Global Stock Market BLOG - Mike Burnick

“Holy Grail” of ETFs Looks Like a Dead-End to Me

The world’s first actively managed exchange-traded fund (ETF) – the industry’s long sought-after “holy grail” has finally been realized at last, or so the industry would have you believe.

After years of discussion between fund sponsors and regulators, the ETF sector finally has its first actively managed ETFs.  Invesco PowerShares last week launched four new ETFs on the New York Stock Exchange, after being granted regulatory approval.

Since the very first ETF was launched 15 years ago they have quickly become one of the hottest investment vehicles of all time. Assets under management in ETFs soared 30% last year alone to nearly $560 billion. ETFs have proven especially popular among affluent investors.

It’s worth noting here that the very first ETF launched in 1993 was designed to track the S&P 500 Index. That’s been one of the key advantages to ETFs all along. That’s a key advantage that actively managed ETFs don’t have in their favor.

Index Tracking ETFs Keep Costs Low

Up until now, each of the hundreds of ETFs listed is designed to track an index. There are ETFs that track stock indexes, ETFs that follow bond indexes, ETFs that track commodities, real estate, specific sectors… you name it.

Index tracking ETFs, like the Vanguard index mutual funds that came before them, are very low cost investments. No active management means no high management fees. As a result, the average expense ratio for ETFs is less than 0.4%, while actively managed mutual fund expenses average 1.2% -- three times higher!

Investors are attracted to ETFs for this very reason (among others)… low fees. Lower fees mean higher investment returns. Compound that over enough years in the market, and it’s easy to see why index ETFs are so appealing. In fact, they tend to outperform most mutual funds.

Who Needs Actively Managed ETFs Anyway?

According to Bruce Bond, CEO of PowerShares, the introduction of actively managed ETFs “is a watershed event for the industry because people have not had access to active management within the ETF structure before now.” Bond claims that active ETFs will transform the industry landscape. Somehow, I seriously doubt that.

There are more than 10,000 conventional mutual funds in existence today. The vast majority of these are actively managed funds, with high-priced fund managers collecting fat fees in return for their investment skills.

Sadly, over 90% of these actively managed mutual funds cannot beat the market index return; most fall well short in fact. In other words, investors are paying higher management fees for nothing. No wonder index-tracking ETFs are so popular.

Other big advantages of ETFs are liquidity and transparency. Actively managed mutual funds can only be bought once a day, at the end of the day, when financial markets are closed. ETFs  by contrast are listed on major stock exchanges and can be bought and sold throughout the trading day, minute by minute, and tick by tick.

Transparency: Another Key Advantage is a Roadblock for Actively Managed ETFs

With ETFs you always know what you own. That’s because regulators require ETF sponsors to disclose all their positions every day.  Mutual funds are only required to disclose fund holdings once every six months.

One of the stumbling blocks that PowerShares new actively managed ETFs had to overcome was this transparency issue. Active fund managers – that is the few ace managers who actually can beat the market – like to keep their investment strategies under wraps to some extent. If other investors could plainly see what they’re buying then those stocks would shoot higher, eliminating the active manager’s edge.

According to one industry expert, if “you talk to any active manager that actually has skill, they don't want to disclose what they have every day… that’s the last thing any money manager wants.”

As a result, I very much doubt that actively managed ETFs will attract many talented money managers who could earn much more money by running traditional mutual funds (not to mention hedge funds). Far from being a “watershed event”, the holy grail of actively managed ETFs just doesn’t make much sense to me.

Instead of transforming the industry, active ETFs look like they’re dead-on-arrival in my opinion.

Petrobras’ Voyage to the Bottom of the Sea

Brazil’s Petrobras made headlines recently with the discovery of potentially rich offshore oil fields that hold the promise of more than 40 billion barrels of recoverable oil… the largest oil find in the Western Hemisphere in three decades.

“If confirmed by further drilling the reserves will be triple the size of Alaska's Prudhoe Bay, the largest U.S. field,” according to a report in Bloomberg news.

So, with a discovery of such titanic proportions, why hasn’t it put a dent in skyrocketing crude oil prices?

Perhaps it’s because the Petrobras discoveries were found more than 6 miles beneath the South Atlantic Ocean.

No More “Easy” Oil

It’s been said that all the “easy” oil reserves have already been found, and exploited long ago. Nothing drives that point home quite as well as this story of Brazil’s promising Tupi and Carioca oil fields.

These promising new offshore oil discoveries lie more than 150 miles off Brazil’s coastline; in water that’s as deep as 32,000 feet beneath the surface. That’s nearly twice as far down as the world’s deepest producing offshore wells.

At such depths, the water pressure on drill pipes is 18,000 pounds per square inch – that’s enough to crush a pickup truck like a beer can.

The engineering challenge in extracting oil from such depths is mind-boggling. An oil company executive says: “What we do at that water depth in the ocean is similar to NASA's space program, but they get to do it without any pressure trying to attack them.”

$200 Million Offshore Wells

On the ocean floor, the drilling equipment must be capable of operating at temperatures near freezing. Once there, the oil is still deep beneath the seabed under a layer of salt more than one-mile thick.

That’s another big obstacle, because even the best seismic mapping gear can’t penetrate salt crystals very well. So pinpointing the most lucrative oil deposits can be difficult at best. If Petrobras drills in the wrong spot, they’ve wasted lots of time and money.

Petrobras isn’t saying exactly how much it spent on the initial test wells, but similar drilling by Exxon and Chervron in the Gulf of Mexico cost $180 to $200 million for EACH well… and that was much shallower water.

Getting through this ancient salt bed at the bottom of the sea means using high-tech diamond encrusted drill bits made out of the same material used in nuclear reactor fuel rods.

Chevron shattered as many as a dozen drill bits – at $50,000 a pop – at EACH of 14 deep water drill sites in the Gulf of Mexico. That project cost the company nearly $5 billion.

Petrobras Climbs the Ranks of Top Producers… But at What Cost?

Once Petrobras successfully taps into its offshore oil bonanza special pipes are needed to carry it to the surface. These pipes must be designed to carry oil at temperatures above 500 degrees Fahrenheit.

As one oil analyst says, “A big find might not be a good find if it costs so much to develop that it's not commercially viable.” As I said: all the easy oil has already been found.

This 40 billion barrel find could catapult Petrobras into the upper ranks of the world’s biggest oil producers.

The reality is: the oil from these offshore fields would most likely never make it to a refinery without crude above $100 a barrel.

