WSJ: Stock-Market Capitulation, Defined

By SIMON CONSTABLE

Sometimes there comes a point in battle where one army just gives up. It's called a capitulation.

The same thing occasionally happens in investing, and it can arrive in the form of panic selling.

"It's when the towel gets thrown in," says Vinny Catalano, chief investment strategist of New York-based Blue Marble Research. There are a lot of times when selling by investment professionals is rooted in pressure from clients wondering why you're losing money or not beating the market, he says.

If the pressure is great, then you'll get a lot of stocks being dumped all at once.

A great example of a capitulation came in 2008. Over the first eight months of the year the major indexes lost about 11% as problems in the banking system became apparent. By September investors were clearly agitated, and the S&P 500 index plunged from 1,255 on Sept. 19 to under 900 by Oct. 10.

That also coincided with historically high trading volume, but elevated volume isn't a necessary aspect, Mr. Catalano says. He points out that a temporary rally in stocks often comes within a few months before the real "bottom" is set. After that plays out, a rally can really get going again, as was the case in 2008-09.

The great thing about capitulations is that there is an opportunity to find bargains. "I live for those days," Mr. Catalano says, but "they don't happen often."

The recent selloff in biotechnology stocks likely isn't a capitulation, but rather just profit-taking within a bull market, he says. One clue is that people haven't given up on the biotech sector.

See original story here.

Barron's: Why Oil is Cruising for a Bruising

By SIMON CONSTABLE

Here's a puzzle: The U.S. is producing the most crude oil in decades, domestic stockpiles are at record highs, yet oil prices are near $100 barrel. What's keeping prices aloft?

The first piece of the puzzle is the way the U.S. prices its oil. The U.S. benchmark, known as West Texas Intermediate, or WTI, is based on delivery at a storage hub in Cushing, Okla. How much oil is stored in Cushing affects the price. At the moment, inventories of oil across the U.S. are at their highest going back to 1982, but Cushing has seen a steady drop since a new pipeline linking the hub to refineries along the Gulf Coast opened earlier this year.

The Cushing hub is "running on fumes," according to Société Générale, giving the appearance of tight supplies, and leading prices higher.

Another boost is from money managers, including hedge funds diving into the futures market. Financial firms betting on higher prices outnumbered those betting on a slide by 322,788 futures contracts as of April 22, almost double the number a year ago, according to the U.S. Commodity Futures Trading Commission.

There's more. The U.S. oil benchmark is also tracking global crude prices, which have been elevated by tensions between Russia and Ukraine. The threat of more-intense hostilities and the possibility of a supply outage will likely keep Brent crude, the global benchmark, higher until the situation is resolved, wrote Commerzbank in a recent report. Russia is the second-largest oil exporter after Saudi Arabia, and investors are concerned that Western sanctions in response to Moscow's encroachment on Ukraine could hinder the flow of crude.

Currently, WTI trades about $9 below Brent. U.S. oil prices settled Friday at $99.76 a barrel, up 1.4% for the year.

BUT THAT'S ONLY THE story so far. Analysts see plenty of reasons for oil prices to slide in the weeks ahead. Oil inventories are piling up in the South as several Gulf Coast refineries have temporarily shut down for maintenance, writes Michael Cohen, an analyst at Barclays in New York. Oil continues to flow to the Gulf Coast because it fetches a higher price there—that's the so-called Light Louisiana Sweet, or LLS—than it does in Cushing. But Cohen says transportation costs from Cushing to the Gulf Coast also add $3 to $4 a barrel.

However, the buildup of supplies on the Gulf Coast has started to weigh on the LLS price, and that will bring it closer to the U.S. benchmark price, Cohen says. As prices near parity, it makes less economic sense to send crude from Cushing to the Gulf Coast, which will help supplies at Cushing rebuild. When Cushing's stockpiles grow, WTI prices are likely to soften.

A threat to prices is also "posed by a potential wave of hedge-fund liquidation of existing long positions," Cohen wrote in March, referring to bets on higher prices. If hedge funds do dump a substantial part of those bets, $10 to $15 would be wiped off the price of a barrel, he wrote.

Finally, when the Ukraine crisis abates, Brent prices are likely to retreat, and with that, WTI prices may fall as well.

