negligible.
6. It seems certain that the Fed uses this type of stimulus to help the recovery from even mild recessions, which might be healthier in the long-term for the economy to accept.
7. The Fed, both now and under Greenspan, expressed no concern with the later stages of investment bubbles. This sets up a much-increased probability of bubbles forming and breaking, always dangerous events. Even as much of the rest of the world expresses concern with asset bubbles, Bernanke expresses none. (Yellen to the rescue?)
8. The economic stimulus of higher asset prices, mild in the case of stocks and intense in the case of houses, is in any case all given back with interest as bubbles break and even overcorrect, causing intense financial and economic pain.
9. Persistently over-stimulated asset prices seduce states, municipalities, endowments, and pension funds into assuming unrealistic return assumptions, which can and have caused financial crises as asset prices revert back to replacement cost or below.
10. Artificially high asset prices also encourage misallocation of resources, as epitomized in thedotcom and fiber optic cable booms of 1999, and the overbuilding of houses from 2005 through 2007.
11.  Housing is much more dangerous to mess with than stocks, as houses are more broadly owned, more easily borrowed against, and seen as a more stable asset. Consequently, the wealth effect is greater.
12. More importantly, house prices, unlike equities, have a direct effect on the economy by stimulating overbuilding. By 2007, overbuilding employed about 1 million additional, mostly lightly skilled, people, not counting the associated stimulus from housing- related purchases.
13. This increment of employment probably masked a structural increase in unemployment between 2002 and 2007, which was likely caused by global trade developments. With the housing bust, construction fell below normal and revealed this large increment in structural unemployment. Since these particular jobs may not come back, even in 10 years, this problem may call for retraining or special incentives.
14. Housing busts also help to partly freeze the movement of labor; people are reluctant to move if they have negative house equity. The lesson here is: Do not mess with housing!
15. Lower rates always transfer wealth from retirees (debt owners) to corporations (debt for expansion, theoretically) and the financial industry. This time, there are more retirees and the pain is greater, and corporations are notably avoiding capital spending and, therefore, the benefits are reduced. It is likely that there is no net benefit to artificially low rates.
16. Quantitative easing is likely to turn out to be an even more desperate maneuver than the typical low rate policy. Importantly, by increasing inflation fears, this easing has sent the dollar down and commodity prices up.
17. Weakening the dollar and being seen as certain to do that increases the chances of currency friction, which could spiral out of control.
18. In almost every respect, adhering to a policy of low rates, employing quantitative easing, deliberately stimulating asset prices, ignoring the consequences of bubbles breaking, and displaying a complete refusal to learn from experience has left Fed policy as a large net negative to the production of a healthy, stable economy with strong employment.

My outlook and disclosure:  I own and recommend in my newsletter an asset allocation that consists of "franchise names" and small stocks that I think will do well over the long term no matter what the economy does.   I have sold ALL bonds and bond funds not indexed to inflation but have positions in TIPS, TIP funds and iBonds that have very nice gains already and should do more if we get an inflation bubble.  I also have a significant position in cash to take advantage of buying opportunities such as those suggested by Grantham.

Investors Intelligence Sentiment Survey Data & Charts

Investors Intelligence (II) Sentiment Survey Data and Graphs

Data for November 10, 2010:

• Bulls = 48.4%
• Bears=23.1%
• More about Investors' Intelligence Bull Bear Survey

My charts below showing the “Investors Intelligence Survey“ or IIS and its moving averages currently say now is a good time for a market correction. On September 22, 2010 with the S&P500 (quote and charts) at 1,134 I wrote on the sentiment page of my newsletter:

"Sentiment made a lower low last month while the market made a higher low. This divergence is probably due to noise in the readings but the odds continue to favor saying the low for the S&P500 is in at 1010.91 given the quick recovery in sentiment and slowly improving economic data. It was good that many of my stocks fell into my buy zones during the latest pull-back. I added shares and now I have nice gains for the portfolio overall from those buys. The 4-week moving-average (MA) suggests the market can work significantly higher in the weeks ahead until that reading gets into my “profit taking” caution zone...."

As you can see from the first chart below, with the S&P500 now at 1211, sentiment is much better  than it was on Sept. 23.  It is also "stacking up" which often precedes a market correction.  I've taken profits and will take more profits if we go higher, but I am ready for a correction should it occur.