As far as making a dent in the global supply-demand inmbalance, the first significant oil from Tupi isn't expected to flow until 2012 to 2015 at the earliest.

Crisis & Opportunity: Two Sides of the Same Coin!

The Economist Magazine labels it “The Silent Tsunami.” The International Monetary Fund and World   Bank say it is the biggest threat to emerging markets – a greater risk even than the ongoing credit crunch.

What are they all talking about? The global food crisis and the impact it’s having on soaring inflation rates – and potentially slower growth around the world – particularly in developing countries.

As my colleague Eric Roseman has detailed, over the past year wheat prices have tripled and soybeans nearly doubled. Just since January alone, rice prices have sky-rocketed 141%.

That’s potentially devastating to the 3 billion plus in emerging Asia for whom rice is the most basic of staple food sources. While the IMF and World Bank are focused on "how to solve" the food crisis, I'm looking for ways to profit from those solutions.

Food “Hoarding,” Export Restrictions, Only Make Matters Worse

Many countries are responding to this food crisis by hoarding food supplies. The World Bank is currently monitoring 48 nations that have imposed some form of price controls or export restrictions designed to keep more grain at home. The inevitable consequence is that supplies available on global markets will be reduced even more.

The price of one variety of wheat shot up 25% in a single day amid news of export restrictions in several large wheat producing countries including Russia and Kazakhstan.

This will only worsen an already dire situation, driving grain prices higher still. With rice prices recently trading above $1,000 per ton for the first time ever, rice exporters including Vietnam, India and China have imposed export restrictions.

In other words, expect even higher rice prices ahead, thanks to these misguided protectionist policies.

There’s no end in sight either. Eric sees “powerful supply-side fundamentals pushing prices even higher over the next several years, there's no reason why grain prices can't double or triple from current levels.”

Is There a Silver-Lining to High Rice Prices?

Inside every dark storm cloud, you can usually find a silver-lining. There’s always a flip-side to every coin. For the global food crisis it’s no different. That’s because amid every “crisis” there’s usually and opportunity to profit too… if you look hard enough.

Amid the global rice crisis, the opportunity lies in the world’s leading exporter of rice: Thailand.

Thailand is a dynamic emerging market that has seen rapid growth over the past dozen years, but political turmoil in 2006 short-circuited Thailand’s bull market. A military coup ousted the elected government, throwing Thailand’s economy into chaos for about 18 months.

In March however, the Thai military stepped aside, and a newly elected government was installed in Bangkok… a government that’s pursuing pro-growth policies.

Perhaps in anticipation of these events, Thailand’s economy is now beginning to enjoy robust growth again. Job growth is picking up, and along with it consumption is expanding at a healthy clip.

The new government just introduced a package of personal and business tax cuts and other fiscal stimulus measurers that should spur the economy even more. 

Kitchen of the World Enjoys a Golden Opportunity

Thailand’s exports are soaring again. Export growth surged 24% in the last quarter of 2007 leading Thailand to its fastest economic expansion in more than two years.

Since agriculture makes up 10% of exports, Thailand is also cashing in on rising food prices world-wide...especially Thai rice, which has tripled in price over the past year! This is the opportunity I’m talking about, which is the flip-side to the global food crisis.

Thailand is the world’s largest exporter of rice; the “kitchen of the world”. In fact, between November 2007 and February of this year, rice exports from Thailand were running at the rate of one-million tons a month – an “unprecedented bonanza” according to the Economist.

And Thailand’s new government isn’t talking about potentially damaging export restrictions or tariffs; instead they’re taking a free-market based view.

Thailand’s new prime minister says that high global prices are an “opportunity” for Thai farmers to export rice at higher prices. As a result, they're likely to grow even more Thai rice. That’s a smart market-based solution to this problem, rather than government intervention.

Although government policies often have the best intentions, we all know they rarely work as planned, and often do more harm than good. That’s the law of unintended consequences at work. Instead, Thailand’s prime minister says high rice prices are “a matter of supply and demand,” and that there’s “no need” for export restrictions.

So here you have, not only an up and coming emerging market, but one that’s poised to cash-in on soaring food costs as well. It's just another example of a rich profit opportunity that can be found amid crisis.

A Timely Update from Our Ace Asian Analysts on the Power of SanTong

Share prices in mainland China soared 16% this week - with the benchmark CSI 300 Index gaining over 9% on Thursday alone – the largest single-day gain ever recorded.

It’s clear that Beijing is serious in its attempt to put a “floor of support” under mainland stock markets in Shanghai and Shenzhen. China’s two mainland stock exchanges have lost about 50% of their market value since October 2007.

That’s an amazing $1.7 trillion in wealth destruction… it makes the subprime credit crunch losses of $300 billion seem like peanuts in comparison.

Beijing Pulls Out All the Stops

To follow up on an earlier blog post (China Shares Get Cut in Half, But Don't Panic Just Yet), the catalyst for this week’s strong rally was Beijing’s cut in taxes on stock trading, or the “stamp duty”, a move that was widely expected.

Less well know however, China has made some other moves recently that indicate a coordinated move by the authorities to shore up China capital markets.

We're fortunate to have friends like Jack Flader, at Global Consultants and Services Limited (GCSL) in Hong Kong, who bring us "local intelligence" on what's really going on in this dynamic part of the world. According to GCSL, other rule changes in China could help sustain this rally.

Johnson Chien, who holds the fort in GCSLs Shanghai office, writes: “Mutual fund companies in China will temporarily be exempt from corporate tax for their stock market investment revenue which includes profits from stock and bond trading.”

So in addition to much lower transaction costs for retail investors, thanks to the cut in the stamp duty, China’s institutional investors are getting a very big tax cut too. In addition to the tax cuts, Beijing recently tripled the amount of foreign investments allowed to flow into mainland shares to $30 billion.

Also, Chinese regulators just opened the sale of new mutual funds to mainland retail investors, after a five-month hiatus. Meaning even more retail cash is likely to flow into the mainland markets soon.

Will SanTong Provide a Catalyst for More Chinese Stock Gains?

Johnson also makes a bullish case for Taiwan, which reinforces my own views. The landslide victory of the KMT in recent elections sends a clear signal that “the policy of SanTong between Taiwan and China will come to fruition,” according to GCSLs analysis.

SanTong  is taken “from the ‘Cross-Straits Act’ which was discussed between Taiwan and China 10 years ago.” This early-stage economic détente between China and Taiwan sought to liberalize transportation and trade links between the two. Another aim is to reduce business investment restrictions across the Taiwan Strait.

