One Investment Strategy for Q1 2011: Cash, Baby, All the Way
by ilene - December 28th, 2010 10:09 pm
Charles Hugh Smith agrees with us on the wisdom of cash: One Investment Strategy for Q1 2011: Cash, Baby, All the Way - Ilene
Courtesy of Charles Hugh Smith
In response to readers’ requests, I disclose my own amateur’s Investment Strategy for Q1 2011: cash is king, and the U.S. dollar looks good simply because almost everyone expects it to collapse.
Despite my oft-avowed amateur-market-observer status, readers often ask me for advice or opinions on where to put their capital. This is not advice (please read the HUGE GIANT BIG FAT DISCLAIMER below), it is a disclosure of my own personal opinion, what we might call "one investment strategy of many possible investment strategies" for the first quarter of 2011: cash, baby, cash all the way.
Why am I in cash? Because I don’t trust the parallel rallies, and I am extremely skeptical of the various "stories" which are driving the rallies. Why am I skeptical? Because everybody and their sister has bought into the stories, and a one-sided trade is rarely the winning one.
Yes, it’s my contrarian nature: when everyone is a believer in a "story" that is too good to be true, then I become skeptical. This often gets me in trouble. When everyone was buying GM at $50, I was shorting it. When everyone was buying Fannie Mae at $60, I was shorting it (via puts). Both GM and FNM were obviously, painfully insolvent, but it took practically forever for reality to intrude on the fantasy/narrative that each firm was a "solid blue chip" investment with numerous analyst recommendations. In the meantime, I lost money treading water for quarter after quarter.
So even though the market is clearly top-heavy, the short-side trade may yet be ground down by the Fed’s prop-job and the Wall Street/Central State partnership’s desperate desire to use a rising stock market as a propaganda proxy for the "recovery."
(Hey, just borrow and squander roughly 13% of GDP, year after year after year (roughly 45% of the entire Federal budget), and you might stimulate a modest "recovery," too.)
So let’s examine each of the "stories" driving the rallies.
1. The global recovery is solid, and Central State stimulus and quantitative easing will keep growth rising and interest rates low. This narrative drives capital into "risk assets," i.e. stock markets, commodities, FX carry trades, Chinese real estate, junk bonds, etc.
I’m not really sure…
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DiggUNDERSTANDING THE MECHANICS OF A QE TRANSACTION
by ilene - November 9th, 2010 4:56 pm
UNDERSTANDING THE MECHANICS OF A QE TRANSACTION
Courtesy of The Pragmatic Capitalist
Some people want you to believe that the Fed just injected the economy and stock market full of
Before we begin, it’s important that investors understand exactly what “
This is a crucial point that I think a lot of us are having trouble wrapping our heads around. In school we are taught that “cash” is its own unique asset class. But that’s not really true. “Cash” as it sits in your bank account is really just a very very liquid government liability. What is the difference between your checking and savings account? Do you classify them both as “cash”? Do you consider your savings accounts a slightly less liquid interest bearing form of the same thing a checking account is?
What is a treasury note account? It is a savings account with the government. So now you have to ask yourself why you think cash is so much different than a treasury note? What is the difference between your ETrade cash earning 0.1% and that t note earning 0.2%? NOTHING except the interest rate and the duration. You can’t use your 13 week bill to pay your taxes tomorrow, but that doesn’t mean it isn’t a slightly less liquid form of the exact same thing that we all refer to as “cash”. They are both govt liabilities and assets of yours.…
WHAT IF THE MARKET ISN’T A “WIN WIN”?
by ilene - September 28th, 2010 12:43 pm
WHAT IF THE MARKET ISN’T A “WIN WIN”?
Courtesy of The Pragmatic Capitalist
Apparently I am not the only one who took issue with David Tepper’s comments that the
“Too bad we weren’t invited as a guest on CNBC last Friday to engage in a friendly debate with this portfolio manager because he didn’t outline the third scenario, either because he doesn’t believe it or he just plain didn’t contemplate it or he’s simply not positioned for it. That third scenario is that the economy weakens to such an extent that the Fed does indeed re-engage in QE, but that it does not work. So the “E” goes down and the P/E multiple does not expand. Maybe it even contracts since it already has spent the past number of years reverting to the mean as are so many other market and macro variables (for example, the dividend yield, savings rate, homeownership rate and debt ratios). In this scenario, the stock market does not go up; it goes down.