Chart of Bulls / (Bulls+Bears) vs. S&P500 for 11/10/10

from 1998 to now 

click images for full size graphs

More about the Investors Intelligence Survey:  One of the oldest weekly sentiment indicators is the “Investors Intelligence Survey“ or IIS. A chart of the Investors’ Intelligence Survey (IIS) “Bulls over Bulls plus Bears” versus the market is a key sentiment tool for stock market technical analysis. The IIS began in January 1963 by A.W. Cohen and has been published every week ever since. Cohen was surprised to find out that the newsletter writers, just like average investors and speculators, were usually wrong at major turning points!  Cohen found the best time to go long the stock markets was not when the most advisers were bullish, but when they were bearish! Cohen’s IIS survey turned out to be a wonderful contrarian indicator!

Chart of Bulls / (Bulls+Bears) vs. DJIA for 11/10/10

from 1970 to now 

More about

• Investors' Intelligence Bull Bear Survey
• Sentiment Indicators
• Kirk's Two Investment Letters

GeoGlobal GSPC Carried Interest Dispute Update

This is an update on the "carried interest dispute" between GeoGlobal Resources (GGR Charts and current Quote) and the Gujarat State Petroleum Corporation.

Background: 

GeoGlobal Resources (Ticker GGR) is a Canadian based oil and natural gas exploration company listed on the American Stock Exchange.

GSPC  is Gujarat State Petroleum Corporation, a state owned oil company in India that had to put its planned IPO on hold, possibly due to the way it treats its partners.

GGR has a 10% "carried interest" in the KG exploration block in the deep waters off the shores of India.  This means it pays none of the costs of exploration until there is cash flow from the discovery to pay its share of the costs.  This "carried interest" was payment for GGR's expertise in finding hydrocarbons.  GGR will only see revenue after its share is fully repaid to the major "operating" partner, GSPC.  Some time ago, GSPC got political pressure for "giving away too much" to GGR but this was well after the KG discovery was declared a "major discovery."

Here is the latest via email from indianpetro.com and my thoughts.  The links to "details" require a paid subscription to read which I do not have.  Since GGR is listed on the American Stock Exchange, I rely of formal SEC filings mostly.

Fracas continues at KG-OSN-2001/3

Part-I: GeoGlobal complains about being kept out of the loop by GSPC

Nov 8: The fracas over multiple issues at the KG-OSN-2001/3 block is showing no signs of abating. GeoGlobal Resources (GGR) -- technical partner and 10% stakeholder in the block -- has written a strongly worded letter to the management committee (MC) for the block, accusing GSPC (Gujarat State Petroleum Corporation) of going ahead with operations in the block without due intimation to its partner.

Webster: intimation- 

#1 to make known especially publicly or formally

#2  to communicate delicately and indirectly

GSPC had asked GGR to participate in the MC meeting for the block, but only to discuss a single item on the agenda, dealing with cessation of the Canadian E&P major's participating interest (PI) in the block. The Indian PSU wants GGR's stake to be terminated due to alleged inaccuracies in the technical studies conducted by the latter on the block.

GGR opined that as a member of the operating committee (OC) for the block, it had full rights to be intimated about all agenda points and provide its opinion on the same. Not adhering to this implied that GSPC's actions were in "complete derogation" of the provisions in Article 6.7 of the production sharing contract (PSC) for the block, which states that "...the Secretary shall forward the agenda to the members at least nine days prior to the date fixed for the meeting..."

The company also pointed out that Jubilant -- the other 10% stakeholder at the block -- had no(t) received any intimation about the agenda point on cessation of GGR's stake. This reinforced the fact that the item had never been placed before the OC for its approval, contrary to PSC stipulations.

GGR said that GSPC's assumption that the former was a "defaulter" was presumptuous at best and could even be proved completely wrong.

In view of this GGR has proposed a specific agenda point for the MC meeting. The item reads, "to discuss and decide on the purported action of GSPC taken vide its letter dated August 18, 2010, to GGR". GGR has further requested that the scheduled date of the MC meeting should be pushed back to a more suitable date, allowing time for GGR to present its case on all the agenda items in the meeting.   (Click on Details for more information) Details

Fracas continues at KG-OSN-2001/3

Part-II: GSPC claims it has followed PSC provisions to the letter

Nov 8: Gujarat State Petroleum Corporation (GSPC) has refuted the claims put forward by GeoGlobal Resources (GGR) saying that it was in no way violating the provisions of the PSC (production sharing contract) and JOA (joint operating agreement) signed for the KG-OSN-2001/3 block.

