Just over one year ago, Casey Research’s energy guru Marin Katusa made a bet – I believe at an investment conference – with Porter Stansberry about the price of oil.  The over/under was…get this…$40.

Marin joins us today to accept his trophy, and also invite you to a webinar he’s hosting about the prospects of the much-maligned nuclear energy complex.

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Porter Stansberry vs. Marin Katusa: Who Won the Bet?

By Marin Katusa, Chief Energy Investment Strategist

On May 1, 2012, Porter Stansberry and I made a bet. Porter predicted that oil would go below US$40 per barrel within 12 months.

I stated that there was no chance that this would happen (my reasons are presented at the link above).

Putting our money where our mouths are, we both agreed to bet 100 ounces of silver on the matter.

I have a lot of respect for Porter, who is a very smart man. When he talks, I listen. But when he discussed the reasons why he thought oil was going below US$40 per barrel, I knew I had him – this was going to be one of the easiest bets I have ever made.

One of Porter’s main arguments was that a global shale-oil revolution would push volume way up and prices way down. It is definitely a sensible argument, yet it was missing something very critical: timing.

The shale gas boom that happened in the United States did not occur in a vacuum. Rather, it was built upon decades of experience in new technologies such as hydraulic fracturing and horizontal drilling. This was then based off of more than 150 years in conventional oil and gas exploration. Today in North America, there are thousands of rigs and hundreds of thousands of skilled oil and gas workers to work on the projects.

This simply does not exist in the rest of the world.

For a new shale discovery – however large it may be – it would take years just to prove up its commercial viability, another few years to get the infrastructure running, and even more years before it produces enough to matter.

This means there are tremendous opportunities to profit – for those who are in the know – while we wait for the rest of the world to catch up.

$40 crude? Not on this chart!  (via StockCharts.com)

A similar situation is shaping up in the nuclear sector. Many countries rely on nuclear power and are planning to expand its use – the US among them – yet companies involved in the mining and refinement of uranium remain in a slump. We at Casey Research have created a webinar discussing these issues; it’s titled The Myth of American Energy Independence: Is Nuclear the Ultimate Contrarian Investment?, and it will premier May 21 at 2 p.m. EDT.

Featured participants include Chairman Emeritus of the UK Atomic Energy Authority Barbara Thomas Judge, former US Energy Secretary Spencer Abraham, and former Canadian Minister of Natural Resources Herb Dhaliwal. We will provide an expert, insider’s perspective on the global nuclear power scene, showing you how to leverage its rising importance in your portfolio for potentially life-changing gains. Learn more about the free webinar and reserve your place today.

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Global Shale-Oil’s Pregnancy Pause, and the Prospects for Nuclear is an article from: The Contrary Investing Report

It’s been a full year since we initially highlighted Guidewire (GWRE) as a growth software company with utility-like revenue stability.  No doubt inspired by the piece, GWRE has hummed from $25 to $41 – a gain of over 60%.

During that time, I have been selling covered calls on GWRE.  My shares were called away several times, but I was fortunate enough to buy them right back afterwards.  All-in-all I’d probably have been just as well off buying and holding GWRE as I was selling calls for income on my current shares – though I was more protected from downside employing the option strategy in tandem.

GWRE Valuation Update

As we’re patting ourselves on the back, we should take the time to reconsider Guidewire and ask if we didn’t yet hold a position here, would we start one?  Let’s revisit – and update – our previous valuation thesis:

Guidewire sports a market capitalization of $1.35 billion, is sitting on a cash pile of $170 million, and no debt. So the company itself can be had for $1.18 billion.

While management does not provide growth projection guidance, it appears to be on track (based on a question answered during the last investor conference call) for at least the short term to achieve sales and earnings growth north of 30%.

Longer term, Guidewire believes there are 1000 additional insurance companies that need its software. And the current product set has not been fully sold into the existing customer base – in fact it thinks it can grow revenue four times just selling the existing product set to the existing customers.

For the sake of argument I’ll assume Guidewire can grow sales and earnings 25% per year for the next five years – and let’s toss in a sixth to make the math easy. This is a double across the board every three years.