Is it possible that QE2 won’t work? The answer is yes. How do we know? Well, because the first round of QE didn’t work. After all, if it had worked, the Fed obviously would not be openly contemplating the second round of balance sheet expansion. If the objective was narrow in terms of bringing mortgage spreads in from sky-high levels, well, on that basis, it did help.”
I don’t entirely agree here. QE1 worked because we were in a different environment. The problem Bernanke was targeting in 2009 was one of bank balance sheets. Bank balance sheets were loaded with toxic assets so replacing these assets with cash was most certainly beneficial. It eliminated much of the risk associated with the banking system. As Bernanke said at the time, the point of QE was to alleviate pressures in the credit markets. As we can see from credit spreads he certainly succeeded in this regard. But this is no longer the environment we are in. As I said last week there are no bank balance sheets to fix. There is no…
Money Illusion
by ilene - August 4th, 2010 8:03 pm
Money Illusion
Courtesy of Tim at The Psy-Fi Blog
Sleep Soundly
Money illusion is just about the most venerable of all of the behavioural biases that afflict people’s financial good sense. It was recognised back in the early part of the twentieth century, was an integral part of financial theories from thereon and spawned a range of measures that are more or usually less useful to us in everyday life.
Then economists decided that money illusion was … illusory. Which led to various predictable, albeit unpleasant, consequences such as believing “you can’t go wrong with property” or that storing cash in your mattress equates to sensible financial planning. Being poor is one thing, but not being able to get a good night’s sleep is entirely another …
Vanishing Trick
Money illusion is the trait that causes people to focus on the amount of money they possess rather than it’s worth to them. A hundred dollars a hundred years ago is obviously worth much more than a hundred dollars now: prices have inflated and the value of the hundred dollars is far less than it used to be. Measuring this exactly isn’t possible: what price would a businessman have paid for instant communication across the world a century ago compared to the peanuts we pay for the internet today?
In deciding to ignore the idea of money illusion economics was, for once, joining the mainstream, where most people happily ignore the fact that the value of the dollar in their pocket isn’t what it once was. This leads neatly to a world where there are more unemployed people than there should be, where central banks run around like puppy dogs chasing their tails trying to avoid the dreaded d-word and lots of people end up much, much poorer than they ought to be. As ever in monetary matters the world is stranger than we can possibly want to imagine.
Fisher’s Indexes
Despite the practical impossibility of real comparisons we know perfectly well that the value of a dollar or a pound, shekel, rouble or euro isn’t what it used to be. In fact, in the case of the euro it almost certainly isn’t what it was when you started reading this. This fact, however, doesn’t stop us from almost exclusively focussing on how much money we have today rather than what it can purchase for us:…
See, I told You So (Again): Corporate Balance Sheets
by ilene - August 3rd, 2010 3:25 pm
Essentially, the giant piles of cash on corporate balance sheets are offset by similarly large liabilities (but few are writing about that). – Ilene
See, I told You So (Again): Corporate Balance Sheets
Courtesy of Karl Denninger at The Market Ticker
BOSTON — You may have heard recently that U.S. companies have emerged from the financial crisis in robust health, that they’ve paid down their debts, rebuilt their balance sheets and are sitting on growing piles of cash they are ready to invest in the economy.
…
It all sounds wonderful for investors and the U.S. economy. There’s just one problem: It’s a crock.
Yep.
Again, back to the charts:
See the blue section? Yep.
$10.9 trillion, to be precise.
To be fair, it is down some from the peak, which was $11.16 trillion in Q4/2008. But the recent low, that is $10.9 trillion recorded in Q4/2009, is now up by close to $300 billion.
So when you hear "record cash", you have to subtract back out the liabilities. At least you do if you’re being honest, which none of the mainstream media clowns are.
Let’s look at this with a bit different perspective via charts:
There’s your "growth" in non-financial business credit.
Now let’s compare against stock prices to see whether leverage is "reasonably reflected" in them….
Uhhhhh… that’s not so good…..
Specifically, notice that during the "climb out" from the 2002 dump leverage continually increased. That is, while prices roughly doubled so did total outstanding business credit. The problem with this progression is that you only get benefit from that if you can profitably employ the credit you have out.
When equities dove then and only then did businesses cut back – and not much! And now, with the nice little rampjob from the lows, businesses have stopped de-leveraging.
