“Since bottoming in October 2012, inventory levels of copper have risen 190% in warehouses operated by the London Metals Exchange.  That’s a huge and rapid increase, and it conveys a powerful message about the future for copper prices.

Back in September 2012, spot copper prices topped out at $3.81/pound, and they have now fallen 18%.  In terms of big drops in copper prices, this one does not rank very high among the big drops in copper prices over the past few years.  But it is producing a huge and rapid rise in copper inventories.

It is normal for prices and inventory levels to generally move in opposite directions.  When copper producers don’t like the market price and think that they can get a better one by waiting, they put their production into warehouse storage and wait for better times.  When prices rise up to or above a price level that the producers like, copper starts coming back out of inventory and onto the market.  So watching copper inventory levels can give us insights about where the producers think a fair price is.

It was understandable that copper inventories would rise back in 2008, when the economy was grinding to a halt, and when copper prices plummetted from above $4/pound in July 2008 to $1.25/pound in December 2008.  And shortly after copper bottomed at the end of December 2008, copper inventory levels started coming back down again.

Now we are seeing an even more rapid rise in inventory levels, and it comes on just a small amount of drop in copper prices.  The first message to take from this is that copper producers don’t think that $3.60 is a fair price.

That’s where copper was hovering just as the big run up started in inventory levels.  The inventory rise makes a pretty emphatic statement that the producers think they can get a better price by waiting.

 

This does not mean that they have to be right.  But producers spend their time dealing with copper prices, figuring out how much to produce and when to sell.  So they are in perhaps a better position than some others are to know what a fair price is, and so the opinion that they are conveying with their inventory behavior is at least worth listening to…..”

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“Those who cannot remember the past are condemned to repeat it. – Santayana

The question of whether to commit new funds to stocks here is nuanced and complex, not least because it isn’t obvious that traditional alternatives – bonds or cash – offer any better value. We are very near all-time low interest rates across most developed government bond markets, credit spreads are near all-time tights, and rates are negative out to 5 or more years in real terms. If these options are representative of the complete opportunity set, then one might be justified in apportioning some capital to equities, if only because it is difficult to identify which investment stinks most profoundly.

However, those who do choose to allocate to equities should be aware of where we are relative to other bull-bear cycles throughout history. We have rambled-on about the poor prospects for equity returns over the next 10 – 20 years in many prior articles (see here for a full analysis, and here for a summary of research from other respected firms), but the true authority on stock market valuation is John Hussman. We would strongly encourage readers to investigate Dr. Hussman’s Weekly Market Comments for all the gory details.

This article approaches the issue from a completely new direction than our other work and the work of Dr. Hussman. It is mostly constructed as a thought experiment that explores the logic of compounding, but the conclusion is troubling for those currently overweight U.S. equities.

For the purpose of the study below, we examined the S&P 500 price series fromShiller’s publicly available database to understand the duration and magnitude of all bull and bear market periods in U.S. stocks since 1871. We defined a bear market as a drop in prices of at least 20% from any peak, and which lasted at least 3 months. Bull markets were then defined as a rise of at least 50% from the bottom of a bear market, over a period lasting at least 6 months.

Chart 1 and Table 1 describe every bull market since 1871 in the S&P, including duration and magnitude information. The lesson from this analysis is uninspiring for equity bulls, as we will see. The core hurdle is that the current bull market has (through end of February) already delivered 105% of gains, against the median 124% bull market run through history (using monthly data). Of course, this means that, should this bull market deliver an average surge, investors can hope for less than 20% more growth from this cycle. Further, given that the median bull market has historically lasted 50 months, and we are currently in our 49th bull month, we are about due for a wipeout.

Chart 1. Bull Markets since 1871

Source: Shiller (2013)

Table 1. Bull Markets since 1871 – Statistics

Source: Shiller (2013)

It’s troubling enough that the current bull market has already delivered 85% of the gains, and lasted about as long, as the median historical bull market. More disconcerting still is the fact that, when the bear market comes, as Chart 2. and Table 2. demonstrate, it is likely to wipe out 38% of all prior gains. And this has profound mathematical implications for current equity investors.

Chart 2. Bear Markets since 1871

Source: Shiller (2013)

Table 2. Bear Markets since 1871 – Statistics

Source: Shiller (2013)

Portfolio growth is governed by the mathematics of compounding, which means that, for example, a 100% gain is erased by a 50% loss, and a 50% loss requires a 100% gain to get back to even. Applying the same principles to where we are in the current bull/bear cycle is illuminating.

If we assume that the next bear market will deliver losses in-line with what we have experienced from bear markets through history, then….”

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“The collapse in bullion prices is set to rekindle gold mining takeovers as Chinese companies, sovereign wealth funds and private equity and hedge funds step in to rescue cash-strapped small and mid-sized miners.

Gold miners in China, the world’s biggest producer, have been chasing mines and listed companies in a bid to grow and match the largest global producers, like Barrick Gold.

