Barron's: Why Aluminum Price Will Bounce

By SIMON CONSTABLE

The cure for aluminum's low prices seems to be those low prices themselves. That's standard free-market economic theory, and it appears to be playing out in the real world. After years of overproduction of aluminum and steady price declines, producers are starting to manufacture less of the metal, which is used in everything from packaging to auto parts to airplanes. That could bring prices back above $2,000 a metric ton.

Benchmark futures, traded on the London Metal Exchange, are down about 34% from their May 2011 peak of $2,774 a metric ton, and recently traded around $1,820. See original story here.

Aluminum extrusion

Photo by Mastars on Unsplash

MarketWatch: How Treasury's Jack Lew Could Kill Stocks

By SIMON CONSTABLE

Who’s going to sink the stock rally?

A lot of people assume it will be Federal Reserve Chairwoman Janet Yellen who sooner or later will start to raise the cost of borrowing. But equally important could be Treasury Secretary Jack Lew.

Why? These two people hold wrenches that could potentially monkey with mergers and acquisitions activity. Frenetic deal making on Wall Street tends to go hand-in-hand with a firm stock market.

Doubt me? Just look at the chart below plotting the dollar volume of U.S. deal activity (as tracked by Dealogic) and the S&P 500. Deal flow goes up, so does the market. Deal flow drops, so do stocks. There’s certainly a correlation.

Deals are affected by many things including management optimism. But a couple of things stand out. One is the cost of borrowing money.

Low interest rates are certainly favorable for M&A, explains Bob Bruner, dean of the Darden Graduate School of Business Administration and co-author of the book, “Deals from Hell.” Or put another way, when the cost of borrowing money is cheap then it can make sense to buy other businesses.

As rates rise the favorability of borrowing to do such things will be lessened. But as we have heard, Yellen’s Fed will likely raise rates starting next year.

The other thing is tax rates. Even the casual observer knows that tax rates drive deal activity. U.S.-based Pfizer’s thwarted desire to buy UK-based AstraZeneca  for $120 billion was no doubt driven by the desire to avoid 35% U.S. corporate tax rates and switch to much lower British taxes. It’s known as tax inversion. Although, the Pfizer-AstraZeneca deal is off for the time being, other companies such as Eaton, Chiquita Brands and Applied Materials have all successfully retreated to lower tax countries, or are well on the way. Others are considering the move.

Although tax inversions are eminently possible now, politicians are increasingly banging the drum to stamp them out. That job will fall on the Internal Revenue Service, part of Lew’s Treasury. It could be that tax inversions get legislated away by Congress. Or alternatively the folks at the IRS could simply eliminate them using new interpretations of existing laws.

So there you have it. A potential nightmare scenario: higher interest rates and a clamp down on tax-led deals could dry up the deal flow.

When it does, expect stocks to languish.                    

See original story here.

Barrons: The Three Big Trends to Watch Internationally

By SIMON CONSTABLE

When George Evans, portfolio manager of Oppenheimer International Growth (ticker: OIGAX), isn't worrying about what the future will look like for his investments, it's likely that he'll be reading for pleasure.

The native of the U.K., who graduated from Oxford with a joint bachelor's and master's in geography, and then earned an M.B.A. from Wharton, says he reads an "enormous amount," including history, armchair science, and novels. Though this reading is not directly tied to his day job, "You never know where ideas come from," he says. "It's tremendously important to read extensively." See original story here.

Photo by Greg Rosenke on Unsplash

Barrons.com: Who You Gonna Believe, Janet Yellen or Your Lying Eyes?

By SIMON CONSTABLE

When it comes to inflation, who are you going to believe, Janet Yellen or your lying eyes? If you see rising prices you should tweak your portfolio with some inflation-loving stocks.

Yellen, who heads the Federal Reserve, says inflation is subdued. The latest government data could delude you into thinking that's true, with the consumer price index up less than 2% on the year.

But here's the rub, because like politics, all inflation is local. If rising prices empty my wallet then we have inflation, regardless of what the government says. See original story here.

United States Federal Reserve, 

Public domain, via Wikimedia Commons

WSJ: A Fund-Company Chief Embraces Technical Analysis

By SIMON CONSTABLE

If it wasn't for the global financial crisis that began in 2007, Sam Stewart, president of the Wasatch Funds, might never have considered using so-called technical analysis to help pick stocks.

But these days he wouldn't consider doing otherwise.

Technical analysis, also known as chartism, is the art of using patterns in stock-price charts to help make investment decisions. It differs from "fundamental" analysis, which looks at the economics and finances of industries and companies.

It's unusual for investment managers who rely on fundamental analysis to give much weight, if any, to stock charts, says Vinny Catalano, chief investment strategist at New York-based Blue Marble Research, a market-research and asset-management firm. Fundamental analysts, he says, often dismiss technical analysis as fluff that lacks any theoretical underpinning for its conclusions. But not Mr. Stewart.

In the fall of 2007, he saw value in stocks. The major indexes were starting to drift lower then, and some sectors, including financials, were already tanking. Some stocks looked cheap to him, based on fundamental analysis, so he bought them—and lost money as markets plunged in 2008 and into 2009.Wasatch Advisors, the fund-management firm Mr. Stewart founded in 1975 and still runs, is well known for doing solid fundamental research and generating competitive returns. "We used to be 100% fundamental analysis," Mr. Stewart says.

In retrospect, Mr. Stewart says, "I lost sight of the forest for the trees." If he had looked at the charts at the time, he'd have said to himself, "You are crazy" to consider buying, he now says.

So, while Wasatch still conducts intense fundamental analysis, Mr. Stewart now monitors "several technical indicators that were flashing warning signs prior to the global financial crisis," as he explained in an April 4 letter to Wasatch shareholders.

He focuses on two technical indicators to supplement his analysis. One is point-and-figure charts, designed to display patterns in share-price movements in a way that makes it clear when a new upward or downward trend has emerged. The other is moving averages of share prices. For instance, if the current price of a stock is above both its average over the past seven weeks and its average over the past 21 weeks, and both moving averages have an upward slope, then the stock is in both a short-term and long-term upward trend. Many chartists see that as a buy signal.

For those who are bullish on stocks, Mr. Stewart has some good news. The same indicators he ignored at his peril back in 2007 "are giving me reasons for optimism today," he wrote to shareholders.

See original story here.

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.