Well, Taiwan’s recent election result paves the way for SanTong in a big way. In fact, the desire for economic reconciliation between the two is crystal clear in the US$3billion in cash that returned to Taiwan in the days after the election.

This post-election cash influx triggerd a huge spike in the Taiwan dollar – which has risen nearly 7% in US dollar terms in just two months! And these capital flows are rapidly finding their way into Taiwan stocks as well.

According to GCSLs Johnson Chien, “The central bank of Taiwan is now expecting another infusion of US$20 billion.”

It looks to me like both Taiwan stocks - AND the currency - are good BUY candidates right now!

Is Wall Street’s "Top-Cop" Involved in a Subprime Cover Up?

The ongoing subprime credit crunch is far from over. As my colleague Eric Roseman pointed out in an article yesterday, the prime-indicator that signaled the crisis is flashing red again… this time in several economies overseas.

Here at home, Uncle Sam is doing his level-headed best to simply sweep this crisis under the rug. In fact, regulators have even gone so far as to hush-up an investigation into the demise of Bear Stearns. Shocked? Don’t be…

Back in January I described how U.S. credit-rating agencies were under pressure to maintain an investment grade seal of approval on hundreds of billions in sub-prime debt and other sordid asset-backed securities.

But Washington’s attempt to cover-up this mess goes even further… straight to the top of the Securities Exchange Commission.

The SEC is responsible for regulating securities firms, and bringing enforcement actions when necessary.  But it seems America’s “top-cop” abruptly ended an enforcement case into activities at Bear Stearns – just months before the firm imploded in March.

What Did the SEC Know About Bear Stearns, and Why Did They Do Nothing?

As far back as 2005 – in the hey-day of the subprime lending craze – the SEC “said it planned to recommend that Bear Stearns be charged for the way it priced and valued about $63 million of CDOs,” according to the Wall Street Journal.

These are the now toxic collateralized debt obligations that Bear Stearns, and other Wall Street firms happily churned out in record numbers during the boom. Aided and abetted with triple-A credit ratings from the big agencies to make them more saleable, Wall Street pawned-off these toxic securities to investors globally.

So far, big banks and brokerage firms have collectively suffered losses of more than $300 billion (and still counting) in the credit market bust that followed. Most of these losses and asset write-offs are due to CDOs; many of which are trading today at just a fraction of the value that Bear Stearns and others originally sold them for.

Since the SECs investigation into Bear Stearns activity apparently began way back in 2005, you’d think they would have dug up enough subprime dirt to bring an enforcement action. But last December, the SEC apparently “pulled back” from this investigation without bringing any formal charges. Three months later, with Bear Stearns practically bankrupt, it was sold off to J.P. Morgan at a fire-sale price.

Taxpayers Have a Right to Know...

It turns out that Congress got wind of the Bear Stearns probe, and curious as to why the SEC prematurely scuttled its investigation, requested information. According to the story, “In an April 2 letter, Sen. Charles Grassley, an Iowa Republican, requested information from the SEC into the circumstances surrounding the dropped case.”

Citing “confidentiality” the SEC has so far refused to share details with Congress. However, taxpayers are now on the hook for $29 billion worth of Bear Stearns assets that the Federal Reserve was kind enough to “guarantee” as part of the fire sale to J.P. Morgan. So with taxpayer’s money on the line, I think Congress deserves an explanation.

What does the SEC have to hide anyway? Bear Stearns is now practically dead and buried. Are there details of Wall Street’s subprime shenanigans that the SEC doesn’t want investors to find out about?  Inquiring minds want to know…

China Shares Get Cut in Half, But Don’t Panic Just Yet

So far this year, China's stock market lost nearly $2 trillion in market capitalization. Just to provide some scale, that’s equivalent to the entire value of Canada and Germany's stock markets – lost in less than four-months!

The bear market in China reached epic proportions yesterday, as I described here yesterday. The CSI 300 Index, which tracks A-shares (available only to domestic investors), listed in Shanghai and Shenzhen, has now plunged 50% from its all-time high reached just six-months ago. Over the same period, China’s output has continued to expand at an average rate of more than 11% – the world’s fastest growing economy by far.

How to reconcile these apparent contradictions? Well, that’s China for you.

Setting aside the question of whether Beijing’s economic data is accurate (just how accurate is ANY government data anyway), it is worth remembering that China’s mainland stock markets operate as a closed system.

It’s an un-real world detached in many ways from economic reality. Of course it’s still fun to watch this spectacle unfold. First we saw the stunning rise in Chinese share prices – which for the record soared 478% in 2006 and 2007. And now, the equally spectacular decline has arrived.

Shanghai Gets Too Expensive for Local Investors

But this is really just an exercise in curiosity for most of us, since China’s domestic exchanges are pretty much closed to foreign investors. While it’s interesting to watch from afar, China’s bear market has little impact on global financial markets. It doesn’t appear to be having much impact on the average Chinese investor either.

The financial media has an abundance of reasons for why Shanghai shares have dropped so sharply. “The simplest story is that the market was just too expensive,” says an analyst with HSBC in Hong Kong. At the height of last year’s speculation, China’s domestic shares traded over 70-times earnings.

The premium value awarded to A-shares listed in Shanghai, reached nearly twice that of the freely tradable H-Shares listed in Hong Kong; same companies, same earnings, but twice the price in Shanghai. That was the height of the speculative frenzy in China.

But what about the impact on Chinese investors who have just seen their investments cut in half? Here too, the fallout may not be that severe.

Chinese Speculators Run for Cover… But They’re Likely to Return Soon

To be sure, millions of new Chinese retail investors were seduced by the lure of fast profits over the last few years. At the height of speculation last year, China’s brokers were opening new retail stock trading accounts at a rate of about one-million per month! It was enough to make the 1999 dot.com bubble in the Nasdaq look positively tame by comparison.

Such behavior isn’t really surprising when the interest rate paid on savings accounts remains far below the rate of inflation. Cash is trash… wasting away in a bank account. But as Will Rogers would have reminded Chinese investors: it’s not so much the return ON your money, as the return OF your money, that’s most important!

A recent Financial Times article asks rhetorically if it’s “time to panic? Not really. Perhaps of all the world’s big stock markets, China’s can tank with the least collateral damage.”

Shanghai Share Crash Does Little Damage to China’s Wealth

The reality is that the Chinese are voracious savers, routinely stashing away about 50% of disposable income. Households and enterprises in China maintain a war-chest of over $4 trillion in savings at last count. The fact is, Chinese retail investors hold over 90% of their financial assets in cash. That’s plenty of potential stock “buying power” sitting on the sidelines.

