Goldman Sachs’ Cohen: New bull market has begun

U.S. stocks have entered a new bull market, and the S&P 500 index could rise as much as 10 percent from current levels by the end of this year, Goldman Sachs strategist Abby Joseph Cohen said on CNBC on Thursday.

Goldman Sachs sees the benchmark Standard & Poor’s 500 index in a range of 1,050-1,100 toward year-end, said Cohen, the firm’s senior investment strategist and president of its Global Markets Institute.

That range, she said, “is where we should be toward the end of this year. “We do think the new bull market has begun,” Cohen said. “It may prove it began in March of this year.” Stocks have recovered sharply since hitting 12-year lows in early March, with the S&P 500 index now up 47 percent since trading as low as 666.79 points in March. In early afternoon trade on Thursday, the S&P was off 0.53 percent at 997.44 points.

Cohen also said she expects the labor market to improve, but in “an erratic way. “It appears job losses are slowing, and there is some job creation going on,” she said. But “we have many more months of difficult labor situation ahead, even if the recession, using GDP or industrial production, is almost over.” The U.S. labor market has remained weak even as other parts of the economy have improved, with the unemployment rate at just under 10 percent.

Friday’s July employment report from the Labor Department is forecast to show the jobless rate at 9.6 percent, its highest since June 1983, and 320,000 monthly job losses, according to a Reuters survey.

Cohen said sectors tied to economic improvement are likely to be the best stock picks for right now, including energy, technology and financial companies. “Many of us have lost track of the fact that most of these (financial) stocks do follow economic growth, so when the GDP is doing well, financial services tend to do well,” she said.

Goldman Sachs on Wednesday raised its gross domestic product forecast for this year’s second half to an annualized rate of 3 percent, from a prior outlook of 1 percent, citing an expected increase in production by companies. “Many companies trying to be very cautious over last year really squeezed inventories down to levels that are unsustainable,”

Cohen said on CNBC. “Even without any notable improvement in current demand, companies just need to have more stuff in the back room to get their business done.”

Dow Sends Buy Signal That’s Worked Since 1921

The Dow Jones Industrial Average is sending a buy signal that has foreshadowed gains of 18 percent during the past nine decades.

 

The 30-stock gauge climbed to more than 10 percent above its mean level from the previous 200 days, rebounding from 34 percent below the so-called 200-day moving average in November, according to data compiled by Bloomberg. Eighteen of the last 21 times the Dow rallied from at least 10 percent below the 200-day level to 10 percent above, it posted gains during the next 12 months, Bloomberg data since 1921 show.

The CHART OF THE DAY tracks the difference between the Dow’s last price and its 200-day average since 1989. The lower panel displays the measure’s price, along with the buy signals it sent near the start of rallies in 1991, 1999 and 2003.

“This rally, while it will have its fits and starts, is the beginning of a new trend, not just a bounce,” said Michael Williams, managing director of New York-based Genesis Asset Management, which oversees about $2 billion. “It is a significant opportunity.”

The Dow posted an average advance of 18 percent during the 12-month period following buy signals since 1921, Bloomberg data show. In the six-month period, there were 17 advances for an average gain of 8.2 percent. In three months, it climbed 18 times, averaging an increase of 5.7 percent.

Returns by the Dow Jones Industrial Average 12, 6 and 3 months after the buy signal.

Buy Signal            12 Months         6 Months      3 Months
June 11, 2003          13.36%             8.98%         3.01%
Jan 8, 1999            19.49%            15.38%         5.75%
March 5, 1991           9.05%             1.21%         1.11%
Jan  27, 1989          10.18%            13.46%         4.14%
Sept. 3, 1982          31.38%            23.02%        11.67%
July 18, 1980           3.78%             5.34%         3.48%
Aug. 9, 1978           -3.74%            -7.76%        -9.83%
March 7, 1975          26.43%             8.63%         9.11%
Dec. 7, 1970            4.73%            12.75%         9.69%
May 8, 1967             1.02%            -6.60%         1.41%
Jan. 25, 1963          15.20%             1.18%         5.68%
July 24, 1958          33.51%            19.91%         8.53%
Dec. 13, 1949          16.26%            15.04%         3.15%
Nov. 6, 1942           16.66%            18.21%         8.29%
Sept. 11, 1939        -16.61%            -4.49%        -5.20%
July 6, 1938           -3.05%            10.95%         7.49%
Feb. 18, 1935          43.10%            19.09%         8.06%
Apr. 19, 1933          54.47%            23.53%        51.63%
Aug. 29, 1932          37.72%           -31.68%       -21.87%
Aug. 18, 1924          35.82%            14.36%         5.46%
Dec. 12, 1921          21.89%            12.53%         8.12%

Average                17.65%             8.24%         5.66%

The overhang of ready supply places a fairly firm cap on the price

NATURAL GAS
At the height of its late 2005 rally, natural gas in the U.S. was selling for just over $16/MMBtu, 350% higher than today’s price of $3.56. The oil/gas ratio, now over 18, is an all-time high… suggesting that natural gas is dirt cheap. So, it’s a buy, right?