Which means when we pull up this article in 2018 (on our iPad 8), we’ll wake up to a GWRE that sports four-quarter recurring revenue approaching $400 million, earnings-per-share around $2.80, and likely still has a lot of insurance companies to sell software to. Those numbers would probably make us happy with our buy-in price of $25 per share / $1.18 billion for the whole enterprise.

Source: Seeking Alpha, May 14, 2012

Guidewire now boasts a market cap of $2.34 billion, is sitting on about $100 million in cash, and still has no debt.  So you’re paying $2.24 billion for the company today – almost double the $1.18 billion you could have picked it up for this time last year.

Our favorite four-quarter recurring revenue number increased 32% year-over year – from $96.3 million to $127 million.  This was a pleasant surprise, as we had only pencilled in 25% growth.

Still, the stock is quite a bit pricier than it was a year ago with respect to our “keep a few core developers and just cash the checks” number (see the original article for a full description of this).  Last year, we paid about 12x this number for shares of GWRE – this year, it’s 18.

Moving GWRE to a Hold

If you don’t yet own Guidewire, I’d stay on the sidelines and see if the stock gets unfairly punished after an earnings report.  The long term story still looks great for GWRE, but you know how manic the market can be in the short term (and we’ve seen it before with GWRE, too).

If you currently own Guidewire – first, congratulations.  Secondly, don’t forget to move your stops up to lock in your gains.  A decisive break below $35 for GWRE would be a sell signal for me.  Be sure to set a stop that flows with your trading strategy and goals.

Guidewire (GWRE) breaks out to all-time highs. (Source: StockCharts.com)

It’s very possible that GWRE could double again from here.  It has a business model that parallels Wall Street Darling Salesforce.com – if GWRE garners a multiple that parallels CRM, there will be some room to run from here.  That’s why I prefer to respect the trend from here, now that the valuation aberration has been closed to at least some extend.

Why Not Sell Covered Calls While We Wait

Finally, there are some nice premiums on the $45 call options for those of you inclined to sell covered calls while you sit and wait.  The June 22 GWRE call options most recently traded hands for $1.05 – which would be a 2.5% return in just 46 days.  Granted you’re giving up the upside above $45, but I’m willing to trade that in exchange for a 20%+ annualized return on shares that I’m going to keep holding anyway.

Past Analysis and Coverage on GWRE

Guidewire: A Growth Software Company with Utility-Like Revenue Stability (May 14, 2012)

Guidewire’s Ambiguous Earnings Results, and the Market’s Manic Reaction (June 10, 2012)

Selling Covered Calls on Guidewire (October 4, 2012)

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Moving Guidewire (GWRE) to a Hold (or Sell…If We’re Talking Covered Calls) is an article from: The Contrary Investing Report

Handicapping the Potential Successors to Ben Bernanke

By Paul Brodsky, QB Asset Management

[Ed. note: This article originally appeared as a guest contribution in the "Midweek Matters" Casey Daily Dispatch.]

A couple of days after the Fed announced Ben Bernanke would not attend the Jackson Hole summit, for the first time in twenty five years, the New York Times (on the first page, no less) ran an in-depth profile of Janet Yellen, the heir apparent to run the Fed. Beneath her profile there were three other candidates “being discussed”: Roger Ferguson, Tim Geithner, and Larry Summers.

We at QB Asset Management normally do not spend time handicapping presidential appointments. In this case, however, we think the choice for next Fed Chair may have profound economic implications, and that it would not require expertise in econometric modeling, credit policy management, and maintaining the public perception of economic stability. We think the next Fed Chairman will oversee a conversion of the global monetary regime. A thick skin, diplomatic skills, and strong relationships with global banks and monetary policy makers will be the skill set most needed. We think Tim Geithner (with Bill Dudley as an alternative) will take over the Fed when Ben Bernanke steps down next January, and it seems by all indications that the table is already being set.

