The market is rallying, but so what. SocGen’s uber-bearish analyst Albert Edwards says you should be terrified if you’re a bull, and that if you’re not terrified, you’re probably deluding yourself.
We have just had the worst decade’s performance for equity investors on record. Relative to government bonds, equities have been an even bigger disaster. Surely after such a terrible decade for equity investors things can only get better?
On a ten year view, equities may indeed prove to be a good investment. On a 1-2 year view, however, we still see much pain to come. After what we have been though so far, where the bulls’ optimism has been crushed in 2001/2 and in 2007/8 surely there must be a heavy weight of self-doubt yoked onto the shoulders of the bulls – but apparently not!
The lesson from Japan is that while de-leveraging plays itself out, the global economy will remain extremely vulnerable. The Great Moderation is dead. It was built on a super-cycle of private sector debt. We know from Japan, we now return to what was before, i.e. highly volatile and unpredictable cycles. Recession will quickly follow recovery.
Kian Abouhossein at J.P. Morgan delivers some excellent insight into the Dubai crisis. The wealthy UAE will be able to easily bail out Dubai if need be, this time. It just might not be so optimistic to do so in the future.
We are less concerned for global banks about Dubai World’s direct $59bn outstanding debt exposure with $4.3bn due to mature in Dec-09 and a further $4.9bn in 1Q10, considering “only” $13bn of syndicated loans across global banking sector based on Dealogic data. Assuming a 10% “hold” strategy, the most exposed banks would be RBS with $0.23bn, DB and CS with $0.17bn each.
…
The view from our MENA team is that this event reflects cash flow challenges rather than refinancing ability. They believe that obligations on Dubai World and its property unit Nakheel PJSC are likely to be fulfilled at the new May 2010 earliest repayment date, and that Dubai should be eventually be able to fulfill its debt obligations maturing in the short-term ($4bn in Dec-09, relating to Dubai World, and $9 to $10 in 2010) with continued Abu Dhabi support. Abu Dhabi is strong financially with fiscal and current account surpluses, ~$150bn in FX reserves and a ~$300bn sovereign wealth fund. However it seems that Abu Dhabi will no longer be happy to underwrite all debt, and rather will differentiate more strongly between supporting Dubai’s strategically important assets (such as DEWA, and Dubai Ports), and the non strategic assets – hence the concurrent timing of the Dubai World debt restructure and the Abu Dhabi underwritten government of Dubai debt raising.
Here’s one rough measure of relative bank exposure to Dubai, based on Dubai World syndicated loans since 2007. Overall, JP Morgan believes the exposures are relatively small compared with the major banks involved.
Here’s probably a better estimate of relative exposure, by loans made to the UAE as a whole. The amount of direct loan exposure to Dubai specifically, within this UAE-wide figure, are apparently very difficult to know.
In his latest later, Raymond James strategist Jeff Saut argues that even if there is something like a bubble in stocks, everyone has to keep buying into it, or else they lose their jobs.
Thus, the trend remains your friend.
Nevertheless, we think the upside should continue to be driven by “game theory,” which suggests that the under-invested institutional portfolio managers have to buy stocks into year-end driven by their under-performance, their subsequent “bonus risk,” and ultimately their “job risk.” Verily, many of the portfolio managers we know remain under extreme pressure to commit their outsized cash positions in an attempt to “catch up” to their benchmarks between now and year-end (see the nearby Credit Suisse institutional cash versus retail cash on the sidelines chart).
Reinforcing that game theory point Jeremy Grantham notes:
“In markets where investors hand over their money to professionals, the major inefficiency becomes career risk. Everyone’s ultimate job description becomes ‘keep your job!’ (Manifestly) Career risk-reduction takes precedence over maximizing the client’s return. Efficient career-risk management means never being wrong on your own, so herding, perhaps for different reasons, also characterizes professional investing. Herding produces momentum in prices, pushing them further away from fair value as people buy because they are buying.”
Jeremy goes on to note a couple of insightful points: “Refusing, on value principal, to buy in a bubble will, in contrast, look dangerously eccentric. And when your timing is wrong, which is inevitable sooner or later, you will in Keynes’ words – ‘Not receive much mercy’” – he sums up what that means to the folks who try not to go with the herd and do the right thing, “Today the challenge is not getting the big bets right. It’s arriving back at trend with the same clients you left with . . .”