"It could be a while," but eventually prices should capitulate, says Michael Wittner, a global head of oil research at Société Générale in a recent research report. 

See original story here.

WSJ: Five Important Shrines to Capitalism

By SIMON CONSTABLE

In the spirit of WSJ Sunday's focus on the financial, here are five tourist sites important in the history of capitalism.

The City: At the heart of London's financial district is the Bank of England, the empire's famed central bank, founded in 1694. Guided tours are available some weekends in summer and fall. Check out the current home of Lloyd's of London, located on Lime Street. Mixing God with mammon, don't miss Sir Christopher Wren's nearby masterpiece, St. Paul's Cathedral. See original story here.

The Bank of England 

Photo by Colin Smith, 

CC BY-SA 2.0 <https://creativecommons.org/licenses/by-sa/2.0>, 

via Wikimedia Commons

WSJ: How the 'Recency Effect' Trips Up Investors

By SIMON CONSTABLE

When you buy a mutual fund based on its recent performance, you could be succumbing to the "recency effect."

It's a "cognitive defect" from which most people suffer, says Josh Brown, chief executive of New York-based Ritholtz Wealth Management. "People extrapolate what just happened into more of the same." Or put another way, if stocks have consistently risen year after year, people expect they will continue to do so indefinitely.That's the tendency when making a decision to give recent events more weight than things further in the past. See original story here.

Barron's: Capital Spending Boom

By SIMON CONSTABLE

The prolonged capital-spending drought may soon end. If it does, which seems increasingly likely, equipment makers should benefit.

Over the last five years, Corporate America has spent barely enough to replace worn-out or depreciated machines, equipment, and factory buildings, according to a recent report from Société Générale. In simple terms, capital equipment, which typically costs at least $5,000 and lasts more than a year, is defined as the machines used to make other items.

"Today's capital stock [is] older than at any point since 1964," writes Aneta Markowska, a New York-based economist at SG.

Why? It's the result of chronic underinvestment. Capital stock grew at an average rate of just 1% per year during the past five years, well below the historical average of 2.6%, the report says.

Markowska concedes that capital expenditure orders are "not very encouraging" so far. Orders dropped from December through February, according to the latest government data.

Still, there are reasons why she remains hopeful.

The first is that corporate chieftains know that to remain competitive they need to invest. Second, executives have more of a sense about what the government will do. Stated differently, there is less policy uncertainty.

The Economic Policy Uncertainty Index, as designed by academics from Stanford University and the University of Chicago (Scott Baker, Nicholas Bloom and Steven J. Davis), has remained close to its long run average for the past five months. It spiked considerably during the financial crisis and then again during various fiscal showdowns in Congress.

"History suggests that capital expenditures levels tend to respond to changes in the uncertainly level with a 12-month lag," writes Jack Ablin, chief investment officer at BMO Private Bank in Chicago. The general idea being that when there is more certainty about what the government will do then businesses are more likely to make risky investments.

"I'm hopeful that based on the indicators that [capital expenditure] should rise toward the second half of the year," Ablin says.

If we see capital spending surge due to uncertainty staying low that would help equipment manufacturers like GE (ticker: GE) and Honeywell (HON). Alternatively, investors looking to place a broader bet might want to buy the Industrial Select Sector SPDR Fund (XLI), which holds a basket of industrial stocks.

See original story here.

Barron's: Why Copper is Pointing to a Slow Economy

By SIMON CONSTABLE

Dr. Copper is signaling that more danger is ahead.

Copper, which is consumed for a wide variety of uses including manufacturing and construction, is said to have a Ph.D. in economics because of its ability to forecast economic activity. Hence the Dr. Copper moniker.

When prices of the red metal drop it often presages slower economic activity and lower stock prices. Benchmark contracts for copper have tumbled from around $3.38 a pound at the beginning of the year to about $3.00 recently. But that's only part of the story. See original post here.

Barron's: Ukraine Farmers Stockpile Grain

By SIMON CONSTABLE

Here's something to chew on: Ukraine's farmers are using wheat and corn to hedge against the risk of a currency crisis. What's more, the uncertainty in Crimea has the potential to drive prices even higher in markets already worried about supplies from the major grain exporter. See original story here.

Photo by Igor Karimov on Unsplash