We attended a small dinner party a few years ago at which an iconic financier (and major Obama supporter) let it slip that he questioned one of Obama’s most senior aides just prior to the 2008 Democratic convention about taking over the economy when it was imploding. The aide waived it off and exclaimed, “Oh, don’t worry, Bobby has it covered!” Most of the table was relieved that Bob Rubin still had their backs and that banks would keep priority. Such was, and remains, US economic policy.

Neither growth nor austerity nor gloom of night will stay these currencies from their appointed devaluations. Bank balance sheets must be preserved; ergo sufficient inflation must be manufactured. We think the dull but persistent economic malaise amid increasingly aggressive monetary intervention policies will soon engender fear among the not-so-great washed – net savers. This happier band of brothers cannot maintain an edge when the real economy contracts and interest rates are already at zero. Base money is already being manufactured in the form of bank reserves, and the total money stock is not growing because there is very little natural economic incentive among the rest of us to consume (much) or take risk. Something and someone new is needed.

Ben Bernanke seems like a brilliant political economist and a decent guy, the top of his field in terms of comportment, academic credentials, and specific competence in understanding historical monetary policies during a countercyclical (i.e., deleveraging) period. Perhaps Janet Yellen is too? But such qualities are not what we think will be preferred by the powers that be now that global resource producers are openly questioning US, British, Euro, and Japanese monetary policies, and reserve holders are realizing their stash is being methodically turned to trash.

Meanwhile, aggregate leverage is growing and real economies are withering. Does anyone believe that Ben or any other monetary authority has been proactive, or that any fiscal authority has enacted legislation that promises to help achieve “escape velocity?” Can’t we all agree that the rationale for economic policy may be boiled down to the counterfactual: “Yes, but imagine if they withdrew liquidity or enforced true austerity – it would be worse!”? Is there a serious analyst who still believes economies can grow their ways out of being overlevered without leveraging further?

Whether or not contraction has to come a-knocking prior to a monetary reset is anyone’s guess, but it would be difficult to imagine monetary system change without a generally recognized economic tragedy that precedes it. This implies disappointing GDP prints, declining corporate revenues, and maybe even a swoon in stock and real estate markets. We have already begun to experience the first two. Now that we read global central banks have begun buying equities, perhaps equity prices may be controlled too (as are the level of interest rates via large scale asset purchases like QE and relative currency exchange rates via timed interventions)? Negative output growth and asset price busts would certainly open the door for our hero to enter.

The role of a central banker in the late stages of deleveraging seems to be volume triage, as they say in intelligence circles – reacting to an increasing barrage of events as they occur, wherever they may occur. In economics as in policing, the bad guys always get to take the first shot. From the central banker’s perspective, the bad guy in the current regime is the real economy. If it continues to shrink, as we think it must, then TPTB must change the way they do business.

We think the box we drew in our last write-up, contrasting inflation/deflation with leveraging/deleveraging (they are not the same thing), is the key metric in understanding the forces behind economic growth and market pricing. An inflationary leveraging perpetuates imbalances, while deflationary deleveraging threatens the survival of the banking system at large. Hopes for organic credit growth, which would promote the former, are now fleeting. This, in turn, engenders the threat of the latter. Continued ZIRP, increasing asset purchases, and a steep decline in the universal efficacy of it all suggests the time to press the reset button is quickly approaching. May to December 2013 may turn out to be the darkness before the dawn: a time we look back upon and choose to forget.

All in all, we think the most efficient Fed Chair in advance of a reset would be Paul Krugman. He seems willing to destroy the current global monetary system with swift dispatch, without consultation, declaration (or second drafts). Alas, capitalist economies in liberal democracies require level-headed responses to market forces. There is no place for rogue pro-actionists. Institutions like the Fed are meant to appear as first responders working on behalf of the societies their banks serve.

And so we think that circa 2070, our children will write and read (140-word) biographies about how Timothy Geithner saved the world from economic darkness. Geithner will save the day and bring glory to the Obama presidency by reducing the burden of debt repayment while maintaining the nominal integrity of debt covenants and bank balance sheets. The only way to accomplish this would be by destroying the currencies in which those debts are owed. Net debtors will rejoice and net savers (all 1% of them?) will suffer, finally realizing their unreserved currencies and levered financial assets were never sustainable wealth in the first place.