In a phrase, not exactly.

According to a recent report by Natural Gas Intelligence, U.S. natural gas available for production “has jumped 58% in the past four years, driven by improved drilling techniques and the discovery of huge shale fields in Texas, Louisiana, Arkansas and Pennsylvania, according to a report issued Thursday by the nonprofit Potential Gas Committee (PGC).”

According to the report, the increase in gas discoveries and production improvements means that North America shouldn’t have to be concerned about gas supplies for up to 100 years!

Dr. Marc Bustin provided an overview of the situation in the May edition of Casey Energy Opportunities.

In the United States, the tremendous growth in natural gas resources and estimated recoverable natural gas, particularly from gas shales, just in the last two years (Figure 1) is sending tremors through the entire industry. These tremors include the risk of making obsolete the proposed $26 billion Alaskan and $16 billion northern Canadian pipelines to tap northern gas resources and a slue of proposed LNG terminals… unless they are for export!

The numbers currently kicked around are that something around 2,000 trillion cubic feet of gas are technically recoverable in the United States. At current production rates, this supply would last about 90 years.

Some analysts are predicting that even if the U.S. economy recovers in the next year, the amount of gas discovered to date in gas shales will severely dampen any increase in gas price for some time. According to a new study by energy consulting firm CERA (Cambridge Energy Research Associates), new technologies for unconventional gas fields are being applied so successfully that supply is essentially no longer a driver in either production or price in the North American gas market – whatever the market wants, North American gas fields can supply. CERA reports that natural gas production in the Lower 48 states has risen a startling 14% from 2007 to 2008, for example.

Figure 1. Major shale areas or formations in the U.S. and the estimated recoverable natural gas in 2006 and 2008. Modified from Daily Oil Bulletin (May 4, 2009).

Given the increase in production and the small slide in demand, the price of natural gas has fallen to around $3.50-$4.00 per MMBtu (down from $13 per MMBtu last summer). At these prices, many gas prospects are uneconomic, and thus there has been a marked decline in the number of wells being drilled. Rig activity (how many rigs are operating) is down about 50% in North America.

But here is where an interesting feedback mechanism kicks in. One of the characteristics of unconventional shale gas wells, and to a lesser extent natural gas wells in general, is that the production rate declines through time. Most shale wells’ production rates decline 60 to 90% in the first year. If you were a gas company trying to survive amidst today’s low prices, the rate of return on your capital investment would also be painfully low for a significant amount of gas if this were your initial year of production.

Another complementary fact is that over 50% of natural gas consumed in the United States today is from wells drilled less than three years ago, and 25-30% of the gas produced today comes from wells drilled last year (Figure 2).

Hence it follows that if there are 50% fewer wells drilled this year (from the drop in rig activity), new production will decline about 35-40% by the end of the year, so there will be gas shortages. Those will in turn lead to higher North American prices, which in turn should lead to additional drilling.

Figure 2. Historical gas production in the U.S. showing the percentage of production from vintage of well (modified from Chesapeake April 2009 Investor presentation from original data of HIS Energy)

Everything else being equal (which it’s not, this being the real, not the mathematical world), gas prices and drilling will see-saw until an equilibrium is reached. In detail, of course, things are more complicated, but it is pretty clear that gas prices will have to rise within the year, and the big losers will remain the more expensive plays that require higher gas prices to be economic.

Where will the gas price end up in the short term? A poll of analysts by Reuters suggests $6 MMBtu in 2010 (Daily Oil Bulletin, May 4, 2009), but I don’t think I would bet on a gas price based on a vote by analysts. At the same time, it’s an interesting coincidence (or not – coincidence, that is) that many prospects become economic at around the $6 MMBtu range. Among them are the Haynesville and Marcellus shales – and it’s no large leap from there to see their tremendous gas production potential acting as a buffer to gas prices going much higher in the near term.

