Volatility Is The Highest In A Long Time: Charting The Decades

Bloomberg Pro often has great charts that tell a story in a simple frame. We know that the recent swings in markets are unusual, but just how unusual are we talking about?

Thinking back to 2008/2009, there were 700 point days – that seemed pretty wild. But the fact is that the last few week’s action actually tops that from a volatility standpoint.

From Bloomberg:

By Cecile Vannucci and Jeff Kearns
Aug. 25 (Bloomberg) — U.S. stock price swings are widening at the fastest rate since the 1987 crash as concern the economy is stalling and optimism the Federal Reserve will try to spur growth whipsaw investors.

The CHART OF THE DAY shows a measure known as three-month historical volatility for the Standard & Poor’s 500 Index jumped 119 percent between July 22 and Aug. 23, the biggest rise over the same amount of time in almost 24 years, according to data compiled by Bloomberg. Excluding that year, the current increase is the biggest in at least four decades.

“We’re going to remember these times for the rest of our lives,” Brenna Hardman, a derivatives broker at MEB Options LLC, said in a phone interview yesterday from the Chicago Board Options Exchange. “People are scared. And I’d say bars around here are seeing their bottom lines increase. I’ve never spent such long days on the floor, and you don’t see anyone walking down here smiling very big.”

The Dow Jones Industrial Average rallied or declined 400 points on four straight days this month, the longest streak ever, as S&P’s reduction of the U.S. government’s credit rating fueled concern the economy will falter. Harvard University economics professor Martin Feldstein, a member of the National Bureau of Economic Research that measures recessions, said this month that the odds of a contraction are 50 percent…

HUI / Gold Ratio

Protect Yourself From Rising Food Prices : AGU, COW, CROP, MOO, PAGG

Many consumers have recently felt the effects of rising oil prices in their wallets. With turmoil continuing to rage in the Middle East, oil prices have been volatile. Funds like the United States Brent Oil (NYSE:BNO) have rallied in the face of higher prices. Analysts predict that this trend of higher oil prices could continue for awhile as the political situation in the Middle East remains in a quagmire. However, while consumers focus on the gas in their tanks, a potentially more serious problem is still brewing - rampant food inflation.

Biggest Increase
The United Nations Food and Agriculture Organization's (FAO) latest report showed that global food prices rose 39% in June versus June 2010. So far, consumers in the United States have not really felt the full effects of this rising food price inflation. Recent weather calamities such as a drought in Russia and flooding Australia, have disrupted harvests and helped push food prices higher. In addition, long term demand from emerging nations for new sources of food and biofuels is putting continued pressure on food prices. The USDA estimates that throughout 2011, its all-food CPI will increase 3 to 4%, with food at home (grocery store) prices forecast to rise 3.5 to 4.5%. The USDA forecasts are based on strengthening global food demand, mostly in the developing world.

Emerging World Demand
That demand in the emerging world is growing quite rapidly. The FAO projects that global populations will increase nearly 11% by 2020 and 20% by 2030. Analysts at Goldman Sachs expect the global middle class to expand considerably over the same time frame, to over 3.5 billion by 2030. Worldwide demand for beef is at all time highs, with beef exports surging by 19% in 2010. Wheat imports in China will need to rise by more than 30% this year. Last year, China was a net importer of corn for the first time in 14 years. Unlike developed nations such as the United States, citizens of emerging nations can spend as much as 40 to 50% of their income on food.

Sowing the Seeds
With the trends pointing in the favorable direction, investing in agriculture has been a big hit. While many agricultural commodity prices have climbed already, investors with a long term focus should consider adding the sector to a portfolio. Both the Market Vectors Agribusiness ETF (NYSE:MOO) and the PowerShares Global Agriculture (Nasdaq:PAGG) offer broad global exposure to some of agriculture's biggest companies like Deere (NYSE:DE) and fertilizer maker Agrium (NYSE:AGU). These two funds can form a great base in sector. However, there are other ways to play the growth in Ag.

The agricultural sector accounts for a big portion of total economic activity in both New Zealand and Argentina. Argentina is the second largest corn exporter and third largest soy exporter in the world. The nation is also top beef and lamb producer. New Zealand has seen its milk exports to China rise more than five times since 2008 as rising incomes increase demand. Both the iShares MSCI New Zealand (Nasdaq:ENZL) and Global X FTSE Argentina 20 ETF (NYSE:ARGT) should do well as the Ag sector grows.