Into excess capacity this is suicidal and is one of the (many) reasons that I say that equity valuations are dramatically unattractive at the present time. De-leveraging grossly compresses multiples, which serves to amplify the damage that comes from debt service that is required on non-productive borrowed funds.
"The street" talks about how "debt markets have pretty much returned to health" (other than securitized mortgages and similar things.) Sure they have – for the snakes on Wall Street, who are back to their asset-stripping and…
With Stocks, It’s Not the Economy
by ilene - July 25th, 2010 9:21 pm
Decoupling between stock prices and the domestic economy – and Zachary Karabell explains why he believes this trend will continue. – Ilene
With Stocks, It’s Not the Economy
By Zachary Karabell, courtesy of TIME
From the beginning of May until late June, stock markets worldwide declined sharply, with losses surpassing 10%. The first weeks of July brought only marginal relief. Ominous voices began to warn that the weakness of stocks was a direct response to the stalling of an economic recovery that has lasted barely a year. Anxiety over debt-laden European countries — most notably Greece — combined with stubbornly high unemployment in the U.S. to create a toxic but fertile mix that allowed concern to blossom into full-bloom fear.
The most common refrain was that stocks are weak because global economic activity is sagging. A July 12 report by investment bank Credit Suisse was titled Are the Markets Forecasting Recession? With no more stimulus spending on the horizon in the U.S., Europeans on austerity budgets and consumer sentiment best characterized as surly, the sell-off in stocks was explained as a simple response to an economy on the ropes.
It’s a good story and a logical one. But it distorts reality. Stocks are no longer mirrors of national economies; they are not — as is so commonly said — magical forecasting mechanisms. They are small slices of ownership in specific companies, and today, those companies have less connection to any one national economy than ever before.
As a result, stocks are not proxies for the U.S. economy, or that of the European Union or China, and markets are deeply unreliable gauges of anything but the underlying strength of the companies they represent and the schizophrenic mind-set of the traders who buy and sell the shares. There has always been a question about just how much of a forecasting mechanism markets are. Hence the saying that stocks have…
BMO Says “Go to Cash – In Plain English”, Cites Weakening Credit Conditions
by ilene - June 9th, 2010 1:57 pm
BMO Says "Go to Cash – In Plain English", Cites Weakening Credit Conditions
Courtesy of Mish
I do not think I have ever seen a warning like this one. BMO literally says Go to Cash – In Plain English
Summary
We advocate switching out of equity positions and going to cash. The European sovereign debt crisis appears to be nowhere near over. The global credit environment is worsening. Cost of capital is going up and availability is going down. There are large gaps between where the credit market prices risk and where the equity market is priced. Equity is lagging the deterioration in credit conditions. Moves in currency, equity and commodity markets are mirroring the moves in the credit market. Global growth, in a credit-constrained environment, will slow. Profits will be squeezed by the higher cost of capital.
State of the Market: Credit vs. Commodities & Jobs
The frail state of the markets is now becoming more obvious and as such the audience for our call to cash is growing. The difficulty in getting our message out is that in its raw form (how we normally write), the argument is quite technical:
Client: Why go to cash?
Quant/Technical: Look at the euro-dollar basis swap pricing!
Client: Say what??Now, however, the market is showing signs that everyone can easily recognize as indicative of economic weakness:
Job growth has stagnated, and Commodities and inflation expectations are falling.
These new signs are not new information on why things are bad. Rather, they are symptoms, or outward displays of how weak the credit market has become.
Weakening credit conditions are the cause. Economic fallout is the effect.
Western European Sovereign Debt Crisis = Asian Growth Problem
We observed that the sovereign default risk of Europe was very well connected to the sovereign default risk of Asia.
Then we tracked down the tidbit that European financials have funded Asia to the tune of more than half a trillion dollars.
By observation, we know there is a link and now we have part of the economic rationale for what we are seeing.
We have what we need for our call for extreme caution:
The funding of Asian growth is closely tied to the health of the European financial system.
Further, we know that the North American equity market is fixated on Asian growth.
Our equity
…
Mutual Fund Cash Depletion Highest Since 1991
by ilene - March 9th, 2010 4:54 pm
Mutual Fund Cash Depletion Highest Since 1991
Courtesy of Mish
In what can best be described as a contrarian indicator with an uncertain timing trigger, Mutual Fund Cash Depletion Highest Since 1991.
