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Deep Thoughts From Bob Janjuah

Courtesy of Tyler Durden

My last cmmt, from 5th June, is re-presented below.

Plse read it. The following – which is in response to a very large number of requests – will make more sense once you have read it, and if you have read what I have been putting out all yr:

Both Kevin and I have been saying all year that this yr was going to surprise, with H1 09 far better than the consensus was forecasting back in Jan/Feb (and H2 much worse). Take yourselves back to the dark days of Jan/Feb. I know that I have the reputation of an uber Bear, and I think this sometimes means that some folks may sometimes ASS-U-ME they know what I am saying, rather than actually carefully reading what I am actually saying. However, I don’t know of any (other?!) ‘uber Bears’ who were telling you back in the dark days of Jan/Feb that risk assets would rally and surprise to the upside. The entire Street was telling you H1 09 would be terrible. Not Me, and not Kevin.Virtually every client we spoke to in Jan/Feb was telling us that this year was going to be a disaster, with some small hopes of a bottom and turnaround at 09 year-end. Not Me, and not Kevin.

What is the point of this? Well, simply put SO FAR this yr economies and mrkts have broadly followed the route map we suggested. OK, we could have been a little more aggressively bullish. On a scale of -10 (max bear) to +10 (max bull), having been at -10(00!) over 07 and 08, we only went to +3/+5 or so on risk assets. We should have gone to +10, but for us a move from -10 to +3/+5 was pretty significant. Fortunately, enough clients did follow our words (rather then any pre-set belief of what our words were saying) to mean that, SO FAR, 09 is working out pretty well. At the very least, some folks as well as ourselves realised that pretty much EVERY major bear mrkt in history has AT LEAST one major 50% retrace along the way. From the all time highs in Oct 07, thru to the dark days of Jan/Feb 09, we had not seen even a single retracement anywhere near these % move levels, and thus we were well overdue one. We are having it NOW, from the lows in March 09, to the highs which I think we see in the next few weeks.

If you have read my previous cmmt (below) CAREFULLY, you will see that on the day of writing, June 5th, I said that the risk asset rally has further to run. On June 5th S&P traded at 950, the iTrx XO index traded in the mid-low 600s. As you will see below I suggested that the Jul thru to Sept period would be the ‘tipping zone’ and that during this period we could see another 5 to 10% gains in the S&P before rolling over. Between 5th June and now we had a mini-retrace (869 early-July S&P low, from an early-June high of 956, nearly -10%) but are now in the middle of a parabolic spike up. This spike higher/better in risk assets is as expected and fully within the levels I said in early June. I expect this risk rally to CONTINUE, into and maybe even thru a large part of AUG. I see scope, as I said in early June, for a move in the S&P up to 1000 (no doubt)/1050 (potentially), this equity move will drag all risk assets better and lead to further weakness in govvies and the USD too.

What happens after that? Well, SO FAR, nothing has happened to alter the views I have set out already below – namely that the next ugly leg of the bear mrkt begins as we get into the end of the Jul thru Sept tipping zone, driven by failure of the data to validate the V that is now FULLY priced in into markets, with new equity lows forecast for late 2009/early 2010. I see late Aug/early Sept as the most likely best spot to short stks/credit/risk assets, as I expect the S&P to peak for the yr at 1000/1050 around then, and I see this same timeframe as a great oppo to buy BUNDS again, when 10yr bund yields could well be back up in the 3.70s/3.80s yield area.

Some will say the data – macro and earnings – are validating the V. Well, if for some reason your time clock only started working the day after Lehman, then of course you are right, and it is such comparisons which have driven the current bear mrkt rally post early-March. But compare the data to the day before Lehman – do this and you will see things are in much poorer shape, on almost every metric. The Lehman event is, as Kevin puts it, going to be seen as the head fake when this crisis is looked back upon in the history books of tomorrow. I had my own staggering version of this recently. One client at a leading investment firm told me the other day that I was too bearish long term because Q2 earnings were UP. Up? Up against what? Against the utterly bogus guidance given to you by companies themselves, which have been trimmed down continuously into the reporting date? Yes!! Yippee – I guess. Up vs the results of Q4 and Q1, which were amongst the 2 worst qtrs in global economic history EVER? Yes, but again, yippee – how could they NOT be up considering governments around the world have thrown TRILLIONS of taxpayer money at the hole. But Up against the same qtr last yr – NO NO NO. Q2 S&P operating earnings are DOWN over 20% vs Q2 last yr, and that measure is AFTER the dramatic ‘changes’ on accounting policies re earnings from the financial sector.