A seven-fold rise in gold prices between 2001 and 2011 spurred a run of goldmergers and acquisitions. Activity fell last year as major miners digested some big buys and smaller players held out for better offers, with global gold M&A tumbling to $14.6 billion from $43.3 billion in 2011, according to Ernst & Young.

But that is expected to pick up again this year as a 15 percent plunge in gold prices this month forces smaller miners, especially those with high-cost production or single assets, to seek partners to stave off a cash crunch.

“This might be the final shoe to drop that makes some people think ‘there’s no way I’m able to finance myself going forward, so I’ve got to think more seriously about my investors and give my investors a return by putting things together with people that have … got the cash,’ ” John McGloin, executive chairman of Africa-focused minerAmara Mining, told Reuters….”

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“Federal Reserve Bank of Richmond President Jeffrey Lacker said he favors slowing bond buying now to ensure record growth in the central bank’s balance sheet doesn’t impede the eventual withdrawal of record accommodation.

“I’m in the camp we have to taper and stop right now if it were up to me,” Lacker told CNBC. “If you made me dictator, that’s what I would do. I wouldn’t have gone down this asset purchase path,” he said.

The Fed is buying $85 billion of Treasurys and mortgage-backed securities each month.

“The deeper we go with asset purchases, the trickier we are going to make the exit process,” he said. “That to me is the largest cost.”

He also said that expectations for future U.S. inflation remained well-anchored, despite massive Fed policy easing that he had personally opposed.

“I have been impressed by the stability of inflation expectations. People are pretty confident we’re not going to let it get away from 2 percent. I like that,” Lacker said. “I think we’re in a good place now, but I think we shouldn’t be complacent,” he said…..”

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“The number of Americans filing new claims for unemployment benefits rose last week and factory activity in the nation’s Mid-Atlantic region cooled in April, further signs of a moderation in economic growth.

Underscoring the softening growth outlook, another report on Thursday showed a gauge of future economic activity fell in March for the first time in seven months. They were the latest data to indicate a step-back in the economy after a brisk start to the year as tighter fiscal policy began to weigh.

“The evidence is mounting that the economy lost momentum in March and that has carried to April,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.

Economic data for January and February have suggested growth accelerated in the first quarter after activity almost stalled in the final three months of 2012.

But in a replay of the prior two years, the economy appears to have hit a speed bump at the end of the quarter, with data ranging from employment to retail sales and manufacturing weakening significantly in March.

Initial claims for state unemployment benefits rose 4,000 to a seasonally adjusted 352,000 the Labor Department said. The four-week moving average for new claims, a better measure of labor market trends, rose 2,750 to 361,250.

While claims rose last week, they were still at levels economists normally associate with average monthly job gains of more than 150,000. That helped ease concerns of a deterioration in labor market conditions after nonfarm payrolls posted their smallest increase in nine months in March.

“Labor market conditions still appear to be grinding forward, but pushing against the weight of a slowing economy and subdued confidence,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Michigan.

DOWNBEAT OUTLOOK….”

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“………….The chart below shows the damage:

 

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[youtube://http://www.youtube.com/watch?v=rEYoxwllFKc 450 300]

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“The Philly Fed’s April business outlook survey is out.

The headline index unexpectedly fell to 1.3 from last month’s 2.0 reading. The consensus estimate predicted a rise to 3.0.

The unemployment sub-index plunged from 2.7 in March to -6.8 in April.

The new orders sub-index declined from 0.5 to -1.0.

Below is the full text from the release:

April 2013 Business Outlook Survey

Manufacturers responding to the Business Outlook Survey reported near steady business activity in April. The indicator for overall activity remained slightly positive this month, but other broad indicators were mixed. Indicators for new orders and employment were weaker this month. The survey’s broad indicators of future activity suggest that firms expect continued growth, but optimism waned compared with last month.

Indicators Suggest Steady Activity…”

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[youtube://http://www.youtube.com/watch?v=BfK3_kJ4z7k 450 300]

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I for one heard many people react verbally against Muslims and felt disgust for those jumping to such conclusions.

Again by posting this i am not making a statement about the recent events, but i think it is important to explore all facets of a complicated ongoing story.

[youtube://http://www.youtube.com/watch?v=TBobEiXInxQ 450 300]

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“I recently posted two pieces discussing that the peak of economic growth was likely behind us.  (See here and here) In particular both pieces addressed personal consumption expenditures and their importance to the overall strength and direction of the economy.  To wit:

“…personal consumption expenditures (PCE) comprise about 70% of the gross domestic product calculation.  As PCE goes – so goes the economy.”

The importance of consumption on the overall economy should not be overlooked.  While, in the economic cycle, it is production that comes first, as it provides the income necessary for individuals to consume, it is ultimately consumption that completes the cycle by creating the demand.  This is the problem that government, and the Fed, face today.