Higher beef prices may be here for awhile as it takes two to three years for a cattle rancher to substantially increase herd. The U.S. currently has the smallest cattle herd since the 1950s, even though exports are surging. The iPath DJ-UBS Livestock ETN (NYSE:COW) and UBS E-TRACS CMCI Livestock ETN (NYSE:UBC) allow investors to bet on the prices of livestock.

Bottom Line
With global demand surging, higher food prices are here to stay. Investors with long term timelines should consider the sector. Growing populations, coupled with the newly minted middle classes desire for new sources of protein makes the sector a great place to be for the next few years. Funds like the new IQ Global Agribusiness Small Cap (Nasdaq:CROP) should continue to do well as global populations increase exponentially.

Kudlow Interviews PIMCO's Bill Gross

Quite a good interview tonight with Bill Gross on CNBC; I'd say I agree with much more of what Gross says in this interview than many of his other interviews. Bill says some things here that probably many do not want to hear....

U.S. Home Prices Tumble 4.5% in June

By Steve Schaefer
Forbes
August 30, 2011

A closely-watched gauge of U.S. housing was down sharply from a year ago in June, but the measure of home prices across the country is showing signs that the deterioration in the market is slowing.

The S&P/Case-Shiller index of home prices in 20 major cities was down 4.5% in June from a year ago, a hair less than the 4.6% annual decline in May. Nineteen of the 20 cities showed improvement from May – Portland was flat – while 12 showed a third-consecutive monthly increase. Perhaps more importantly, even the cities that saw the biggest year-over year declines – Minneapolis (-10.8%) and Portland (-9.6%) – did not make fresh lows.
11 images Gallery: 10 Big Cities Where Buying Is Cheaper Than Renting
15 images Gallery: Where Home Prices Are Making A Comeback

On a national scale, S&P/Case-Shiller reported home prices were down 5.9% in the second quarter from the corresponding three-month period in 2010, but up 3.6% from the previous quarter.

S&P Indices’ David Blitzer, chairman of the index committee, said eight cities bottomed in 2009 (California cities plus Dallas, Denver and Washington D.C.), while five set fresh lows in 2011 (Las Vegas, Miami, Phoenix, Tampa and Detroit). “These shifts,” Blitzer said, “suggest that we are back to regional housing markets, rather than a national housing market where everything rose and fell together. (See “Ryland Pulls Up Stakes In Jacksonville, Dallas.”)

The housing recovery has proceeded at a snail’s pace, largely due to the lack of substantial employment growth – August’s nonfarm payrolls due out Friday are expected to add just 75,000 jobs – but also factors like the foreclosure overhang that is keeping a lid on prices and sales. (See “U.S. Cities Where Buyers Do Better Than Renters.”)

Much-maligned banks are also a factor, with many still working through mortgage issues from the housing bubble and exercising far stricter lending standards. Just Monday, the FDIC objected to Bank of America’s proposed $8.5 billion settlement with investors in mortgage-backed securities sold by its subsidiaries. The latest delay to BofA’s efforts to put mortgage issues in the rearview mirror is just one example of how conditions are tilted against a big comeback for housing anytime soon.

Home builders and retailers that have substantial exposure to housing – Home Depot and Lowe’s being the two biggest examples – were a mixed bag Tuesday. The retailers started the day in the red, while builders like KB Home and PulteGroup shot up more than 5% apiece. (See “Toll Brothers: Thanks For Nothing Mr. Market.”)

The broader market opened modestly lower Tuesday, with the Dow Jones industrial average off 27 points to 11,513, the S&P 500 5 points to 1,206 and the Nasdaq 8 points to 2,554.

According To JPM There Is Now A "Better-Than-Even Chance" Of Fed Action On September 21

For now it was just Jan Hatzius calling for QE3 now if not sooner. With the addition of JPM to the list of banks now implicitly expecting (read demanding) QE3, it is now quite clear how Wall Street feels - after all someone has to pay those Wall Street bonuses - it sure won't come from M&A activity, underwriting of Chinese IPO frauds, or trading volume. Here is the key sentence from a just released note by JPM's Michael Feroli: "We believe the minutes lend themselves to our view that there is a somewhat better-than-even chance the Fed takes action at the next meeting to increase the average maturity of assets on their balance sheet." Keep an eye on the market tomorrow for confirmation: a third day of the same low volume meltup we have seen this week should make the open QE3 question into case closed.