Our little narrative could certainly turn out to be wrong, but we discuss it here (against all political wisdom) because we cannot find another one that better fits current macro and market pricing trends. If we are wrong about Mr. Geithner, we think it would imply that TPTB (raise your hand if you think the Fed’s shareholders do not choose/approve the Fed Chairman) believe a clear-headed and decent academic political economist can figure out what all past ones could not: how to support asset prices beyond ZIRP and central bank asset purchases. (Ben is gone, long reign Janet!) That is not our projection.

When and if it becomes clear that Tim Geithner will ascend the steps at Eccles, we think it would already be too late to buy physical gold and resources. The only play remaining for financial asset investors looking to get full value after the reset would be shares in precious-metal miners and natural resource producers holding reserves in nature’s vault. Properly held bullion and shares in precious-metal miners would act as the most efficient store of purchasing power over the course of the devaluation and conversion. (Worst to first? Get ‘em while they’re cold!) Futures, ETFs, unallocated bullion holdings, and other fractionally reserved claims on physical reserves easily replaced with cash would not participate.

If our scenario comes to pass, then bank, government, and consumer balance sheets would be quite healthy following the reset and would be ready to expand. We would think consumable commodities and shares in their producers would lead equity markets higher and that interest rates would remain low, as further inflation would be mitigated by the discipline of a full or partial peg to precious metals. We think all should question whether we are 100% wrong. If not, then prudence dictates some allocation to properly held precious metals. (Presently, it is less than 1% of all global pensions.)

Paul Brodsky is a founding member of QB Asset Management Company, a New York investment manager.

Owning precious metals is a must in these troubled times, but you should also consider buying exceptional junior exploration companies – even the best-of-the-best juniors are down 50% or more over the last year. This situation is providing contrarian investors with a rare opportunity to literally make fortunes. To help you take advantage of this historic profit opportunity, Casey Research is offering a free viewing of Downturn Millionaires. This must-see online video features legendary resource speculators Doug Casey and Rick Rule, who reveal their personal strategies for creating life-changing wealth from troubled markets. You’ll also discover actionable investment advice from Casey Research Chief Metals and Mining Investment Strategist Louis James. To learn more about Downturn Millionaires, click here now.

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A Familiar, Horrifying Face to Succeed Bernanke? is an article from: The Contrary Investing Report

With the precious metals recovering from their recent free fall, you would think investor sentiment would be at rock bottom levels.  If so, then you (and me) would be wrong – at least according to an indicator that only our technical expert Carl Swenlin would have a beat on!

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Precious Metals Sentiment: Low, But Not Low Enough is an article from: The Contrary Investing Report

Regular contrarian correspondent Sy Harding digs into recent economic data, including last week’s jobs report, to see if we’re potentially heading for another summer slowdown in 2013.  Of particular concern to Sy is the decline in average hours worked – which may signal there’s less work that needs to get done.  (Everbank’s Chuck Butler cited this concern as well in this morning’s Daily Pfennig).

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Did Last Week’s Critical Economic Reports Vindicate Market’s Resilience?

Being Street Smart

By Sy Harding

For several months the U.S. stock market has been impressively shrugging off a staggering string of terrible economic reports that seemed to indicate the economic recovery is stumbling again, as it has in each of the last three summers.

Since in each of those last three years the stumbling economy was accompanied by double-digit corrections by the S&P 500 of up to 21%, the market’s lack of concern this time has been puzzling analysts.

In my column last week I noted that although the market gets high marks for its resilience and ability to shrug off the negative economic reports, it had also made almost no further progress over the last six weeks. The Dow & S&P 500 had been trading in a narrow sideways range since mid-March, while the DJ Transportation Average and Russell 2000 had pulled back 4% or so from their levels of mid-March.