Thus, while there may be some seasonal and relatively short-term trading opportunities in natural gas, the overhang of ready supply places a fairly firm cap on the price. Which begs the question, which big-trend energy opportunities should be getting our attention today?

Marin Katusa, who heads the Casey Research energy team, answers the question by, correctly, cataloging the opportunities according to geography.

In North America
1. Geothermal — the most interesting of the alternative energy sources, by a wide margin.

2. Nuclear.
3. Oil.

In Europe

1. Unconventional gas has, by far, the most upside.
2. Unconventional oil.
3. Small hydro (such as run of river).

In Africa

First and foremost, you want to avoid infrastructure plays (pipelines, refineries, etc). Then you want to look for areas with huge oil potential, which have been held off the market by concerns over political risk. I like what Lukas Lundin is doing in Ethiopia, Somalia, and Kenya, hunting for “elephants” with the idea of eventually selling the discoveries off to the Chinese.

In Asia,
1. Liquid Natural Gas (LNG)
2. Coal Bed Methane (CBM)

Lessons to learn

There are a couple of useful lessons to be derived by investors looking to tap into the virtually unlimited opportunities in energy.

First, just because something is “cheap” doesn’t mean it can’t stay cheap, regardless of historical ratios — if there has been a fundamental shift in the supply/demand equation. Which is very much the case with North American natural gas.

Secondly, geological and transport considerations make much of the energy complex a “local” market.

For example, while North America enjoys an abundance of natural gas, Europe is forced to rely on the heavy-handed Russians for the bulk of supplies. As you read this, there are companies looking to break the Russian grip by applying the same unconventional gas technologies that have so successfully built gas supplies in the U.S. — technologies that are only just now being applied in Europe. Early investors could reap huge profits.

In short, the real opportunities are not found by simply “investing in energy” but rather by taking the time to understand the structural differences within the energy complex and cherry picking the special situations that invariably exist in a sector this large.

Existing home sales show signs of recovery – sales rise in June for the third consecutive month

The U.S. housing market is finally on the mend after its most far-reaching collapse in 70 years. That could help rebuild consumer confidence and revive the economy

For the first time in five years, sales of previously occupied homes rose for the third consecutive month in June, while foreclosure sales and the glut of homes on the market both declined

The figures, released Thursday by the National Association of Realtors, and a string of rosy corporate earnings reports sparked a rally on Wall Street as the Dow Jones industrials rose above 9,000 for the first time since January.

People believe that the worst is behind us,” said Julie Longtin, a real estate agent with Re/Max Professionals in Providence, R.I., an area that has suffered deeply from record foreclosures of risky loans.

Sales also have risen for three straight months in 40 out of 55 major metropolitan areas tracked by the Associated Press-Re/Max Housing Report, also released Thursday. Prices rose during that period in about half of those areas.

Still, unlike past recessions, the turnaround in the real estate sector is likely to have a muted effect overall. That’s largely because homebuilders are expected to keep bulldozers idle as long as they face competition from bargain-priced foreclosures. And it’s likely to take at least another year before job losses and foreclosures peak.

The Labor Department said Thursday the number of newly laid-off workers seeking jobless benefits rose 30,000 to a seasonally adjusted 554,000 last week, though the government said its report again was distorted by the timing of auto plant shutdowns.

Unemployment insurance claims have declined steadily since the spring, but most private economists and the Federal Reserve expect jobs to remain scarce and the unemployment rate to top 10 percent by year-end.

We’re not going to see much growth in (home) sales until the labor market turns around,” said Patrick Newport, an economist with IHS Global Insight. “People don’t move as much when they can’t find work.

But companies should start hiring as their fortunes improve — and there were some early signs Thursday that’s starting to happen.

Ford Motor Co. surprised investors with a profit of $2.3 billion, due mainly to a huge gain for debt reduction, while manufacturing conglomerate 3M Co. and candy maker Hershey Co. raised their profit forecasts for the year.

The Dow Jones industrial average, the stock market’s best-known indicator, shot up almost 190 points Thursday to 9,069.29, its highest level since November, and all the big indexes gained more than 2 percent.

Analysts said signs that housing market is finally, gradually turning around could help spur demand as buyers become less fearful of losing their shirts.

It’s been the abject pessimism about house prices that has placed a pall over the housing market,” said Mark Zandi, chief economist at Moody’s Economy.com. “As that psychology reverses itself, things start to work in the opposite direction.