I am of course aware of the risks to this call. Specifically, I could be putting too much emphasis on policymakers making the right longer term decisions rather than shorter term populist decisions, which will almost certainly end in disaster, albeit disaster delayed. Policymakers can decide to create another asset price bubble thru running non-credible and ultimately disastrous monetary and fiscal policy. They can blow up another bubble in asset prices by inflating, no doubt to breaking point, the public sectors’ balance sheets (government accts and central bank). This will give all us supposed market pros exactly what we deserve – a shrt term illusion of wealth and gain. I use the word ‘supposed’ because, frankly, we should all by now have learnt the consequences of greed & letting policymakers put short-term ‘populist’ DEBT policies in place over sound longer term policy. Short-termism and Greed gave us the mother of all debt collapses which we are now working thru. Deepdown investors and analysts must realise they are AGAIN being sucked back into the game where ‘markets make opinions’, where ‘excess liquidity’ is the driving investment rationale – surely we must all know that investing purely because of price action and excess liquidity NEVER ends well. However, whilst I still HOPE and believe that we will now see sound longer term polices to deal with this debt-bust, which will mean PAIN over the next 12mths at least, my FEAR is that policymakers/governments will blow up sovereign credit worthiness so that we can again con ourselves that all is well, at least for a little while.

TRUST ME, we should NOT choose the shrt-term ‘new bubble’ route now. Why? Because the end-game to this type of bubble, if unchecked, is almost always, IMHO, UTTER disaster in the form of protectionism, horrible levels of sustained unemployment & inflation, and maybe even social/civil unrest – history is pretty consistent on this point. There is NO new paradigm here. Sadly the majority of sell-side analysts & policymakers in the world – the same crew that did not see the credit disaster coming even when it was inches away from their collective noses – have chosen to forget these basics and instead spout output gap, valuation & other such rubbish to you, like the 1970s (or indeed 07 & 08) never happened. Still, what do you expect. My real disappointment is not with such folks – they are doing their jobs – but rather with all of us, because we are so eager to forget their failures, and are so eager to believe their bull-hype without seriously thinking thru the consequences. Ask yourself this: who bails out Government after they have bailed out everyone. Reckless fiscal and monetary policy, which is being used to pretend that the debt-bust didn’t happen, will – if it runs unchecked – be the worst possible outcome for the UK and US economies. It might trick us – in the short term – into believing all is well, into causing UK and US house/equity/asset prices to rise and into believing that 07/08 weren’t really that bad, but this will all largely be a MYTH/money illusion that will not last much beyond mid-2010. Into late 2010 and 2011/2012, the costs of such reckless policy will I think make the events of the last 18/24mths seem like a walk in the park. Think of unemployment, inflation and bond yields up in the teens and then ask yourself how you will feel. Trust me, if unemployment, inflation and govvie yields are in the teens, buying risky assets like credit, equity and EM at current levels now will be exposed as hugely loss making endeavours.

In order to protect against this fear, that policymakers can’t bring themselves to do the right thing and instead do the short-term thing AGAIN, with no heed to the l-t consequences as a result, then sensible Stop Losses are needed. I will go with the same Stop Loss I set out below on 5th June. So, if the S&P cash index closes ABOVE 1022 for 4 consecutive days, I will be stopped out and it will very likely be the case that policymakers are going the ‘shrt-term next bubble’ money illusion/nominal route rather than the longer term route which would be more painful shrt term but which will pave the way for the next 20yr boost to real productivity and real wealth gains.