China’s retail investors must by now be familiar with this kind of volatility in local share prices. After all, this isn’t the first time stocks in Shanghai suffered a sharp decline, and it certainly won’t be the last.

From 2000 to 2001, the Shanghai market fell almost 40% during a global bear market. In 2004 and 2005, Shanghai shares plunged over 40%, in the midst of a global bull market. Volatility is nothing new to Chinese investors.

In fact, due to the sheer magnitude of the recent decline, there’s good reason to believe the worst of the selling may already be over.

Shanghai Shares Much Cheaper Now, But Still Not a Bargain

Shares listed in Shanghai now trade at a more reasonable 26 times trailing earnings – and just 20 times estimated this year’s estimated profits – down significantly from P/E ratio of over 70 last year.

And falling share prices only explain part of the cheaper valuation. China’s corporate profits grew 48% last year at firms included in the CSI 300 Index. Earnings are expected to rise another 32% this year as well.

Solid profit growth, plus a much cheaper valuation, may lead investors back into A-shares just as soon as some upside catalyst emerges to dispel gloomy sentiment.

The government of course could provide just such a catalyst in the form of regulatory changes. Lowering taxes on retail stock is a great start, and this morning that’s just what Beijing announced. Mainland stocks responded with a rally of about 5% overnight. Last year, authorities tripled the stamp duty tax on share transactions, but could provide some relief with more tax cuts.

Another idea is to loosen restrictions on foreign institutional investment in China’s mainland markets. Entirely doing away with the cumbersome dual listing structure of A-shares (for Chinese investors) and B-shares (foreign investors), would be another positive step.

There are Cheaper and Safer Routes to Chinese Stocks

Beijing might even consider the more drastic step of using some of its $1.7 trillion worth of currency reserves to prop up share prices directly. After all, the government has dipped into its sovereign wealth before to bail out the banking sector – so why not the stock market. Remember, mainland China isn’t an open market… it’s a rigged game.

After all, China has said publicly that it wants to “diversify” its currency reserves!

Meanwhile, with Shanghai stocks down 40% so far this year, I still believe the best ways to invest in China today are through Hong Kong and Taiwan… the unrestricted gateways to Chinese stocks.

Hong Kong’s Hang Seng Index, which includes many H-share listings of top Chinese firms, is down just 10% in 2008. Taiwan is actually up 13% year to date, buoyed by recent election results that promise closer ties to mainland China.

These two markets still offer you much better bargains than mainland Chinese shares, even at 50% off!

The Dreaded Day of Reckoning Finally Arrives

It’s been a long-debated, much anticipated event, and it has finally arrived. You can’t say that you didn’t get plenty of advanced warning either.

What event am I talking about? It’s the economic slowdown now underway in China, of course. That day has finally arrived. It’s time for the China-bears to rejoice.

Growth has indeed slowed in the world’s fastest growing economy… to 10.6% in the first quarter of 2008, down from 11.9% for full-year 2007. That’s not exactly falling off a cliff now is it?

“But soon” say the bears, “any day now China will blow-up.” Don’t bet on it, says I.

Beijing actually revised its final 2007 growth numbers last week, upward… from 11.5% to the higher 11.9% for all of 2007. Even after “slowing” to the mid-10% range over the past three months, China’s economy continues a very robust expansion – growing about 18-times faster than the U.S.!

Exports Are NOT the Key to China’s Growth

Such strong growth is especially amazing considering the headwinds coming from the ongoing credit crunch and soaring food and energy costs. Heck, if China were expanding at just half the current rate, it would still be the world’s fastest growing major economy.

China’s export growth to the U.S. and Europe is slowing, no doubt about it. In fact, growth in shipments to Wal-Mart and other U.S. customers has been steadily declining over the past few years.

Most China-bears forget to mention this while warning of a devastating slowdown in exports that has in fact already happened. It started long before the Wall Street credit crunch.

Increased trade with other emerging markets, particularly in Asia, has more than picked up the slack for slowing shipments to the U.S. A recent Economist magazine article points out that “Asia and the Middle East accounted for more than 40% of China's export growth in the first ten months of 2007, North America for less than 10%.” In fact, China’s overall trade surplus continues to grow – by $41 billion in the first quarter of 2008 – up 40% from a year ago. That’s in spite of slowing exports to the U.S.

Investment and Internal Consumption Drive Expansion

Another popular misconception of the China-bears is this obsession with China as an export-only economy. Exports are very important for sure, but China’s economy is also a great story of accelerating internal demand growth. In fact, even if China’s “net exports fell to zero, China's GDP growth would still be close to 9% thanks to strong domestic demand,” according to the Economist.

Retail sales in China soared at a 21.5% annual rate in March. That’s the largest gain in consumer spending in over nine years!  Over 500,000 new automobiles drive off dealer lots and showrooms each and every month! As a result, China’s factories are running flat-out to keep up. Industrial production in China surged at close to an 18% annual rate in March, accelerating from 15.4% in February, the fastest pace in five-months.

This is yet another crystal clear sign that internal consumption is leading the Middle Kingdom’s impressive growth, just as much as external trade.

So how should global investors square China’s robust growth with a stock market that’s plunged over 30% in the first quarter? That’s a great question. In tomorrow’s blog post, I’ll take a closer look at what’s driving China’s share prices now, and what to look for next. Stay tuned!

Is The Rally For Real This Time?

Another day of record-setting losses for an iconic American financial firm… another triple-digit gain for stocks!

Today it was Citigroup’s turn to fess up to more “collateral damage” related to the ongoing subprime credit crunch… and it was a doozy. Citi posted a $5 billion first-quarter loss, and kicked in another $16 billion of write-offs and increased loan loss reserves. Ouch!

Still, as has been the case this week, investors chose to look-through the bad news. The financial sector losses being reported with first-quarter results this week have largely been anticipated and “priced in” to current market values.

As a result, Citigroup shares actually rallied 4.5% today – following in the footsteps of Merrill Lynch, and J.P. Morgan – both of which also reported dismal results, but saw their stocks rally.

It’s pretty clear that the point of maximum pessimism in this market has already passed – at least for now. While the credit crunch is far from over, investors are getting used to it now. Big credit losses no longer have the same “shock” value. Until the next unanticipated crisis comes along (which could be anytime), stocks have room to rally.

