lighthouse weekly chart window - 2013-09-02

7/30/2019 Lighthouse Weekly Chart Window - 2013-09-02

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Lighth

Weekly Chart Window - Septembe

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ouse Investment Management

r 2, 2013

kly Chart Window

September 2, 2013

Page 1


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Lighthouse Investment Management

Weekly Chart Window - September 2, 2013 Page 2

Contents

Nominal Bond Yields ..................................................................................................................................... 3

Real Bond Yields ............................................................................................................................................ 4

TIPS-derived Inflation Expectations .............................................................................................................. 5

Corporate Bond Spreads ............................................................................................................................... 6

Currencies: Emerging Markets ...................................................................................................................... 7

Currencies: Scandinavia and Switzerland ..................................................................................................... 8

Stock Market: Moving Averages ................................................................................................................... 9

Stock Market: MACD ................................................................................................................................... 10

Stock Market: Stocks Above 50-Day MAVG ................................................................................................ 11

Stock Market: Stocks Above 200-Day MAVG .............................................................................................. 12

Stock Market: Net New Highs ..................................................................................................................... 13

Stock Market: New Highs/Lows Ratio ......................................................................................................... 14

Risk-on / Risk-Off ........................................................................................................................................ 15

Lighthouse Timing Index ............................................................................................................................. 16

Spotlight: Potash Producers ........................................................................................................................ 17


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Nominal Bond Yields

Observations:

Yields kept surging, reaching the highest level in two years 10-year Treasury bond yields have more than doubled since the low (1.4%, July 2012) The increase in yields is not driven by increased inflation expectations (on the contrary -

inflation expectations are receding, see page 5)

Instead, an increase in real yields is the driving force

CONCLUSION: The Fed wants to depress real yields, so investors (desperate for returns) buy riskier

investments, driving up their prices (creating a modest wealth effect) and enabling financing of projects

that would otherwise have been unattractive. This plan seems to fail, which risks hurting the Fed's

credibility.


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Real Bond Yields

Observations:

Real (inflation-adjusted) bond yields continue to increase As the Fed tries to reduce monthly purchases of Treasury bonds, real yields seem to normalize

from artificially depressed levels

Accepting negative real returns only made sense if investors were expecting severe and long-lasting deflation (TIPS principle amounts are adjusted by inflation, hence reduced in case of

deflation, but always paid back at par [100%], and therefore have a 'free' deflation protection

embedded).

CONCLUSION: The Fed is trying to 'have the cake and eat it'; they want to depress real yields, but

increase inflation expectations. These two goals are, in free markets, not compatible. It seems that

even $1 trillion asset purchases per year are not enough to enforce the Fed's will.


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TIPS-derived Inflation Expectations

Observations:

Inflation expectations are calculated by subtracting real (TIPS) yields from nominal yields. Inflation expectations have resumed their decline. The Fed prefers elevated inflation expectations in order to motivate consumers to spend. A slowing

velocity of money counters the Fed's efforts.

Recent talk from Bernanke about possible 'tapering' of QE later in 2013 led to doubts regarding theFed's policy of N-GDP targeting, only adopted in late 2012.

CONCLUSION: Nominal and real interest rates have risen above levels seen before theannouncement of the most radical program of 'quantitative easing'. The Fed has failed to achieve its

goal (depress yields) and, despite record bond purchases, has lost control of the yield curve. It is

highly questionable if the Fed will be able to follow through on its plan to reduce bond purchases. Its

credibility is waning, which might ultimately hurt the dollar's value.


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Corporate Bond Spreads

Observations:

Corporate bond spreads continue to rise slowly Since May 2013, the yield premium paid by BBB-rated companies has increased from 1.87% to

2.11% (previous week: 2.10%)

Since May 2013, the yield premium paid by CCC (or lower)-rated companies has increased from7.51% to 8.26% (previous week: 8.22%)

CONCLUSION: Corporate bond spreads are still depressed by historic standards. However, spreads might

continue to mean-revert (just as real yields). However, the correlation between the BBB corporate bond

spread and the S&P 500 index is zero (monthly data since 1997).


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Currencies: Emerging Markets

Observations:

Emerging Market currencies continue to weaken against the US Dollar, especially the Indian Rupee,Brazil Real, South African Rand and the Indonesian Rupiah (not shown above)

The widening gap between the Brazil Real and the Mexican Peso is not sustainable The main driver has been escalating current account deficits Central banks have to intervene to support their currencies, losing vital currency reserves in the

process. As forward FX rates are directly linked to short-term interest rates, central banks try todiscourage short selling by raising rates.

Weak currencies trigger capital flight by international investors lured by higher yields Rising bond yields risk pushing already weakening economies into recessionCONCLUSION: Deteriorating conditions in emerging markets could spill over into developed markets.

Global companies might feel negative impacts in their earnings.


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Currencies: Scandinavia and Switzerland

Observations:

The Norwegian Kroner is trending weaker after slower than expected economic growth (despitethe fact Norway is benefitting from rising oil prices)

The Swiss Franc remains around 1.23 to the Euro, not far from the 'line in the sand' of 1.20drawn by the Swiss National Bank

CONCLUSION: Renewed discussions about Greece's membership in the Euro-zone, once German

elections are over, could lead to upwards pressure on the Swiss Franc, forcing the SNB to buy more

Euros against Swiss Francs.


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Stock Market: Moving Averages

Observations:

All moving averages have a positive slope (pointing upwards) The 10-day mavg has breached the 50-day moving average - a first warning sign Momentum of the 50-day mavg seems to be topping out

CONCLUSION: The uptrend is still intact, but looks vulnerable


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Stock Market: MACD

Observations:

The S&P 500 Index is around 8% above its 200-day moving average, which is quite extended The S&P is less extended from its 100-day moving average (which is to be expected, as shorter

averages tend to follow the index more quickly)

All three derivatives of moving averages are falling, suggesting the stock market is losingmomentum.