From JPM:

Sometimes the squeaky wheel doesn't get the oil

The hawks on the FOMC may generate a fair amount of media attention, but today's minutes to the August 9th meeting remind us that there is a less vocal dovish faction that favors even more aggressive policy easing, and their view has been winning out over time. This contingent of "a few" favored a "more substantial move" at the recent FOMC meeting, "but they were willing to accept" the mid-2013 rate guidance "as a step in the direction of additional accommodation." While the change to forward guidance was one such step, other steps discussed included the usual three: further enhancements to forward guidance, further asset purchases, and lowering the interest on excess reserve rate. Inflation targeting, price level targeting, and other more extreme measures were not discussed. We believe the minutes lend themselves to our view that there is a somewhat better-than-even chance the Fed takes action at the next meeting to increase the average maturity of assets on their balance sheet.

Regarding enhanced communications, there was a relatively lengthy discussion of conditioning the fed funds rate guidance on explicit numerical values for the unemployment rate or the inflation rate. A similar policy was undertaken by the BoJ several years back, when they conditioned the continuance of zero interest rate policy (ZIRP) on inflation remaining negative. While some on the FOMC argued in favor of this strategy, the only downside that was mentioned in the minutes was "questions about how an appropriate numerical value might be chosen." Given the Committee added a day to the next meeting to discuss easing options, some further communications enhancement at the next meeting cannot be ruled out.

On balance sheet policy, "some participants noted that additional asset purchases could be used to provide more accommodation." The minutes then went on to note that "others" favored an Operation Twist, perhaps of the active version, to extend the maturity of the Fed's assets holdings by actively selling short maturity assets from the Fed's balance sheet and buying more longer maturity assets. It was noted that this "would have a similar effect" on long term rates as more outright purchases, but would "not boost the size of the Federal Reserve's balance sheet and the quantity of reserve balances." It was not explicitly spelled out why either of these latter two variables should matter, but reading between the lines it could be the case that concern about the adverse political and public reaction to an increase in the monetary base may be leaving Fed policymakers hesitant to undertake another large expansion of the balance sheet. The discussion on lowering IOER was very terse, as "a few participants noted" that it could be "helpful in easing financial conditions."

Stepping away from the discussion of policy options, the Committee's discussion of current conditions and the economic outlook was an exercise in dreariness. The economy's performance so far "was considerably slower than they had expected," uncertainty has "risen appreciably," and "most participants saw increased downside risks to the outlook for economic growth."

Jay Taylor: Turning Hard Times Into Good Times

8/30/2011: Is our Systemic Financial Markets Malaise Nearing an End?

Pick Stocks Like Peter Lynch: COLM, KO, PEP

Legendary Fidelity mutual fund manager Peter Lynch believed individual investors should buy stocks in companies they understood. His rationale was simple, "If you stay half-alert, you can pick the spectacular performers right from your place of business or out of the neighborhood shopping mall, and long before Wall Street discovers them." It was simply a matter of keeping your eyes open to the opportunities around you. (For background reading, check out The Greatest Investors: Peter Lynch.)Go With What You Know
Each of us uses products and services on a daily basis with little thought given to their investment potential. That's perfectly normal - we are usually too busy enjoying them to put two-and-two together.

When we step back, however, we realize that we're far more qualified to make educated investment decisions about products we actually use than ones we don't. That's just common sense, and when applied to thorough stock research, provides the foundation for a sound and successful portfolio.

By researching companies whose products and services you use on a daily basis and understanding their financial situation, you'll be able to determine if they meet your criteria for investment. It takes a little legwork, but it's well worth it. (You've got the market research down, to learn the financial side, check out Due Diligence In 10 Easy Steps.)

Three Peter Picks
Thinking like Peter Lynch for a moment then, here are three companies you are likely familiar with that you might want to follow up on:

PepsiCo (NYSE:PEP)
This global consumer-goods powerhouse produced sales of approximately $62.5 billion in the last twelve months. Some of the brands that most of us use every day include Quaker Oats hot cereal, Tropicana orange tangerine juice and Lay's potato chips. Operating margins for the latest twelve months are 15.2%. Although not as strong as its biggest direct competitor, Coca Cola (NYSE:KO), PepsiCo is still an extremely profitable company operating in 200 markets around the world. With a market cap well over $100 billion, you're not likely to have a larger company in your portfolio.

Columbia Sportswear (Nasdaq:COLM)
Columbia knows its market - outdoor apparel - and it knows it well. Many investors can't help but wonder why Nike (NYSE:NKE) hasn't already bought Columbia Sportswear yet. The two companies' products rarely overlap and both headquarters are located in Oregon. Nike and its $20 billion in sales could probably buy Columbia (sales of $1.5 billion) with ease.

