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Gary Tanashian is proprietor of Actionable, hype-free technical, macro economic and sentiment analysis is provided in the premium newsletter Notes From the Rabbit Hole ( Complimentary analysis and commentary is available at the 'Biiwii Blog'... More
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  • Watch Semiconductors' Market Leadership

    In January of 2013 NFTRH used the Semiconductor sector as a 'canary in a coal mine' to a potential coming phase of US manufacturing strength and an economic bounce. This had negative implications for gold but normally would have had positive implications for commodities positively correlated to the economy.

    That did not materialize in 2013 (as China decelerated) although with the recent launch of various 'outlier' commodity sectors like agriculture, natural gas and uranium along with persistent strength in crude oil and the highly speculative TSX Venture Exchange (CDNX), we now consider the view that some inflationary chickens (rising cost effects) may be coming home to roost. The economic bounce was after all instigated by an inflationary mix of ZIRP on the Fed Funds rate and long-term Treasury bond buying.

    We are managing precious metals and commodities on an ongoing basis, but today I want to focus back where it all began, with the canaries in the coal mine. Our early alert came in the form of personal information received about a ramp up in Semiconductor fab equipment orders from a friend in the field. If fab equipment companies like Applied Materials and Lam Research were ramping up then it meant that the Semiconductor companies themselves were gearing a new build cycle. This was 'early warning' stuff.

    But now the Semiconductor index itself, which has led the rally since Q4, 2012 (and is still leading despite some other leadership indicators like the BKX-SPX ratio falling off lately) is at a very important big picture pivot point. Here is SOX-SPX, showing leadership during the most intense phase of the cyclical bull market…

    (click to enlarge)

    Dialing out to a monthly view of the nominal SOX index we find the really compelling picture. The Semiconductors are technically above 10 year old resistance! ← You know I don't use (!) very often in my analysis. A March close above 560.68 is needed to confirm this breakout.

    NFTRH has incidentally, added the SMH Market Vectors Semiconductor ETF to the extensive list of strategic ETFs charted each week (joining several precious metals, commodity and stock ETFs) due to SOX' current status.

    (click to enlarge)

    What I find interesting is that most rallies over the last decade have pinged along from the bottom to the top Bollinger Bands and back again. But the current trend is much like the pre-2000 (and pre-blow off) trend as it hugs the top BB line. This is very much in line with the current question we are asking of the markets, 'melt up or correct here and now?'.

    Put it this way, if the SOX holds above the resistance line through March, the odds become heavily tilted toward an upside market blow off, which I believe would be the nature of the bull's end. We have had bull market termination scheduled for spring to mid-year for many months, but a picture like the above could force the analysis to adjust this potential out to Q4, 2014. We'll just have to be patient and let things unfold.

    Bottom Line

    The red line on the chart directly above represents a key level for market players. It is exquisite in that the implications of success or failure at this line are so very different.

    Success means a cyclical bull market blow off is probably engaging that would kill every bear before eventually wiping out greedy bulls (silver 2011 style) who over stay their welcome. Alternatively, take the breakout as a given at this moment and one risks the pain of a potential reversal and failure.

    Regardless, the potential of the SOX is very clear. The best (and crazy sounding) measured target is 953. Improbable I know, but how much about this bull market has seemed probable well in advance? Respecting potentials and probabilities while keeping ego and intellect under control will see us through. So will following the market's road maps, like the one above. It is very clear.

    Take advantage of a free 30 day trial of the entire NFTRH service, including a detailed weekly report, interim updates and 'Key ETF' updates. Over 90% of those who have used the trial have remained on as paying premium subscribers due to the value they have received over the trial period.

    Mar 06 6:21 AM | Link | Comment!
  • 3d Printing; No Barrier To Future Losses For Investors

    [edit] Immediately after publishing this post I noticed DDD down nearly 6% this morning due to a downgrade by Merrill Lynch.

    Valuation - Tech, 1999?

    At a current price to sales ratio of 17.99 and a forward PE ratio of 93.88 (according to Yahoo Finance), we'll let the individual reader decide what represents value when talking about 3D Systems (DDD). Similar lofty valuations are present in competitors like Stratasys (SSYS) and ExOne (XONE). But we will make a case that these companies should be valued closer to traditional automated manufacturing equipment makers than some sort of first mover in a transformative and disruptive technology. Or at least that this is going to be their eventual destiny.

    I am not an equities analyst, but rather just a former manufacturing company owner who bought and utilized serious high end automated equipment over the years. Price tag in $100,000 to $250,000 range per unit. Beyond that I am now a macro financial market manager with no real interest in digging too deeply into too many individual stock situations. So that is the caveat for readers to consider.

    I have been aware of 3D Printing (also known as 'additive manufacturing') for nearly a decade and a half. In the early days these cool gizmos were relegated to the low volume world of rapid prototyping and design for industrial applications. As the industry and the technology has advanced, the door has opened to shop floor production and even hobbyists with low cost consumer models at home in their garages and basements.