CONCLUSION: A correction is under way; the stock market needs to let off more steam.


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Stock Market: Stocks Above 50-Day MAVG

Observations:

45% (previously 59%) of the 500 stocks within the S&P Index are above their 50-day moving average. Less than half of the S&P 500 members are in a medium-term uptrend. This is a bad sign. Any reading below 50% indicates trouble for the bulls. The trend is declining, and the indicator has breached the 50% marker.

CONCLUSION: More than half of the members of the S&P 500 index are in a medium-term down trend.

This is a serious warning sign.


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Stock Market: Stocks Above 200-Day MAVG

Observations:

79% (previously 83%) of the 500 stocks within the S&P Index are above their 200-day movingaverage

More half of the stocks in the S&P 500 Index are in a long-term uptrend. This is a healthy sign. A drop below 50% would indicate trouble. The trend is declining, and the indicator has breached its own 50-day moving average - a first

warning sign.

CONCLUSION: Most stocks are still in a long-term uptrend, but the number is rapidly decreasing. A

warning sign.


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Stock Market: Net New Highs

Observations:

The number of NYSE-listed stocks with new 52-week highs is lower than the number of stocks withnew 52-week lows. This is a negative sign.

CONCLUSION: Most stocks are participating in the recent correction, confirming the rally has ended (at

least in the medium-term).


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Stock Market: New Highs/Lows Ratio

Observations:

NYSE-listed stocks with new 52-week highs exceed the number of stocks with new 52-week lows bya ratio of 1.8 : 1, with a falling trend (previously = 2.3 : 1).

The rally since the beginning of 2013 has been accompanied by falling peaks in the ratio, which canbe interpreted as a negative sign.

The ratio's 50-day moving average (dotted line) is pointing downwards - a negative sign The ratio has dropped below 5 - a negative sign

CONCLUSION: This indicator continues to deliver a "sell" signal


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Risk-on / Risk-Off

The general market (SPY) is outperforming high dividend shares (SDY), (red line, bullish) Stocks are underperforming bonds (blue line, bearish) The high-yield bond ETF (HGY) is underperforming investment-grade ETF (LQD); green line (bearish)

Equal-weight ETF (RSP) is underperforming market cap-weighted ETF (SPY); green area (bearish)CONCLUSION: 1 out of 4 indicators suggest the stock market is in an uptrend (PS: I have low confidence

in these indicators).


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Lighthouse Timing Index

Observations:

The Lighthouse Timing Index remained at zero (previously: 0 points)CONCLUSION: Our composite index suggests that while the uptrend has ended it is too early to confirm

a bear market has begun.

Note: This index is a trend-confirming indicator, and will notbe able to anticipate market tops orbottoms in advance. Due to smoothing of data, a certain time lag of about two weeks is to be expected.


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Spotlight: Potash Producers

Kali + Salz:

Potash (chemical element K) is the thirdmost important plant nutrient after nitrogen and

phosphorus.

Until July, 90% of the world's potashreserves were controlled by two cartels, Canadian

Canpotex (POT, MOS & AGU) and BPC (Belarusian

Potash Company, consortium of Belaruskali and

Ukralkali).

Potash-producing stocks are down around 50% after Ukralkali, the world's largest producer, quitBPC in July and promised to extract the raw material at maximum levels, leading to a sharp price

drop. Ukralkali complained Belaruskali was undermining the cartel by selling potash outside of its

agreed quota.

In return, Belarus arrested the CEO of Ukralkali during a visit. In retaliation, the Russians cut energydeliveries to Belarus by a quarter and banned the import of Belarusian meat.

Timing could not have been worse for German Kali + Salz, which is currently developing a $4bnCanadian potash mine with a budgeted break-even price of $420/ton compared to recent prices of

$350-$400/ton.

Interestingly, EuroChem, a Russian nitrogen and phosphate producer, bought a 10% stake in K+S.EuroChem is owned by Andrey Melnichenko, the 6th richest Russian worth an estimated $14bn.

It is unlikely Ukralkali will remain outside the cartel for long; instead, it is likely trying to disciplineBelaruskali. Sooner or later, the cartel will resume.

Institutional shareholders are increasing pressure on K+S to abandon developing the Canadian mine(which would be a unfortunate).


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It is possible the Russians are simply staging a cartel fight in order to force K+S to abandon theCanadian project.

Alternatively, the Russian billionaire could attempt a take-over of K+S at a depressed price (shortlybefore the Russian cartel adversaries reconcile and world market price of potash rises again).

CONCLUSION: Unless you expect a severe recession, potash producing companies might be a rewarding

play with a 1-year time horizon.

Any questions or feedback welcome.

[email protected]

Disclaimer: It should be self-evident this is for informational and educational purposes only and shall not be

taken as investment advice. Nothing posted here shall constitute a solicitation, recommendation or

endorsement to buy or sell any security or other financial instrument. You shouldn't be surprised that

accounts managed by Lighthouse Investment Management or the author may have financial interests in any

instruments mentioned in these posts. We may buy or sell at any time, might not disclose those actions and

we might not necessarily disclose updated information should we discover a fault with our analysis. The

author has no obligation to update any information posted here. We reserve the right to make investment

decisions inconsistent with the views expressed here. We can't make any representations or warranties as to

the accuracy, completeness or timeliness of the information posted. All liability for errors, omissions,

misinterpretation or misuse of any information posted is excluded.

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lighthouse weekly chart window - 2013-09-02

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