Despite repeated bailouts, programs, and interventions – economic growth remains mired a sub-par rates as consumers struggle in a low growth/high unemployment economy.  Businesses, which have been pressured by poor sales, higher taxes and increased government regulations, have learned to do more with less.  Higher productivity has lead to less employment and higher levels of profits.

The dark side of that equation is that less employment means higher competition for jobs which suppresses wage growth.  Lower wage growth and incomes means less consumption which reduces the aggregrate end demand.  In turn, lower demand for products and services puts businesses on the defensive to “do more with less” in order to protect profit margins.  Wash, rinse and repeat.  This is why deflationary economic environments are so greatly feared by the Fed as that virtual spiral, between production and consumption, is incredibly difficult to break.

This brings us to the latest report from Goldman Sachs entitled “The Consumption Setback” (via Zero Hedge) which discusses the reality that consumer is slowing down which will likely have a negative impact on future growth.  This is a fairly sharp turn from their previous stance of an economic comeback in 2013 which I have previously argued heavily against.

A Consumption Setback

Coming into this year, we expected a notable slowdown in real personal consumption expenditures (PCE) from around 2% in 2012 to a 1% (annualized) pace in the first quarter of 2013. The main reason was the hit to disposable income resulting from…..”

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” “Germany’s top central banker warned that the European debt crisis could take a decade to overcome, apparently contradicting claims from other top European officials that the worst has passed.

He also predicted that the European Central Bank (ECB) might cut interest rates depending on future economic developments.

“Overcoming the crisis and its effects will remain a challenge over the next decade,” Bundesbank President Jens Weidmann told The Wall Street Journal.”The calm that we are currently seeing might be treacherous” if reforms are delayed, he said.

“Everyone is asking what more can the central bank do instead of asking what other policymakers can contribute,” Weidmann noted, adding that the central bank could cut interest rates if new information warranted such a move.

“We might adjust in response to new information,” however, “I don’t think that the monetary-policy stance is the key issue.” The ECB cut its key interest rate to a recod low  0.75 percent in July.

European Commission President Jose Manuel Barroso last week claimed that the worst of Europe’s crisis has passed. “I believe that the EU has come through the worst of the crisis but the situation is still fragile,” he told reporters during a visit to Prague, according to various newswire reports.

Meanwhile, Weidmann said that “a point that I think is important to make — perhaps less for my central bank colleagues than for finance ministers — is that the medication monetary policymakers administer only cures the symptoms and that it comes with side effects and risks.”

The International Monetary Fund (IMF) warned Wednesday that eurozone companies face a massive “debt overhang” that could extend the downturn and possibly spark a more serious crisis, The Washington Post reported….”
.

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Downgrades – APA, EBAY ,EXP, FDX, HBAN, QGEN,

Upgrades – AGU, AIG, ASML, BBY, HFC, JNJ, POT, SNDK, TXT, THRX, TRV, UPS

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SOURCE
NYSE

NASDAQ

AMEX

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In Play ,

On the Wires 

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Continuing claims: Prior 3079k, market expects 3068k, actual 3068k

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“Students with large loan burdens, because of the debt taken on for their educations, likely are not buyers of expensive items such as homes and cars. Perhaps all of their debt makes them less attractive candidates for loans. Or, they may believe their obligation will leave them bankrupt.

The results of a study by the New York Fed show what almost everyone with a high school education knows about student loan debt:

Student loans have soared in popularity over the past decade, with the aggregate student loan balance, as measured in the FRBNY Consumer Credit Panel, reaching $966 billion at the end of 2012. Student debt now exceeds aggregate auto loan, credit card, and home-equity debt balances — making student loans the second largest debt of U.S. households, following mortgages. Student loans provide critical access to schooling, given the challenge presented by increasing costs of higher education and rising returns to a degree. Nevertheless, some have questioned how taking on extensive debt early in life has affected young workers’ post-schooling economic activity….”

 

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“Gasoline prices continue to decline very sharply. Over the past month, they are down another 5%, and soon will fall below $3.50. If low gas prices tend to help the economy, gross domestic product (GDP) should get a boost this quarter.

The AAA Fuel Gauge put the price of a gallon of regular nationwide at $3.512 yesterday, down from $3.692 a month ago, as well as from $3.899 a year ago. Other than Hawaii, where the price for regular is $4.385, not a single state has an average price above the $4 level. And $4 often is seen as the mark at which the media and economists say the cost will undermine consumer and business activity, regardless whether that is exactly true.

Oil prices are not a perfect predictor of gasoline prices because, among other things, of the roles of refinery and transport. However, oil is by far the largest contributor to the price. And oil prices continue to fall rapidly. The price of crude sits just below $86, down from a 52-week high of $106, as well as $95 just five days ago. The irony of the price drop is that it is based largely on a drop in global demand, due to the slowing of major economies. In the meantime, the drop will stimulate American GDP….”

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