In fact, the S&P 500 declined for 5 months in a row from November through the end of March. Such a consecutive losing streak is rare. In fact, it’s only happened 7 times in the past 40 years. After the previous 6 occasions, the S&P 500 averaged a gain of 18% over the following 12 months. So we could see a similar robust rally now.

There are plenty of things to worry about in the future however. That’s because Wall Street still has great expectations for a speedy recovery in corporate profits this year, which ain’t likely to happen.

But hey, spring is in the air after an extended winter of discontent in the stock market. So who can begrudge investors a bit of a rally now? After all, it’s been a long time coming.

So sit back and enjoy. If the magnitude of this rally comes even close to mirroring the size of the decline since November – then it should be a very profitable experience for investors.

Is Russia Running on Empty?

Crude oil notched yet another record high today, trading above $114 per barrel. Analysts and investors (including yours truly) have been scratching their heads in disbelief at how oil could surge to such lofty levels, even amid a global economic slowdown.

But now we know why: The world’s second-largest oil producer, Russia, is running short on oil.

Well, Russia isn’t really running dry, at least not yet. But a top oil executive at Lukoil, Russia’s second biggest energy conglomerate, just told the Financial Times that the country’s prime oil fields in western Siberia are past their peak and that “the period of intense oil production [growth] is over.”

Another Major Oil Producer with Peaking Production

This news is not to be taken lightly, since Russia is second only to Saudi Arabia in global crude oil output. Russia has been counted on this decade as a key fast-growing producer.

If you think oil at $114 a barrel sounds steep, without rising Russian output helping to offset China’s growing thirst for oil, crude would already be priced much higher.

In the wake of the economic chaos that followed its debt default in 1998, Russian oil production hit a low of about 6 million barrels per day.

Since then output has increased in each of the past ten years, aided in no small part by western technology and investment. Last year, total Russian oil production reached nearly 10 million barrels a day – a new post-Soviet high.

In the first quarter of 2008 however, Russia’s crude output slipped about 1% to just 9.76 million barrels per day. And Leonid Fedun, a vice-president with Lukoil says that Russian oil production may not surpass the 10 million barrel mark again “in his lifetime.”

Russia’s Energy Sector Wounds Largely Self-Inflicted

Of course Russia’s current oil production peak is entirely a self-inflicted wound. I have written several times in this blog about how the Kremlin routinely shakes-down western oil company investors. Companies such as BP and Royal Dutch Shell have been forced to pay “protection” to the energy mobsters of Moscow.

This typically comes in the form of “renegotiated” royalty agreements, resulting in less profits and smaller ownership stakes for the western oil company “partners.”

Moscow has also been playing a lucrative protection racket against its own oil industry.

The Russian government forces oil firms to fork over a hefty 80% of oil sales over $27 a barrel! By my calculations, the Kremlin’s “take” in 2007 alone was nearly $30 per barrel sold in pure “oil tax” income.

Now multiply that by nearly 10 million barrels a day… it’s no wonder Russia’s foreign exchange reserves are growing so rapidly!

It’s also no wonder that western AND Russian oil firms alike find very little incentive to invest in new exploration and production projects there. After all, they don’t get to see much in the way of return on investment after paying off the Moscow mob.

To Boost Production, the Moscow Mob Should Ease Up on Oil Sector

So far this year for instance, the average price of a barrel of crude is $84.70. Since the Kremlin’s take is 80% beyond the $27 mark, the government gets $46.16 per barrel in taxes alone. Meanwhile, the oil companies taking all the risk get to keep $38.54 per barrel… talk about a windfall profits tax!

Russian oil firms, including Lukoil, are pushing hard for tax reform. Under a proposal currently being discussed inside the Kremlin, the firm stands to gain back another $1 billion it could use for new projects.

But Lukoil estimates that, to reverse the current output slump, the Russian oil industry will need to invest about $1 trillion in exploration and production projects. Much of that investment would need to come from major oil firms in the west.

Loosening the Grip on Russian Oil

Vast expanses of the Russian wilderness have yet to be explored for big potential oil finds. Who knows how much possible reserves lay beneath the frozen tundra of eastern Siberia?

What’s needed is a sensible energy policy from Moscow that allows a greater profit incentive for the oil industry. What’s also needed is western know-how to help find and exploit new reserves in a cost-effective manner.

But outside oil firms haven’t exactly been given a warm and fuzzy embrace from the Russian bear so far. Instead, the Kremlin is keeping too tight a strangle-hold on Russia’s energy industry – and it’s beginning to squeeze the goose that laid Russia’s golden egg – black gold that is.

Wall Street’s Rosy Profit Forecasts Need a Trim

In yesterday's blog post, I pointed out that investors are on pins and needles as first-quarter earnings season shifts into high gear. So far corporate America is NOT off to a very good start!

This all sounds so familiar. In fact I pointed out in a previous post (Suspicious Earnings Forecast Adds-Up to Uncertainty for Stocks) about one month ago that Wall Street's 2008 profit expectations were a bit too lofty.

Investor sentiment is even more pessimistic now, and market action just as volatile, which makes it interesting to watch how individual stocks and sectors respond to the inevitable disappointments this quarter. Guess what? Expectations are still too lofty.

You Can Pay a Heavy Price for a Cheery Forecast

For instance, when the first quarter began just over three months ago, Wall Street’s cheery forecast called for nearly 5% profit growth for companies in the S&P 500 index.

Now, after numerous profit warnings and outright misses (like GE), Wall Street analysts expect a 12% profit decline, according to Reuters Estimates. That’s quite a reversal of fortune.

These same intrepid analysts however remain undaunted in their rosy outlook for a quick profit recovery. The Wall Street consensus now sees full-year earnings growth of 11% for the S&P 500, down only slightly from 15% growth forecast in January... yeah, right!

Let's just that say I remain very... skeptical!

As for the biggest winners and losers by sector this quarter, it’s no surprise that financials will post the most “lousy” first quarter results.

The S&P Profit Picture Driven (Lower) by Financials

According to Zacks, the financial sector of the S&P 500 will see profits plunge 67% from a year ago – the biggest sector drag on overall results. Unfortunately for the S&P 500 Index as a whole, financial sector profits have until now contributed the largest share of overall earnings to the index, as shown in the graph above.

Now financials have become the biggest drag on profits and are likely to remain so for awhile yet. At least we won't have to wait too long to find out. JP Morgan (the proud new owner of Bear Stearns) reports first-quarter results tomorrow; followed by Merrill Lynch on Thursday and Citigroup Friday! Talk about a "murderer's row"! More unexpected bad news from these guys could once again kill any chance of a market rally.