Equity mutual funds are burning through cash at the fastest rate in 18 years, leaving them with the smallest reserves since 2007 in a sign that gains for the Standard & Poor’s 500 Index may slow.
Cash dropped to 3.6 percent of assets from 5.7 percent in January 2009, leaving managers with $172 billion in the quickest decrease since 1991, Investment Company Institute data show. The last time stock managers held such a small proportion was September 2007, a month before the S&P 500 began a 57 percent drop, according to data compiled by Bloomberg.
Stocks will rally this year as the prospect of higher interest rates lures cash from fixed-income securities to equity accounts, says Mark Bronzo at Security Global Investors. Data from ICI, the Washington-based lobbying group for professional money managers, show investors have pumped $369 billion into bond funds since March 2009 versus $23.4 billion for equities.
“There’s so much money in the fixed-income market and there’s so much money in money-market instruments paying almost nothing,” said Bronzo, whose firm oversees $21 billion, in an interview from Irvington, New York. “If that money shifts to stock funds, it’s going to be very bullish.”
Equities may be boosted by investors deploying some of the $3.17 trillion held in money-market funds tracked by ICI. While $754.3 billion has moved from the accounts in 14 months for the fastest decline on record, Bronzo says more cash will be withdrawn as investors gain confidence in the economy.
It gets tiring pointing this out, but the only time money can move into the equity market is at IPO time or other offerings. Otherwise it is impossible for sideline cash to move into equities. For every buyer there is a seller. At the end of any normal equity transaction, there is as much cash on the sidelines as before.
So many misunderstand the simple mathematical function of buying and selling, that I feel obliged to make corrections.
Sentiment, Not Sideline Cash, Is The Driving Force
Share prices do not move up because sideline cash comes in (as noted above it cannot happen in the first place). Share prices rise or fall…
CONTRARIAN SIGN? PORTFOLIO MANAGERS ARE GETTING VERY BULLISH
by ilene - March 9th, 2010 3:03 pm
CONTRARIAN SIGN? PORTFOLIO MANAGERS ARE GETTING VERY BULLISH
Courtesy of The Pragmatic Capitalist
The sentiment signals are starting to stack up against the bulls. Last week Mark Hulbert at MarketWatch reported that Advisory bullishness was “dangerously high”. He reports that bullishness hasn’t been this high since before the 2007 market highs:
“Based on the several hundred investment advisers I track, I’d have to say that bullish sentiment is approaching dangerously high levels. Consider the Hulbert Stock Newsletter Sentiment Index (HSNSI), which represents the average recommended stock market exposure among a subset of short term stock market timers tracked by the Hulbert Financial Digest.
It currently stands at 62.8%, up from 13.8% just one month ago. That’s an awfully big jump for so short a period of time, especially considering that the Dow Jones Industrial Average rose a modest 4.4% over this period.
Also worrying is that, with but one exception, the HSNSI is now at its highest level since early 2007, more than three years ago.”
That one exception came in early January just before the market rolled over 9%.
In addition, David Rosenberg noted just yesterday, that portfolio
“as charts below from the ICI illustrates,
portfolio managers have been so nervous to miss any up-moves that they have run down their cash holdings to 3.6% of assets from nearly 6% a year ago — the largest decline in 19 years. Equity cash ratios are back to where they were in September 2007, just as the stock market was hitting its peak.”
This new found bullishness by portfolio managers and advisors could be seen as a contrarian sign of things to come.
Mutual Fund Cash Levels Near Historic Lows
by ilene - March 3rd, 2010 8:20 pm
Mutual Fund Cash Levels Near Historic Lows
Courtesy of JESSE’S CAFÉ AMÉRICAIN
The mutual funds, and those who give them their money to invest, look to be about ‘all in’ with regard to US equities.
As I recall, the bond funds have decent cash levels, and the piling into short term Treasuries at negative interest rates is certainly a phenomenon.
The hypocrisy and venality of the US financial sector knows no bounds, and they seem to have bought off the guardians of he public trust. The US government desperately needs to sustain confidence and the aura of recovery. They do not need a falling stock market to say the least. And yet, they have to continue funding record levels of debt issuance every month.
A lot of demand for funds, and many of the players close to flat busted.
It may be an interesting year.
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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...
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