But it seemed quite likely that given this week would be one of the most intense weeks for important economic reports in some time, the market’s sideways action of the last six weeks would end in one direction or the other this week.

The question was “will the reports show sharp positive reversals indicating the slowdown in February and March reports were temporary glitches due to weather or some such? Or will they provide still more evidence that the economy is stumbling again this year?”

The week did not begin well for sure. The first three days of the week included reports that Consumer Spending was up only 0.2% in March, the smallest gain in six months. The Dallas Fed’s Mfg Index plunged from +7.4 in March to -15.6 in April. The Chicago PMI Index, often a harbinger for the national ISM Mfg Index, fell from 52.4 in March to 49.0 in April, its lowest level in more than 3 years. The ISM Mfg Index fell to 50.7 in April from 51.3 in March. The ADP Monthly Jobs Report showed only 119,000 jobs were created in the private sector in April, a substantial decline from the 158,000 reported for March.

And indeed the market did seem to begin paying attention, the Dow plunging 138 points on Wednesday. The Fed also seemed to take more notice of the sharply worsening conditions, assuring markets with its FOMC statement on Wednesday that the Fed remains flexible and stands ready to increase or reduce the pace of its QE stimulus to maintain policy accommodation.

But then a dramatic reversal in reports seemed to begin Thursday morning, with news that weekly unemployment claims fell 18,000 to 324,000, the lowest level since January, 2008. And it was reported that the U.S. Trade Deficit unexpectedly narrowed by 11%, in March. The significance is that a narrowing trade deficit is a positive for the economy as American companies earn more from overseas sales, while American consumers and businesses spend less on foreign products.

The relief provided by those two positive reports on Thursday was enough to close the Dow up 130 points for the day.

An even bigger impact was made Friday morning with the Labor Department’s monthly employment report for April. It showed 165,000 jobs were created in April, much better than the consensus forecast for 135,000. More impressive, the previous month’s shocking report that only 88,000 jobs were created in March was revised up to a tally of 138,000.

That was enough to have the Dow up 175 points by mid-day Friday.

It would have been more impressive if the positive reports had included more than just the jobs picture and the narrowing of the trade deficit.

But the other reports on Friday, ignored by the market in the excitement over the jobs report, were a continuation of the dismal reports of earlier in the week, which have been going on for two months now.

The Commerce Department reported that Factory Orders fell a substantial 4% in March, and the ISM Non-Mfg Index (services sector) declined from 54.4 in March to 53.1 in April, worse than the consensus forecast.

So unfortunately the question remains. Was there really enough in this week’s heavy schedule of critical reports to vindicate the market’s willingness to ignore the negatives?

The employment picture is very important. However, as I pointed out in the other direction, when jobs were still suffering even as signs were showing up of the Great Recession ending, jobs are a lagging indicator that would not improve until after the economy had improved sufficiently.

Unfortunately, they are also a lagging indicator in the opposite direction. Companies do not let workers go until they can’t handle the slowdown in sales by cutting back on workers’ hours. And that was the one glaring detail in the jobs report. The average work-week declined 0.2 hours to 34.4 hours. Just as increasing workers’ hours and adding overtime is an indication of a coming increase in hiring, so a declining work week may be a sign of peaking jobs creation.

Meanwhile, outside of the employment situation, the week’s critical economic reports across a broad array of conditions showed only further deterioration of the slowing trend.

Sy is president of StreetSmartReport.com., and editor of the free market blog Street Smart Post. Follow him on twitter @streetsmartpost. He was the Timer Digest #1 Gold Timer award for 2012 (Gold Timer of the Year), and in 2013 is the #1 Long-Term Stock Market Timer.

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Does the Declining Work Week Signal Peak Jobs is an article from: The Contrary Investing Report

There are two entry strategies I like to employ when trading agriculture.  The first, and classic, is to enter a position on a significant breakout to the upside – as we highlighted recently with regards to cotton futures.

This tried-and-true trend following play concedes the first 10-20% of a move, with the goal of catching the bulk of a run upwards.  Since commodities, especially agriculture, tend to trend, this gets you in the trade if and when something begins to take off.