Whirlpool (NYSE:WHR)
In 2005, the company bought out Maytag, its closest rival, creating a home appliance dynamo. Its brands include Whirlpool, Maytag, KitchenAid, Jenn-Air and many others. In addition, it supplies Sears with appliances under the department store's own brand name, Kenmore. Many investors have no doubt owned or used an appliance under one of these brand names.

The Bottom Line
The three stocks listed above are just a small sample of the companies that spring forth if you keep your eyes open the way Peter Lynch became famous for doing. Rather than putting your head in the sand and giving up on investing, consider adopting an investment plan that takes advantage of your built-in knowledge as a consumer. There are opportunities all around us if we take the time to look.

Palladium Price Lags Gold

Unlike gold, which has rallied recently, the price of palladium has underperformed other precious metals over the past few months. Although palladium wsa one of the best performing commodities last year, signs of an end to its rapid price recovery are growing. According to the latest report of the German precious metals trading group Heraeus, Exchange Traded Funds (ETFs) got rid of nearly four tons of palladium in the last four weeks. While global demand for palladium bars for investment purposes has slightly increased, the total volume remains at relatively low levels.

Palladium was one of last year´s biggest winners after the global automobile industry had significantly recovered again. While the global financial crisis caused a heavy setback in worldwide car production numbers, the industry was able to rebound in the last two years. Even if sales figures in many regions could not reach their pre-crisis levels again, palladium demand among industrial end-users turned out to be strong. This development contributed to palladium price rally, after hitting a low of $161 per ounce in the fall of 2008. Palladium reached a new record high of $855 per ounce in February of 2011; more than a fourfold increase compared to its bottom at the height of the global financial crisis.

In addition, the rally in the palladium market has been fueled by growing concerns over future supply shortages of the white metal. After the mining giant Norilsk Nickel warned of depleting Russian state inventories of palladium in autumn 2010 followed by strikes in South Africa, the largest producer, this contributed to a tightening of the supply situation in global palladium markets. However, the resulting fears among global capital investors have given way to greatly increasing concerns over a new recession in the United States and a significantly slowing global economy in recent weeks. A shrinking demand from the automobile industry would have a highly negative impact, which is primarily used in the manufacture of catalytic converters.

The report from Heraeus also stated that sales in Europe´s automotive sector decreased by 2% from January to July of 2011. While Germany´s car market has proven to be a stabilizing factor for European car sales in the respective period, new vehicle registrations severely fell in those countries most affected by the region´s sovereign debt crisis. Spain, Italy and Great Britain suffered a slump of 24%, 13%, and 6.7% respectively. While vehicle sales in the U.S. rose by 11% compared to July 2010, new car registrations only increased by 1% month-on-month. Similarly in China – the world´s fastest-growing car market – vehicle sales recently posted a drop. Should this situation not change soon, the risk for a continued decline in palladium prices is high. Thus, investors should be extremely cautious were the technically relevant support level of $720 per ounce to be lost.

Focus on Stocks, Not the Overall Market: Technical Analyst: DE, CAT, DG, TGT, NKE, TIF, BBBY, CERN, AET, POT, IPI, MOS, DE

Amidst the noise of economic recessions versus slow patches, and technical bottoms versus temporary market retracements, it's important for investors to remember that the stock market consists of hundreds and thousands of individual stocks. Ignoring the macro noise is what technical analysis is all about, which is why Breakout welcomed RBC's Rob Sluymer to help viewers find the stocks working on both a relative and absolute basis.

An investing "focus on stocks versus the market is going to keep us out of trouble," Sluymer says. He likes names which, taken as a basket, go beyond counter-intuitive and into the land of bizzaro stock picking. Sluymer likes Deere (DE), but not Caterpillar (CAT), and consumer discretionary names like Dollar General (DG), but not staples like Target (TGT), and Hamsters (RAT) but not Goldfish (BAIT).

Sluymer acknowledges it's a "hodge podge" but he gives a ton of names to consider. Checking them out for yourself is probably a better use of your time than taking a stab at whether the S&P 500's next move takes us to 1,300 or 1,100. As always, you're welcome to debate and argue amongst yourselves in the comment section:

Consumer Discretionary:

Nike (NKE), Tiffany (TIF), Bed Bath & Beyond (BBBY)

Healthcare:

Cerner Corp. (CERN), Aetna (AET)

Agriculture (It's own sector because "Materials" or "Industrials" doesn't quite cut it):

Potash (POT), Intrepid Potash (IPI), Mosaic (MOS), Deere (DE)

S&P 500 Annual PE Ratios