Plainly, we agree with Mr. Grantham, which is why we continue to think the improving fundamentals, and earnings, will serve as the “carrot in front of the horse” to keep investors chasing stocks even if we do get a near-term pullback.
You have to hand it to David Rosenberg. He sticks to his guns. Today’s Breakfast with Dave is a monster 18-page report covering gold, the shadow inventory in housing, the UK GDP report, and excess bank reserves. If anything, he seems more bearish than ever, and cites several "yellow flags."
Among them is this chart
And this chart of financials, noting that there’s been no gains, really, in 5.5 weeks.
And he cites a few other points:
• In another sign of a possible investor move to lighten up on risk, the Russel 2000 also closed the week down 2.5%.
• The market, last Friday, continued to post declines on higher volume; and, a majority of the up days in market were on lower volume. We realize that some will guffaw at the technicals, but in a technical as opposed to fundamental
market rally, the technicals need watching. As the Investor’s Business Daily correctly points out, “six distribution days on the Nasdaq and eight on the S&P 500 would in most circumstances be enough to kill an uptrend.”
• Did you see the VIX index (a measure of volatility in the equity market) jump 7.0% last Friday, to 22.3 — a bit of the complacency (but not nearly all) may be coming out of the marketplace.
In his latest letter, Raymond James strategist Jeff Saut laughs at the bears still calling this a "Sucker’s Rally"
To us it is interesting that despite the monstrous rally in stocks, accompanied by extremely strong advance/decline statistics (Art showed a great breadth chart of this at the conference, which is attached), the negative nabobs continue to call this a bear market “sucker’s rally!” While it’s true that markets can do anything, the real “suckers” have been the bears who didn’t employ adaptive asset allocation and consequently have “sat” out the seven-month rally. Clearly, we disagree with the bears’ assessment, having maintained the view that this is a new bull market since April. Moreover, participants got the Dow Theory confirmation of that “bull market” strategy either in July, or August, depending on which levels you used for the Dow and the Transports. Whether the current rally turns out to be a tactical bull market within the longer-term confines of a trading range market, or the first “leg” of a new secular bull market, remains to be seen.
But, as we told our friend and founder of the “must have” minyanville.com website, “does it really matter?!” Indeed, as the title of Ned Davis’ legendary book reads, “Being Right or Making Money?” Obviously, we’ll opt for “making money.” To that point, we have argued that with credit spreads (Ted spread, OIS to Libor, etc.) back to pre-Lehman levels, there is no reason why the equity market can’t “fill” the downside vacuum visible in the charts created by the Lehman bankruptcy. In the S&P 500’s (SPX/1087.68) case this implies at least a 1200 upside target. Tobe sure, there will eventually be a healthy correction, yet there is little question the primary trend is “up.”
Gluskin Sheff economist David Rosenberg has been negative all the way up, and he’s still not budging.
Today’s report is full of negativity:
On earnings:
Okay, let’s get this straight. We are now being told by the pundits that the reason why Mr. Market is managing to so readily shrug off adverse data is because Mr. Market is discounting “normalized” 2011 earnings of $80. That is behind the latest round of S&P 500 estimates of 1,200.
After a momentous 50%+ surge from the lows, anything is certainly possible. But let’s see if it makes sense. First, with household net worth down $14 trillion, employment down 7 million since the start of the recession and consumer credit down $110 billion from last year’s peak, it would seem to us as though there are too many gaping holes to believe we are going to be seeing anything remotely close to “normalized” earnings any time soon. But even if that were the case, it would suggest that the market is trading near a 12x two-year forward multiple. Go back 80 years worth of data, and the mean two-year forward multiple is 7x. Too rich for our liking.
On "growth"
We did some digging and found that all of the world economic rebound in 2009 — that is, 100% and then some — is being accounted for by fiscal stimulus. There is still nary a sign that the global recovery is being sustained by organic private sector activity. Oh yes, for 2010, we calculate that 80% of the growth that the consensus is penning in is derived from the public sector. Even FDR would blush over this unprecedented government incursion into the economy. Since the impact from government spending is a second-round effect on corporate profits, it will be interesting to see the extent to which earnings growth come into line with today’s lofty expectations.
And on employment:
• Jobless claims stuck at 570k — basically in line with a sustained 200k-300k payroll losses
• Temp agency job losses are continuing even if at a slower pace — this is not good news
• Downward revisions to the prior data — these tend to feed on themselves
• No change
Goldman Sachs has issued a memo to clients blasting the Wall Street Journal’s article on the "huddles."