It’s been a successful strategy for me in the past, but I’m beginning to wonder if it’s become too popular and well-followed for its own good.  With every hedge fund on the planet staring at the charts and moving averages, it’s likely that many are already in the trade by the time we would buy in – hence creating a lot of false breakouts we’re be buying into.

Entry strategy #2 – my new working theory – may solve this issue.  If we wait until a commodity hits key support levels at the end of a downtrend, it is likely unloved and unowned.  The downside of the trade is minimal, because you’d place the stop just below the current levels of support.  Contrast this with a breakout, where you may not have support in the immediate neighborhood – nor a convenient place for your stop nearby.

Since we love commodities that are well off their highs – because the best cure for low prices is low prices – I’d like to highlight two particularly attractive candidates that are trading near key support levels.

Treat Me Rice

For the past two years, I’ve been writing about rice – focusing, in particular, on why rice should rally soon.  While rice has been slowly trending higher since it most recently piqued our interest in 2011, we still haven’t seen an electrifying 2008-style pop.

After a recent “false start” to the upside, rice has dropped back into its recent trading range once again, and is sitting at support levels that have been twice successfully tested thus far:

Rice tests key support levels for a third time. (via Barchart.com)

Will price action finally reflect the projected favorable supply and demand fundamentals in rice?  This is a nice setup to take a flyer on it.

Cocoa Beware

Not to be confused with the original Birdman, the 2013 brand of cocoa appears to be drawing its own line in the sand just above the 2000.  In fact, only once in the last five years has cocoa dipped below current levels – and that was in late 2008!

As you can also see from the chart below, cocoa is highly volatile, and should not be trusted to slowly consolidate and trend upwards.  It’s a close-your-eyes-and-pray type of trade – one that may be best entrusted at these bargain basement levels.

Cocoa has solid 4+ year support at 2000. (via Barchart.com)

20/20 Hingsight: King Cotton

Back to the King – instead of waiting for the recent breakout above 78, we could have purchased cotton in the low to mid 70’s – with a stop below support – and bided our time.  In this example, it would have worked out for us, as we’d have been able to hang in the trade until the breakout upwards.

A variation on this theme would have been to buy an earlier, and less refined breakout – so as to beat a few more funds to the punch, while ensuring that we are going long at the time it appears to be moving up.

More commodity coverage:

• Cotton’s gritty stealth rally kicks off
• Rogers Commodity Index swaps coffee beans
• IEA projects US to surpass Saudi as oil exporter by 2020

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Two Unloved Ag-Mates at Hovering Key Support Levels is an article from: The Contrary Investing Report

Interest rates are beginning to creep up – and technical guru Carl Swenlin believes this may the long-awaited secular upturn in rates.  He outlines – and shows via his trademark charts – why this is.

Interest Rates Turning Up?

by Carl Swenlin

Based upon very long-term charts and commentary from Hoisington Investment Management Company, for some time we have speculated that the 30-year bond rate would continue downward to around 2%. However, the charts are showing strong technical evidence that interest rates may be turning up in the long term.

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Have We Seen the Secular Bottom in Interest Rates? is an article from: The Contrary Investing Report

The latest jobs report for March 2013 sparked some mixture of relief, optimism, and skepticism, depending on your perspective. Technician Sy Harding doesn’t think it matters as a leading indicator – watch the tape to see what’s ahead, he says.

Sy is currently keeping a cautious “buy” call on stocks – but he is prepared for a change as soon as this summer…

Here Is What Investors Need To Realize After The Terrific Jobs Report

By Sy Harding, Editor, Street Smart Report

Friday’s employment report confirmed the extent of the economic recovery from the Great Recession of 2008-2009.

We’ve already seen the two main driving forces of the economy, autos and housing, leading the way. U.S. auto sales bottomed in 2009 with only 10.4 million units sold, and have seen impressive growth since to the current annualized pace of 15 million units, almost back to pre-recession levels. Home sales and prices bottomed last year and have been recovering at a surprising pace since.