    Enter Wall Street; enter a massive hype machine including 3D Systems Partners With Hershey for 3D-Printed Treats and Stratasys' chestnut Super Bowl Cleats Signal 3D Printer Takeovers. The promo never seems to end in this space. This is all Wall Street (defined mostly as analysts and firms with sector coverage and by extension the mainstream financial media) and not the product of real manufacturing people. The 'wow' factor if you will, is being sold to the public. It's a promo operation.

    Folks, the internet was really cool too in 1999. Transformative, disruptive and frankly the core reason I am able to pursue my passion in publicly writing about financial markets and macro economic structures. 3D Printing is no doubt a positive and even disruptive step in modern manufacturing as it cuts into traditional manufacturing areas. Those affected to varying degrees would be casting, molding, plastic injection molding and precision machining.

    But in 1977 when I was a kid working as a machinist at my Dad's company in the summers we were among the very first to adopt 'automated' CNC (computer numerical controlled) machining. Wow, it had a big, tape-driven box attached to a Bridgeport miller and at the push of a button would do what a skilled machinist once did by manually turning handles on the X, Y and Z axes. I was by the way a tape programmer and button pusher, not a skilled machinist!

    Fast forward a couple decades and we are a shop full of finely tuned, high speed, multi-pallet, multi-axis machines controlled by a separate CAD system with wireless download. On that note, here is a point to remember as the hype about the 3D Printing industry gathers steam; it is companies like Autodesk (AutoCAD) and SolidWorks that are the brains behind the printers that let's face it, are the mechanical tool for applying the media from the software model.

    The industry has been using these CAD models for decades now. It is the tools that have changed and improved. Speaking of which, let's look at valuations for a CAD model software company and a CNC machine tool builder.

    • AutoDesk Price/Sales: 5.4, Forward PE: 36.69
    • Hurco Price/Sales: .85, Forward PE: 18.83

    Please be aware that due to a very limited number of publicly traded companies within these spaces, the above is not a fair representation. Hurco especially, is not what I consider a high quality machine tool builder when you have got the quality likes of Matsuura, Kitamura (my personal favorites), Mazak and Mori Seiki out there. AutoDesk's value as relates to 3Dp is watered down due to its scope being far wider than 3D Printer applications.

    But these are companies operating within an industry with competition that seemed to grow on trees as soon as word got out about CNC machining.

    Competition, No Barrier to Entry

    Going back to our little story about the first tape driven CNC, once the cat got out of the bag about this new and transformative way of replacing human skill with mechanized precision, the CNC industry simply exploded; leaving by the way our original first mover with the tape machines in the dust.

    When I saw my first Matsuura it seemed as big as house and as precise and powerful as something out of a science fiction movie. Later, in 1990 our company was literally transformed by a Matsuura '450′ horizonal machining center with 11 indexing pallets that would literally run all day, all night and on weekends, much of the time with nobody in the building! It was 'lights out' manufacturing.

    But Matsuura had an army of competitors to deal with and so too do today's 3D Printer darlings. Let's face it, CNC machining did not have Wall Street's interest and so there was no pitch.

    Manufacturing was experiencing a sea change and this was the reason that prior to going full time with my current passion in the markets I was able to make a nice living as a US manufacturer despite the commonly held belief (especially within the financial media) that 'we do not make things in America anymore'. Wall Street was nowhere to be found on this story… cue the crickets.

    So the Wall Street hype machinery is all over 3Dp even as Hewlett Packard prepares to launch into the space, Matsuura inches closer to 3Dp and domestic and foreign competition spring up like weeds. Now of course, HP may simply be planning to buy its way in. There are rumors of an intent to buy Stratasys by the printer giant. At these valuations, we might believe it only when we see it.

    Another factor is that while China is sprouting 3D printing companies like weeds, these are generally low quality knock offs… for now.

    Bottom Line

    But the valuations of DDD, SSYS and XONE, etc. are based not on the now, but on the future. That future is likely to hold a crowded field of competition as patents expire, start ups get up to speed and the very real opportunity in 'additive manufacturing' is exploited far and wide.

    We will let Terry Wohlers of Wohlers Associates, a leading serious 3Dp industry analyst with no ties to Wall Street have the final words by way of Forbes:

    During his survey of 3D printers in China, Wohlers counted more than thirty such brands. "The Chinese have much to learn (about the technology and marketing of 3D printers)," he says. "But, they are determined to figure it out." Wohlers says the situation is interesting (for producers and consumers of 3D printing) and frightening (due to the threat of competition for U.S. players). A market flooded with cheap 3D printers is also bad news for margins because they will shrink per printer.

    For now, however, 3D printing is in a honeymoon phase. This enthusiasm also spilled over into the stock market as a number of 3D printing outfits made their debut on the trading floor. 3D printing IPOs and stocks had a banner year as valuations for companies reached stratospheric highs. Towards the end of the year, however, the party seemed to be ending. Valuations for 3D printing stocks crashed and there was talk of a bubble.