Citi is expected to post a $5.7 billion loss, with an additional $10 billion in asset write-offs! Merrill could suffer a $7 billion write off, according to analysts. Watch closely at how the market - especially the financial sector - reacts to the back-to-back reports from these industry bellwethers.

Other Sectors Facing Diminished Expectations

Beside financials, there are several other sectors that have seen estimates cut sharply too. These stocks could also be candidates for disappointment. Firms in the basic materials sector for example will see profits up just 1.4% in the first quarter. This may prove especially troubling since many materials stocks have been high-flyers and aren’t cheaply valued today.

Profits in the consumer discretionary sector are expected to crawl ahead less than 1%, while industrial firms (like GE) grow profits just 2.8%.

Not to worry... Wall Street’s fearless forecasters see full-year 2008 results rebounding in a big way for some of the most beaten-down sectors. Profits for financial firms are still estimated to grow 20% for all of 2008 leading the overall S&P 500 to healthy 15% earnings gains... but don’t bet on it!

There are still a lot of thorns hiding amid Wall Street's rosy forecasts... better take a skeptical view; and prune your expectations.

Don’t Bet the Bank on a Big Rebound in S&P Profits

First quarter earnings season is in full swing and the landmines are already going off left and right. Expect more volatility in the days and weeks ahead as S&P 500 firms report how well they’re dealing with the ongoing credit crunch, and the recession that’s likely begun.

How the market and individual stocks respond to this tumult should be very telling about the near-term trend in share prices.

Of course blue-chip General Electric (GE) disappointed investors Friday, missing its first-quarter mark by a few cents. That triggered a cascading end of week sell-off that pulled the entire market lower.

Strong Emerging Market Results Can’t Save GE From the Clutches of the Credit Crunch

General Electric triggered Friday’s stock market rout, when it disclosed first quarter profits that fell a nickel short of expectations. The company blamed the short fall on unexpected losses in its financial service operations.

GE’s overall sales and profits rose, highlighted by a 22% jump in global sales, and robust emerging markets where the top-line soared 38%. However, GE’s finance-related businesses made up 44% of net income and 53% of operating profits last year.

As if GE weren't enough bad news, today, we got just the first of what’s likely to be many dismal reports from the bombed-out financial sector.

Wachovia (WB), the nation’s 4th largest commercial bank, reported a $350 million first-quarter loss. The bank also set aside another $2.8 billion in loan loss reserves  against more mortgage loan defaults.

That’s on top of the $1.5 billion in reserves Wachovia set aside last quarter.

The bank also slashed its dividend 40% and is looking to raise another $8 billion in equity capital... sovereign wealth funds and other distressed investors, please inquire!

NOT a Very Auspicious Start to Earnings Season

A report out from Goldman Sachs today says that corporate earnings are off to an “awful” start so far... no kidding! Goldman expects “generally disappointing results and a swath of lowered profit guidance that will drive the Standard & Poor's 500 Index lower.”

As the credit crunch continues a familiar pattern is taking place. Wall Street is slow to recognize the obvious danger to corporate profits, and is failing to reduce forecasts accordingly.

This of course leads to the inevitable disappointment (see GE, WB) when actual results miss forecasts – sometimes by a very wide margin. The key financial sector is retreating again... testing the March lows. Stay tuned.

Can You Top This?

A popular radio show from the 1940’s, “Can You Top This?”, was one of my Mom’s favorites when she was a kid. In the program, comedians swapped jokes while a “laugh-o-meter” gauged the audience response to see who was the funniest. This was the pre-TV version of "America’s Funniest Home Videos", a show that my kids just can't get enough of today.

Well the subprime credit crunch is no laughing matter, and I think it's safe to say we've all had our fill of hearing about it. But analysts and economists are playing a similar “Can You Top This” game. They're trying to out-do each other with the biggest credit loss estimates imaginable. All we need is a “fear-o-meter” to gauge investor’s shock to these various estimates.

This week the International Monetary Fund weighed in with perhaps the most dismal loss estimates yet. According to the IMFs numbers the subprime credit crunch may result in $945 billion in expected losses and asset write-offs world-wide. Now who’s gonna top that?

The Worst Financial Disaster in History!

Global financial firms have reported about $230 billion or so (and still counting) in credit crunch losses so far. So the IMFs data implies that the financial “pig” isn’t even one-quarter of its way through the credit crunch “python” yet!

If proved correct, the U.S.credt crunch would easily become the costliest financial crisis in history.

The previous holder of this dubious distinction is Japan, which suffered about $750 billion in total losses during its “lost decade” of the 1990’s. In fact, the current subprime loss estimates make the U.S. Savings & Loan crisis of the 1980s and early ‘90s look like a drop in the bucket by comparison. That episode triggered losses of about 4% of U.S. GDP at the time. Today’s IMF estimate puts the total hit at about 7% of GDP.

More than half of the IMFs loss estimate – equal to some $500 billion – will be suffered by the banking sector. These hits are mainly confined to the U.S. and Europe where asset-backed securities proved to be the most popular (and toxic).

The “Mark-to-Market” Fudge Factor

There’s a very large “fudge factor” in the IMFs calculations however. About 76% of the total, or $720 billion in estimated losses, will come from asset-backed securities of different kinds.

To arrive at that number, the calculations are based on distressed mark-to-market prices the IMF observed in mid-March… before the Fed’s “arranged marriage” of Bear Stearns with JP Morgan.

These distressed market prices for toxic asset backed paper may prove too pessimistic (along with the IMFs loss estimates) if credit markets are able to recover. In the wake of the Bear Stearns deal, and since the Fed is now willing to accept a wider range of securities as collateral for direct loans to banks, credit conditions seem to be easing.

Interest rate spreads on Credit Default Swaps for U.S. banks, which are basically insurance policies against another Bear Stearns like debacle, have fallen by as much as 40%. This means there is now less perceived risk in the financial sector. At the same time however, key short term lending rates, such as interbank LIBOR rates, remain uncomfortably high.

How Much of This $1 Trillion is Already “Priced Into” the Market?

The financial system is certainly not out of the woods just yet, that’s for sure. You can expect to see more shocking losses and asset write-offs from big banks over the next several weeks as first quarter reports are posted. It’s important to watch how markets react – financial shares in particular – to these announcements.

Remember, when stocks stop going down further on bad news, that’s the first sign that the worst may have already passed. When stocks actually go UP on more bad news, that’s a strong indication investors are looking beyond the gloomy headlines, and toward a recovery.