As I’ve argued for several years with those complaining about the jobs picture, employment is a lagging indicator, and would not pick up until those two main driving forces of the economy were recovering in a meaningful way. And now we can see from the jobs reports of recent months that the recovery is finally impacting jobs.

Friday’s report that 236,000 new jobs were created in February was well ahead of the consensus forecast for 160,000 new jobs. And the unemployment rate fell from 7.9% to 7.7%. Even more important, those new jobs were largely the result of growth in the private sector, in construction, manufacturing, retail, and healthcare, gains that were substantial enough to offset the continuing cut-backs in government payrolls.

But investors should not get carried away with the thought that the report indicates the economy and stock market now have clear sailing ahead.

Here’s what investors need to realize.

Historically the stock market tends to act three to six months ahead of the economy in both directions. That pattern has not gone away. The 2007-2009 bear market bottomed in March, 2009 when the current bull market began. The 2008-2009 recession ended three months later in June, 2009.

The stock market has been factoring in the economic recovery since, and has already recovered to its pre-crisis levels, the Dow and S&P 500 now back to their peaks of 2007.

Meanwhile, the economy is merely catching up to what the stock market has been predicting for it.

But as the economy catches up to the market’s expectation, the market will continue to focus on what lies ahead, and at this point it may not be a continuation of what it has anticipated for the last four years.

Through those years the economy has been fueled by extreme easy money policies, record low interest rates, and massive government fiscal and monetary stimulus.

The government already began reversing the fiscal stimulus last year with cutbacks in federal payrolls, and is significantly stepping up that reversal this year, with the 2% payroll tax increase in January, and now the upcoming automatic ‘sequester’ cuts in government spending, or some negotiated form of the automatic cuts.

Meanwhile, the Federal Reserve has promised to keep its easy money policies and QE programs, including record low interest rates, going well into 2014 – unless the economy improves faster than expected or inflation heats up.

And already we’re hearing hints that the Fed may also begin to remove the QE punchbowl sooner than currently expected.

The president of the Richmond Federal Reserve Bank said on Tuesday that the Fed’s exit strategy is a major concern and “I just fear that small mistakes could get translated into large consequences.” And the president of the Philadelphia Federal Reserve Bank said Wednesday, even before Friday’s impressive employment report, that the Fed should begin scaling back its QE program now.

Markets don’t wait for governments to act, especially on interest rate changes. Already we’ve seen interest rates, mortgage rates, and yields on bonds beginning to rise. In fact bond yields have risen enough that 20-year bonds have seen their value drop 12% since last August, in a fairly serious correction. (Bond prices move opposite to their yields).

It’s not just bonds but also the stock market that loves low or declining interest rates but hates rising rates. So if, as bonds apparently already are, the stock market begins to anticipate higher interest rates, that could be yet another potential catalyst for my expectation that the market will run into trouble again this summer.

Yes, in addition to correctly anticipating the long-term economic recovery, the stock market has also done a good job of anticipating the short-term setbacks within the recovery by rolling over into corrections just before the economy stumbled in each of the last three summers.

So rejoice in the improving employment situation, but don’t fall for the thought that it means clear sailing now for the stock market. It may soon mean just the opposite if it encourages Congress to be more aggressive in cutting government spending, the Fed to begin reversing its easy money policies, or a more pronounced rise in interest rates.

I and my subscribers remain on a buy signal for the market from last fall, but if anything the strong employment report enhances my expectation that the stock market will again run into problems as April and May approach and the market’s ‘favorable season’ ends, by encouraging an earlier removal of the easy money policies that have driven the recovery.

Sy is president of StreetSmartReport.com., and editor of the free market blog Street Smart Post. Follow him on twitter @streetsmartpost. He was recently awarded the Timer Digest #1 Gold Timer for 2012 (Gold Timer of the Year) award, as well as #2 Long-Term Stock Market Timer for 2012.

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Jobs Report Irrelevant as Leading Stock Indicator is an article from: The Contrary Investing Report

Just nine months ago, we were licking our chops at cotton’s blue light price special.  Cotton had been smashed from a post-Reconstruction high of over $2 to WAYYY down below the $0.70 mark.