Home sales rose 3.6 percent to a seasonally adjusted annual rate of 4.89 million last month, from a downwardly revised pace of 4.72 million in May. Sales are now around the same level as before last fall’s financial crisis.

Foreclosures, however, continue to put pressure on home prices. About one out of three homes sold in June was foreclosure-related, down from nearly half earlier this year.

And despite some buyers’ optimism, some still see potential problems ahead. A tax credit of up to $8,000 for first-time homebuyers expires Nov. 30. Mortgage rates are up from record lows reached last spring, and companies are still shedding jobs.

The nationwide median sales price was $181,800 in June, down 15 percent from year-ago levels but up slightly from $174,700 in May. And an Associated Press analysis shows the shows that the gap is narrowing between the sellers’ asking price and the final sales price, indicating homeowners have finally accepted that their homes are worth far less today.

Jim Dugan, a 53-year-old plumber, is looking for foreclosures and other low-priced properties in Providence. He wants to buy eight investment properties this year and is slated to close on a small bungalow next week for $62,500.

The property was originally listed for $85,000. But Dugan was able to snare a deal because he didn’t need a mortgage, instead tapping a line of credit and his savings.

“Cash talks,” he said.

Investor activity is helping to pare the number of homes on the market. Nationwide there are about 3.8 million, or a 9.4-month supply at the current sales pace. When the market balances at a 7-month supply, prices should begin to stabilize.

A healthy housing market is characterized by prices that rise a relatively modest 4 to 5 percent every year. But this year’s sales prices are still far lower than last year.

Those low prices combined with mortgage rates around 5 percent and a tax credit for first-time homebuyers have made homeownership more affordable than it’s been in decades.

We are seeing contracts like crazy,” said Valerie Huffman, a vice president of Weichert Realtors, in Montgomery County, Md., where home sales are up by 42 percent over last year. “We’re having multiple bids on anything that’s priced well.”

He Called the 2007 Top and Recent Rally, Now Charles Nenner Sees Trouble Ahead for Stocks

Charles Nenner of the Charles Nenner Research Center uses some unorthodox methods to predict the markets. In a nutshell, he ignores what most people think of as fundamental news and uses a variety of cycle indicators to forecast market movements, often to a specific date.

Nenner’s view is that market cycles repeat, and the key is finding points in time when long- and short-term cycles sync up to give a major buy or sell signal.

Sounds crazy, right?

Well, there must be some method to the madness because the former market-timing consultant at Goldman Sachs has made some stellar calls, including:

Forecasting a Dow peak of 14,500 in the summer of 2006.
Calling the market top in October 2007.
Forecasting in late 2007 a “deflation scare” would occur in 2008, something he says isn’t over yet.
In February 2009, predicted a major rally would start “in a few weeks” and could take the S&P as high as 1000.
So what is Nenner saying now?

After some short-term gains to coincide with month-end window dressing, Nenner predicts the stock market will turn south, possibly sharply.

“I’m still worried we could test the lows,” he says, suggesting a break of S&P 850 would make that grim outcome a near certainty.

Check the accompanying video for more on Nenner’s analysis, including some insights on how he uses the past to predict the future.

Video

Charles Nenner’s site

30-Years of Inflation Coming, But “Deflation Scare” Not Over Yet, Cycle Maven Says…buy gold ? wait 6-7 weeks and we should pick up !

Everyone is right to fret about inflation but the “deflation scare” isn’t over yet, says Charles Nenner, founder of the Charles Nenner Research Center.Renowned for his cycle work, Nenner sees deflation remaining dominant until year-end and inflation not picking up for another 18 months. But that will be the start of a 30-year (yes, year) upcycle for inflation says Nenner, who spent 12 years as a market-timing consultant for Goldman Sachs.

The investing implications of this scenario are clear:

• Nenner is bullish on gold for the long-term and even more bullish on gold mining stocks, which he says are currently cheap relative to bullion.
• After a secular decline, Treasury yields are set to rise, with Nenner predicting the 10-year yield will reach 5.50% by Spring 2013, a 45% rise from Friday’s close of 3.78%.

What’s less clear is the timing of this trade. Nenner believes the “deflation trade” is about to reassert itself in the short-term, meaning strength in the dollar and Treasuries, and weakness commodities and equities, as we’ll discuss in more detail in a forthcoming segment.

For those who believe the dollar is doomed, Nenner notes “all currencies are bad.” In other words, currency trading will be a game of relative bets vs. a one-way trade against the greenback, as so many expect.