We may not be at that point just yet, as today’s market slide will certainly attest. But we may be getting closer. The IMF says: brace yourself for one-trillion dollars in subprime losses… can you top that?

A $6 Trillion Private Banking Opportunity

The subprime credit crunch in the U.S. has shocked stock markets around the world. Few have been completely spared from this crisis of confidence in the global financial system. Several emerging markets have held up much better than you might expect amid such a “crisis” – but mainland China is NOT one of them.

The Shanghai index of domestic A-Share stocks tumbled 34% in the first quarter of 2008 alone – and is down more than 40% since the index peaked above the 6,000 level last October.

To be sure, this bear market in China can’t be entirely blamed on U.S. subprime problems. China was not a big investor in adjustable rate mortgage loans. Instead, China has its own fair share of problems to deal with.

Soaring Food Prices A Big Worry in China

Consumer price inflation for one thing is going through the roof in the Middle Kingdom – up nearly 9% year over year.

This makes the recent pickup in U.S. inflation, now at 4%, positively pale in comparison.

A big part of the rise in consumer prices comes from soaring food costs. Rice for example has more than doubled in the past year. Another staple of the Asian diet, Pork, is also in short supply, sending prices much higher.

Remember, shoppers in China spend a much higher portion of their disposable incomes on basic necessities (like food) than do their counterparts in developed nations like the U.S. So rising food costs – a source of irritation in my family’s budget – is a source of major distress for many more Chinese families.

Is China Headed for a Hard Landing?

These factors have investment analysts now questioning China’s growth potential. After recording break neck output growth of 12% last year, some say GDP could decline to 7-8% this year. That’s a sizeable deceleration, but it’s important to point out two things:

First, 7-8% is still growth… exceptionally strong growth at that. Second, 7-8% would still be light-years ahead of growth rates in developed nations, which are forecast to slow to less than 2% in the year ahead. According to forecasts that have been repeatedly cut back in recent months, GDP growth in the U.S. could sink below 1% for 2008 as a whole.

The stars are beginning to align again for China. This spells opportunity for investors for the first time in a long while. In fact, several pieces of the puzzle are falling nicely into place:

1. Pessimism Running Rampant: In just a few months, China has gone from being one of the most loved, to one of the most hated markets on the planet. That's what a stock market decline of 40% will do for you…

2. Still Strong Growth: I like to invest my money where the best long-term growth potential can be found. The way I see it, whether China grows 11% or 7% this year doesn’t really matter; because anywhere in between is still significantly more attractive than 2% growth (or even less) in the U.S. and Europe.

3. Growing Wealth: Most investors know that China has the world’s largest stash of foreign currency reserves at $1.65 trillion – up 43% in 2007 alone. But individual wealth in China is growing fast too.  In fact, at least one-fifth of the 2.6 million "millionaires" in the Asia-Pacific region call China home.

These are all positive signs that China's overheated stock market has cooled considerably. Now all that's needed to spark renewed buying interest in China is a positive catalyst: some reason for pessimistic investors to turn their frowns around.

HSBC Courting China’s Mega-Millionaires

In spite of the recent stock market setback in China, at least one major global bank remains undaunted. HSBC, which already has highly profitable operations in China, recently launched a private banking operation there.

Their target market: affluent Chinese customers with assets of more than $10 million, or $3 million available to invest. By HSBC’s estimates the potential market size is huge: there will be more than 16 million such Chinese customers with total assets of more than $6 trillion within the next four years!

“The creation of wealth in China is a unique phenomenon, in that greater wealth is being generated by a relatively younger age group to the rest of the world,” according to HSBC.

That’s a lot of Chinese cash, at least some of which will be moving into stocks over the next several years – and share prices in Shanghai are 40% cheaper than six-months ago. Now THAT'S what I call a positive catalyst!

Paper or Plastic?

Investors in big U.S. banks should be asking that question. Today the “word on the street” was that beleaguered bank Washington Mutual may get a life-line tossed to it. Private equity firm Texas Pacific Group (TPG) is said to be in “advanced stage” negotiations over a $5 billion bailout deal for the troubled mortgage lender.

Shares of WaMu soared 29% higher today on that news, pulling most financial stocks along for the ride. It was the biggest gain for WaMu shares in 25 years, which sounds like a lot, until you realize the stock has plunged 75% in value over the past year! But TPG is a premiere private equity firm (well connected with the Bush family). Surely they wouldn’t be putting their hard-earned cash to work in a shaky bank.

The reality is that TPG is hardly spending paper-money –  that is to say actual cash – on this deal. Like so many other private equity outfits, hedge funds, and other “distressed asset” investors, TPG’s equity capital is highly leveraged up: 10 to 1... 25 to 1...  perhaps even 100 to 1... who knows. So TPG is buying with “plastic” not paper money – just like so many Americans do at the mall.

Buy me $5 billion worth of WaMu shares... and bag it in plastic please!

WaMu needs the cash – after reporting $3 billion in mortgage loan losses and other assorted (or sordid) asset write offs. That’s just a drop in the bucket compared to the staggering total of $232 billion (and still counting) in world-wide financial sector losses suffered so far in this credit crunch market shock.

Shareholders of WaMu should at least feel somewhat relived (hence today’s big rally), even though their existing interest in the bank will be sharply diluted. The alternative however could be much worse.

The good news for other investors – or for would-be bargain shoppers – in the financial sector is that this deal is another signal that the “all’s-clear” has been sounded in the global banking sector.

Don’t get me wrong: there will still be PLENTY of losses recorded this quarter, next quarter, and beyond. The credit crunch isn’t over yet. Mortgage rates are still uncomfortably high. And who knows how much lower home prices will go – triggering even more loan defaults and foreclosures.

Still, it’s worth remembering that the stock market is a “discounting mechanism.” Share prices often bottom well ahead of the fundamentals. In fact, the S&P 500 Index already suffered a decline of nearly 19% from its October 2007 high, to the March low (see chart above), so the benchmark blue-chip stock index may already be three-fourths of the way through this bear market.

The average U.S. bear market since 1940 lasted about 13 months. Interestingly, on average 74% of the bear market decline was over (in terms of time) by the time the market crossed the -20% mark. Also, there have been many market corrections that stopped just short of the down-20% threshold that commonly defines a bear market.

The bulls are crossing their fingers that last week’s rally was something more than just another dead-cat bounce. It certainly looks to me like this rally might have more legs than previous upside moves that proved to be false-starts.