"A ‘huddle’ is not a forum for sharing stock or sector ‘tips,’" Goldman writes in a memo first published by Bess Levin at DealBreaker.
It seems very clear that Goldman clients--the ones not invited to huddles--must have been raising questions about why they were being left out. The most damaging aspect of the article was the possibility that some "most-favored" clients were getting information or advice that conflicted with what Goldman was telling ordinary clients got. For example, clients coaxed to go long asset backed securities might be peeved if there was some secret Goldman huddle where top clients were told to short.
Goldman is now on the record denying that this occurs.
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While US banks have been busy refocusing their "creative financial products"-time over the past two months, instead defending against allegations of muppetism, or explaining how hedging is really betting it all on red, and then doubling down (just because the casino supposedly has the bank's back), Europe has been busy coming up with new and creative ways of betting on the demise of FaceBook. While official shorting of the most overhyped and overvalued company in history only became a reality for most investo...
Rich Adamonis, NYSE (NYSE: NYX) spokesperson told Benzinga "In response to incorrect reports re: NYX and Facebook (NDAQ: FB): There have been no discussions with Facebook regarding switching their listing in light of the events of the last week, nor do we think a discussion along those lines would be appropriate at this time.”
First we'll go to the technicals. Back in mid April I had opined a 'bear flag' formation was being created. [Apr 17, 2012: Potential Bear Flag Forming] But the market being the difficult beast it is, head faked everyone and rather than a break down from said flag it first went UP and nearly touched yearly highs. This caused everyone to think the bear flag had failed…. only to lead to a horrid May in the market. Generally a bear flag will resolve relatively quickly but the longer...
Despite the fact that U.S. equities are well-positioned and well-supported to go up, once again it is the headlines out of Europe—especially Greece—that are scaring off investors. Some are saying that it is now likely (and even desirable) that Greece will default on all its sovereign debt, withdraw from the euro, and severely devalue its domestic currency (Drachma?). This will allow them to operate a balanced budget while pumping cash into growth initiatives, rather than suffer the ravages of Germany-mandated austerity.
Some say, so what? Greece makes up only about 2% of the Eurozone’s overall economy. Nevertheless, you might say that this new “Grecian Formula” is creating the opposite effect to the men’s hair product, i.e.., rather than losing the gray we are al...
Markets died and then rallied to flat again as European leaders “prepared contingencies” for a possible Grexit
Markets died hard and fast earlier today as major indexes registered as much as 1.5% of losses after news that Euro zone officials were unofficially “preparing contingencies” for a Greek exit from the Euro. Unofficial statements were not enough to keep markets down however, as major indexes rallied back to flat levels by the end of the day.
So the world continues to wait on Europe, as the SPDR S&P 500 ETF (NYSEACA:SPY) gained .05%, the SPDR Dow Jones Industrial Average ETF (NYSEARCA:...
T - AT&T, Inc. – U.S. equities are on the decline as Europe’s woes once again take center stage. Shares in AT&T, down 0.90% at $33.24 this afternoon, are faring better than most of the other Dow components so far, though options activity on the wireless carrier suggests some strategists are bracing for further declines ahead of the long w...
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In this article, please revisit an article written two years ago titled, "The Calm Before the Storm." This article focused on the patent cliff that was looming in the pharmaceutical industry, that was later picked up by the New York Times and several other bloggers! Subsequent articles were written about big pharma company's revenue streams, and the pros and cons of of their later stage pipelines. Other articles have also attempted to identify smaller biotechs with the potential to reap big reward...
My last weekend update is dated from January 30 so after a long hiatus, here is an update of our virtual portfolio. Since the last update, we have closed the AA Money portfolio due to a lack of enthusiasm (and activity) and I have stopped tracking the FAS strangle as the low VIX makes it hard to get rewarded for the risk! But we have added a small $5KP virtual portfolio which does not use any margin.
FAS Money
We have had to recover from a big move up by FAS and a low VIX which keeps option prices low. But the portfolio has gaine about 10% since the last update.
Last update P&L - $5499.00
IWM Money
Not a lot of activity in this portfolio where the main focus is on the large IWM BCS. But the portfolio has grown over 20% since the last update.
Last update P&L - $1998.00
$5KP Portfolio
This is the virtual portfolio that replaced the AA Money portfolio. It does not use margin and we will keep holdings under $5K.
AAPL $50K P...
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(