GSPC pointed out that article 5.6 of the JOA stipulates that approval of the OC (operating committee) requires a minimum affirmative vote of only 70% while GSPC itself held 80% stake at the block. Such decisions are final and binding on all parties. Therefore, no separate approval would be required from the other parties (Jubilant or GGR) for passing an OC resolution.

Moreover, the state-run oil major said that it had notified the government regarding the cessation of GGR's participating interest (PI) at the block, in strict adherence to PSC provisions. GSPC also claimed that Jubilant had also been informed of the move through a copy of the letter sent to the government.

GSPC also claimed that according to article 6.16 of the PSC, the management committee (excluding GGR representatives) had full rights to decide on the participation of the "defaulting party", that is, GeoGlobal, but only after hearing out GGR's views on the matter.

GSPC said that GGR would be given ample opportunity to present its case before the MC. However, the scheduled date for the MC meeting should not be postponed keeping in mind that GGR was informed about the issue well in advance and further delays would unnecessarily hamper work progress in this block.  (Click on Details for more information) Details

Fracas continues at KG-OSN-2001/3
Part-III: DGH says exploration period cannot be extended without definite work programme and budget

Nov 8: Not only is GSPC finding it difficult to push through the proposed cessation of GeoGlobal's 10% stake in the KG-OSN-2001/3 block, but it is also facing flak from the DGH (Directorate General of Hydrocarbons) on extending the exploration period at the block for integrated appraisal of five discoveries in the block.

The DGH has said that the terms of the PSC (production sharing contract) stipulate that the contractor has to submit a detailed programme (including a work programme and budget) for carrying out integrated appraisal of the discoveries.

Without this, the upstream regulator said that it could not recommend extension of the exploration period, no matter how many requests were put in by the operator. Therefore, it is imperative for GSPC to immediately submit the requisite work programme and budget if the request for extension was to be considered favorably by the DGH.

Readers will recall that GSPC has been persistently requesting for a 30-month extension in the exploration period in order to appraise the discoveries that have been made in the block. The operator has made five discoveries in this block, including the "KG-16" in DeenDayal East (DDE), the "KG-22" in DeenDayal North (DDN), the "KG-21" in DeenDayal West DownThrown (DDW-DT) and the "KG-19" and "KG-20SS" in the Base Raghavpuram Unit (BRU) structure.

It is difficult to appraise the data without the help from GGR. Reports I've read elsewhere say GGR stopped helping GSPC find hydrocarbons and won't help until this carried interest dispute is resolved.  That is GGR won't work for free.

GSPC has recently proposed that the appraisal, declaration of commerciality (DoC) and field development plan (FDP) for all these discoveries should be carried out in an integrated and cost-effective manner in order to conceptualise and implement the optimal development strategy for the block. 

Pertinently, the KG-20SS well is an additional well, that is, it was drilled over and above the minimum work programme (MWP) that was specified for the block. (Click on Details for more information) Details 

Disclaimers:

#1   I have made a lot of money for myself and my newsletter subscribers over the years with GeoGlobal Resources stock (GGR Charts and current Quote).  I bought shares as low as 20¢ a decade ago (Nov. 22, 2000).   I have been on "house money" since 2005. I added shares at 90¢ on 12/31/04 tax loss selling to reach 9,000 shares.  By my final sale in 2005 at $13.42, my position was only 2,400 shares with $32,415 in profits taken out from selling.  Since then, I have traded around this core position to run it up to 8,900 shares now with $25,810 cash taken out as I am now loading up for the next run.

#2  As of 08/26/10 I have a $25,810 cash, all pure profit! Plus I currently have 8,900 shares. GGR could drop to zero overnight and I'd still have the cash profits!

#3 I started with a negative $10,005 balance and held 3,330 shares with a cost basis of $3.00 per share back in 1999 when the company was an internet stock with the ticker BOWG.
#4 I took massive profits in 2005 to lock in nice gains. 
#5 Now GGR has joined the ranks of stocks like LRCX that are more like ATM machines - all on house money where I try to continue to grow the total dollars taken out using share price volatility.

For commentary and my current outlook for GGR, read "Kirk's Investment Newsletter"

 More GGR Charts