The question now is” should bullish investors buy with paper or plastic?

The Global Power Struggle for Food Will Keep Agriculture Prices on the Rise

Commodities were among the first-quarter’s best investments, rallying strongly across the board. Meanwhile global stock markets slumped to their worst performance in several years.

Recently however, volatility also entered commodity futures markets. Just a few weeks ago investors suffered very sharp sell-offs in a range of hard assets including gold, crude oil, and industrial metals like copper and aluminum.

Agricultural commodities have been stellar performers in recent months, but here too increased volatility has crept into the grain markets. But there’s good reason to believe that any downside in soft commodities will be limited by the fact the we are in the midst of a global food crisis – there’s just not enough to go around.

Yesterday rice prices jumped to fresh record highs, and corn traded near its highest level ever. Soybeans and wheat also advanced strongly. Bloomberg reports that “Indonesia, the world's third-largest rice producer, may join China, India, Vietnam and Egypt in curbing exports to secure domestic supplies.”

What we’re seeing now is nothing short of a full-scale global power struggle to secure valuable food resources, which grow scarcer each year. Rice for example is the staple food for about 3 billion of the world’s people, mostly in poorer, developing nations. Since 2005, the prices of food staples (including rice) have soared 80%.

This is triggering sharp inflation spikes throughout the developing world – which in turn has sparked troubling social unrest.  Consumer prices in China rose 8.7% in February to an 11-year high. Inflation in India is at a 13-month peak.

The United Nations is warning that “36 countries, including China, face food emergencies this year, as stockpiles of grains such as rice drop to a 26-year low.” The World Bank points to social unrest in 33 countries around the world because of “the acute hike in food and energy prices.”

Of course population growth, along with rising living standards around the world, is one of the key “demand factors” most often cited for soaring food prices. Another factor to keep an eye on is soaring input costs – which is keeping upward pressure on prices from the supply side too.

U.S. farmers for instance are paying much higher prices for diesel fuel to power their combines, nitrogen fertilizers to nurture their crops, and livestock feed. In fact, while commodity prices received by farmers jumped 17% year over year in March – the costs incurred by farmers to grow grains and livestock soared 11% over the same period.

These higher “input costs” will inevitably get passed along over the next few months in the form of... you guessed it: Even higher agricultural commodity prices.

My "Canary" is Singing a BUY Signal!

In yesterday’s blog post, I explained how U.S. stocks have fallen to the most oversold levels since the end of the last bear-market in 2002! Yesterday we saw another sharp rally, but today… no real follow through to the upside.

That’s really been the pattern for several months now. Stocks bend to the breaking point, but refuse to snap back. Instead, global equity markets tread water for a while… maybe bounce a little bit, but then roll-over yet again.

So is this more of the same? I don’t think so. In fact, I’m seeing some signs that indicate a very profitable trading rally may be close at hand. Here’s why: My own personal “canary in the coal mine” indicator is quietly outperforming the S&P 500 – and that’s a potential BUY signal.

Keep Your Eye on the Lagging Sectors

When every bull market breaks down, and rolls over into a growling bear, there’s usually one key sector that leads the way down. In the last bear market, it was technology, and especially internet shares.

In this bear market, it was clearly the housing sector that stumbled first. In fact, the Philadelphia (PHLX) Housing Sector Index peaked way back in the summer of 2005 (see graph above) while the rest of the stock market was soaring.

By mid-2006, the PHLX Housing Index was already down 20% from its peak – in bear-market territory! Of course a year after that MOST of the major market indexes – both in the U.S. and globally – were also in decline. Housing started it all.

Most people aren’t aware of this, but as you can see in the chart above, so far this year the PHLX Housing Index is actually UP about 7% while the S&P 500 is DOWN about 7%.

Investors May Have Already Discounted Most of the Bad News

That’s a major divergence for the stock market’s most beaten-down sector. It tells me that perhaps the worst is over for the industry that started this bear market.

If investors are already looking ahead to a recovery in housing, it stands to reason that the same thing should begin happening with other sectors too. In fact, I’m closely watching the beleaguered financial sector right now, because it’s next on my list for a potential bottom formation.

Bottom line: I doubt that this bear market is over just yet. In fact, the probabilities still suggest lower-lows. However, I’m watching closely for more signs of a powerful bear-market rally. It could ignite shares at any time, and provide some great short-term trading opportunities using call options.

I just sent out a signal to subscribers of my Market Shock Trader service, telling them to buy call options on a leading player in the home mortgage market. I see big upside potential in this trade over the next few months. To get all the details, and a risk-free trial, just click here: Market Shock Trader

Is the Market Rally For Real This Time?

It was another big rally for stocks today and why not... with news out this morning of yet another huge subprime write-off. Swiss banking giant UBS is in the spotlight again today, forecasting a $12 billion first-quarter loss – plus another $19 billion in asset write-downs.

This puts UBS’ total credit crunch market shock tally at $40 billion (and counting). This gives UBS the dubious distinction of being Wall Street’s top money-loser... at least so far, but the quarter is early yet!

Still, in spite of this bad news (plus a $4 billion write-off kicked in by European colleague Deutsche Bank this morning), stocks rallied strongly from the opening bell to the closing gavel on Wall Street. In fact, the party got started overnight in Europe.

Of course we’ve seen this type of “one-day-wonder” rally in global markets before. They’ve typically been followed soon after by even more intense selling, rather than by a meaningful upside follow-through.

It May Be Different This Time

The fact that stocks – especially banking shares – could post such big gains on more bad news is an interesting development.

The first sign of a potential market turn is when shares stop falling amid bad news. The second sign (adding confirmation to the first) is when stocks can actually manage to rally on bad news. Today, we got this second signal.

Recently, I noticed a few other favorable omens that tell me this rally may finally have some legs. Take a look at the graph below, it shows an interesting long-term context for the market.

It displays the number of NYSE-listed stocks currently trading above their 200-day moving average of price.

In a healthy, up trending market, the majority of stocks should be above the 200-day average. One glance at this graph however tells you that recent market conditions have been anything but healthy.

Less than 18% of the roughly 4,000-plus common stocks listed on the NYSE are above this key average now. In other words – more than 82% of stocks are currently trapped in down-trends!

That’s an extremely oversold reading. In fact, it’s overwhelming so. The last time this indicator fell so low was in October 2002 – right at the end of the last bear market.

Even if the current correction/bear market has not yet run its course, such an extreme over-sold condition often serves as a launching-pad for powerful bear-market rallies. Stay tuned!