Cotton futures have quietly dipped to their lowest levels in two years, prompting our “contrarian alert” to sound.  Likely, cotton will base out a bottom, and slowly restart an ascent likely to carry it well above $1. As we wait for a breakout to the upside, King Cotton is a nice potential trade to keep an eye on.  (Full analysis at Seeking Alpha)

Since then, The King has dusted himself off, and began his somewhat-long-awaited rally…

King Cotton picks himself up off the mat…

…and it’s a LONG way back to the top of the hill. (via Barchart.com)

While the top-most chart (past 6 months) shows an impressive rally, the latter chart (past 5 years) shows recent stratospheric levels that cotton has traded at.  While a challenge of 2011 highs may be a bit much, a rally above $1 seems like a more reasonable thesis.

Going Long Cotton

I went long cotton in January upon its breakout past the $0.78 mark.  When soft commodities “base” for as long as cotton did, a breakout above the trading range should usually be bought…so far so good here.

We’ll revisit the fundamentals of the trade next, but our stop-loss will be purely technically based.  If cotton hits a 15-day low, or decisively breaks current support at $0.82, we will close this trade out, book a modest profit, and wait for the next opportunity.

Cotton Fundamentals, and the Tape

Last May, we speculated that cotton supply may decrease because farmers would have fond eyes for the grains:

Corn and soybeans are not exactly cheap right now either – with corn above five bucks a bushel and ‘beans in the lower teens, farmers are making some good coin on these crops. It’s unlikely they’ll replace this acreage with cotton at current prices.

Bloomberg today reports this is exactly what happened:

American farmers may sow 9.4 million acres of cotton in 2013, as they switch to more profitable crops, Macquarie Group Ltd. said today in a e-mailed report. That compares with 12.3 million a year earlier, government data show.

With corn and soybeans currently sitting higher than they were last spring, it’s likely the bearish trend in cotton plantings will continue.

So demand is decreasing – how about supply?

This is the wild card that is more difficult to predict.  There have been reports that the real catalyst of the recent cotton rally has been China buying up as much cotton as it can.  While I find it impossible to get a macro-read on China from my comfortable office chair in Sacramento, I do have access to the cotton price chart, which does appear to be moving upwards.  Hence we’ll continue to use the chart as our real-time indicator of Chinese demand for cotton.

We know the potential for a supply/demand imbalance is there.  It has been for years, and it tipped in a big way a couple of years ago.  Our working theory is that this could happen again – especially with central banks with their collective fingers on the money printing triggers.  So, we’ll keep a speculative long position in cotton, thanks to the breakout as our cue.

Other Commodities to Watch

Rice and cocoa are both trading towards the lower end of recent ranges – these appear the most intriguing in the short term.  We’ll also be keeping an eye on sugar and coffee…both of which continue to tumble, as cotton did in late-2011 and early-2012 before finally finding a nice base to prepare for this current rally.

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Cotton’s Gritty Stealth Rally Kicks Off is an article from: The Contrary Investing Report

As the Dow hits a new time high, with the S&P 500 close behind, signs of an impending correction continue to pile up.  While the market has continued to climb the “wall of worry” higher since March 2009, it’s worth remembering that markets do go down once in awhile as well.  Today technician Carl Swenlin depicts a negative reversal that could be signaling at least a short-term trend change coming up…

NDX Exhaustion Divergence

by Carl Swenlin

Textbook divergences occur when an indicator fails to keep up with price. For example, a positive divergence is when price makes a lower bottom, but the indicator makes a higher bottom. A negative divergence is when price makes a higher top, but the indicator makes a lower top. In each case the divergence signals a possible price reversal. I call them “textbook” divergences because they are the kind that are typically referenced in any discussion, but there is another kind of divergence, which I will call an “exhaustion divergence,” that is extremely useful but rarely mentioned.

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One More Indicator We’re Due for a Price Correction is an article from: The Contrary Investing Report