    "I thought it was over-valued then (earlier this year) and now it (the stock price) keeps going up," says Wohlers. "I am looking at it from a positive perspective and hope that it creates new opportunities." | Notes From the Rabbit Hole | Free eLetter | Twitter

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: No positions but only because I could not find shares of DDD to short on Friday, Feb. 21

    Feb 24 10:14 AM | Link | 3 Comments
  • Precious Metals Grind Out A New Trend

    Gold is Monetary Value

    We preface the post with a statement that has not changed since I began public writing nearly 10 years ago: Gold is not about price; gold is about value. This point was hammered home to me 11 years ago by a person who had much influence upon my viewpoint toward the financial system and its various diseased components at a time when I was ready to listen and understand.

    So whether we are talking about 2013′s epic price crash or a new bull trend in 2014, the simple fact is that physical gold itself is a store of monetary value. That applied last year as the value was marked down by greed and confidence and it will apply this year as it is marked up in the face of a likely unwinding of those things. Humans, what funny and hyper kinetic animals.

    Precious Metals Speculation

    Ah, but this post is about the fun part, the speculative part where we humans can make gains from gaming the simple store of value and its wild little brother, silver. As asset market speculators we care about prices, right? How about the share prices of the completely blown to bits miners that dig the stuff out of the ground?

    There is a reason we put so much effort (i.e. risk management) into not letting the declines of the last 2+ years hurt us, and that reason was to be fully intact for when it is time to speculate. Now, a bottoming process has been ongoing since last spring, believe it or not.

    (click to enlarge)

    The Inverted Head & Shoulders scenario may or may not be the ultimate outcome of the weekly chart above, but NFTRH has been operating to its potential for months now as the grind in gold stocks has well, ground on. In fact, a grinding bottom would provide a better basis or platform for the rally (or baby cyclical bull) than the vertical thing that failed in 2012 off a 'W' bottom attempt.

    Weekly MACD triggered up back in the summer and when it was confirmed by the slower TRIX we had our two most important bigger picture bottoming signals. These have kept us in the gold stocks game - whether substantially positioned or ready to be - since the TRIX signal. But again, the bottoming process has been a real grinder for the better part of a year now. Time flies when you're having fun!

    Not… this bottom has been grinding peoples' nerves every step of the way and as noted to NFTRH subscribers along the way, this is a good thing. A grinding, painful and highly doubted bottom is a better bottom.

    But it takes a new daily trend to even begin moving from a potential bull phase to an actual bull phase. Several weeks ago NFTRH was noting that a bull signal (for a rally at least) would be indicated by a rise above the 50 day moving averages in tandem with MACD going green (0+). While I personally positioned during the false breakdown below 200, it was advised in NFTRH that conservative investors and traders might wish to wait for the above noted signals. Check.

    As to whether this is a new cyclical bull market or just a rally, the weekly chart above will eventually decide that question. There is no need to define it yet, because a bull phase is a bull phase as far as speculators are concerned. If it is a bull market, there will be plenty of time for late comers to jump in and mark it up later.

    (click to enlarge)

    As for staying aboard the rally in the meantime, here is where the fundamentals will come into play, joining the technicals. During much of 2013 we were treated to much railing from within the gold 'community' that gold's fundamentals had never been better. But in reality, gold's fundamentals as NFTRH views them - which are beyond the scope of this post (ref: Gold Mining is Counter Cyclical), but are definitely not what you read in the mainstream financial media or hear touted by certain gold bug analyses - degraded consistently in 2013.

    It can be argued (I for one have argued it) that these fundamentals were jimmied and rigged by all too cynical policy making, but just because something is rigged, you as a speculator, do not stand in front of it. In fact, as a speculator you put your dogma on a leash* and trade what is, not what your inner most convictions tell you should be. In other words, trade your brain not your heart.

    Bottom Line

    The daily trend in the precious metals and in particular gold and silver stocks, which have led the metals as we would like to see in a real bull phase, has turned up. A new bull market is still a ways from being indicated, but for now we'll take a rally and realize that with the bearishness of the last 2+ years and the grind that the recent bottoming activity has been, a new cyclical bull market could also be in play.

    Do not listen to the hype. The macro fundamentals have begun to improve for the gold sector and this will need to continue. NFTRH will manage these fundamentals every step of the way, as well as keep a running tab on the technicals. There will be hysterical rises and challenging declines going forward, but sector fundamentals and support parameters will successfully guide us.

    Our big picture theme for 2014 has been a 'macro pivot' away from the trends of the last couple of years. Give the affordable NFTRH (weekly report and detailed 'in-week' updates) a try and you will likely not be disappointed (see subscribers' thoughts). We are as we have been since the service's launch in 2008, ready to speculate and/or manage risk as the market deems appropriate. | Notes From the Rabbit Hole | Free eLetter | Twitter

    * Paraphrasing the cool lyric from Boston rock band Volcano Suns "Put that dogma on a leash."

    Feb 14 8:25 AM | Link | 1 Comment
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