Lets see. I fully expect S&P to move up to 1000/1050, but holding above 1022 for 4 consecutive days, as opposed to a single day spike up to 1050, will tell me a lot. If what I fear (as opposed to what I hope) plays out then I will have to concede that the lunatics that ran the asylum pretty much into the ground, culminating in the events of Q4 last yr, are back in control. Sadly, if this is indeed what plays out, then when the public sector balance sheet bubble bursts, maybe in a year, but almost certainly within 24mths, I will hopefully be far far away from the madness. I am deeply troubled by what we could see – a REDUX of the Greenspan Fed 2003 thru to 2005, where the WRONG polices were kept in place far too long, validated by nonsense around productivity and global savings glut, which DIRECTLY lead to the terrible failure of global credit markets over the last 2 yrs, and where the new paradigm was that house prices could go up for ever and that nothing could ever default….Ben Bernanke – PLEASE do not make the same mistake as your predecessor!! You and other policymakers should be applauded for dealing with the post-Lehman fall-out, but even you used the term ‘Emergency Policy’ when dealing with this. You must deep down know that such Emergency Policy is NOT the right policy going forward, as Lehman has been ‘dealt’ with. Sadly, your most recent testimony and the way you talked so vaguely abt exit policies – whilst ‘bought’ by the mrkt – leaves me extremely nervous as you said NOTHING concrete abt exit. Some of you will feel I am talking rubbish. Others will say ‘who cares abt the l-t, I only care abt this week/month/qtr/year as it relates to my PnL & payout’. And some others will say ‘sure, you may be right but I will be smart enuff to get out in time’. All Fair Enough. But ALL of us (I reckon) want to live for another 20/30/40+ yrs and in most cases either have or want to have offspring. If you are in this camp, then YOU should care DEEPLY abt the risk of policymakers favouring short-termist populist, ‘immediate gratification giving’ policy over sound long term policy choices, because policy mistakes NOW will make life more miserable for ALL of us for a sustained period of time not too far down the road.

On that cheery note, I need to let you all know that I am away travelling and on hols for the whole of August, and will hardly be able to check bberg/e_mail. I will mention that this will be the third Aug in a row that the Janjuah clan are in Barbados (and yes, it was all booked in March, when the deal was staggeringly cheap). I mention this merely because that last two Augusts’ proved to be pretty pivotal turning points, Aug 07 being the +ve head fake when everyone wanted to believe that policymakers had seen off the Credit disaster at the pass (of course it merely served to suck everyone into risk again before the real nastiness began), and Aug 08 being the calm before the utter collapse of Sept/Oct/Nov…..3rd time lucky anyone?

Normal service will resume in Sept, in the interim Andy Chaytor will be here for you.

Cheers Bob

Bob’s World from 5th June 2009:

U won’t hear much from me over the next 5 wks or so as I am on the road.

So:

1 – We are – as Kevin has said – in the fag-end of the H1 09 rally we called at the beginning of the year. We may have another 5/10% in S+P gains from here.

2 – July thru Sept looks like the tipping zone. The driver will be failure of the V, which is now almost fully priced in, to materialise. The focus for seeing this will be leading indicators of private sector capex, demand, incomes, spending, jobs, earnings (incl. core bank earnings). Of course housing and banks still matter, but these will increasingly be led by and not lead the above factors. For the V in global risk asset pricing to be validated we need to see a surge higher in the above real indicators, not just ‘less bad’ data and not just a hovering around at these levels. I think we’ll see a weakening trend.

3 – The next issues are inflation and rates. I am not worried abt core over the next 6/9 mths pretty much anywhere globally. The concern is the commodity area, esp. crude. We may want to cling to hopes that the rise in commodities (and rates) over the last few mths are signs of grwth, but as already mentioned the grwth data needs to improve meaningfully now if such hopes are not to be dashed painfully.

4 – Sustained increases in commodity prices/non-core inflation and rising bond yields driven more by global investor fears – especially in the US and UK, but also in most ‘developed’ and EM sovereigns running meaningful trade + fiscal deficits – around the issues of monetisation, debasement, currency concerns, sovereign ‘credit’ quality, massively higher QE needs, political concerns etc would cause serious damage to risk assets, and very severe damage if the data on the grwth side also deteriorates.

5 – Over the next 4/8 wks, as the rest of the rally leg plays out, and subject of course to data:

* Equities are at or near the highs for the rest of the year and will I think revisit the March lows. A move to new lows (mid 500s S+P) is still highly likely this year (risk is it may take 3 mths or so longer) if we get the combo of the grwth, commodity/inflation and rate concerns highlighted above.

* Depending on what you think in respect of these 3 factors – and if like me you are worried on all fronts but esp. on grwth – govvies are cheap outright at the peak yield levels seen over the last few weeks, but the real gem even if you are not as bearish on grwth is long bunds, shrt USTs (looking for USTs to trade +50/+100 to bunds in 10yrs).

* In FX I like buying VOLA generally but, because I expect to see much higher QE needs – this is just abt all that policymakers, esp. in the US and UK, have left as a tool to create inflation/nominal grwth – I like buying puts/vola on the twin deficit balance sheet impaired currencies, most obviously USD + GBP, mostly vs NOK, Surplus Asia and EUR. These currencies will be risked for the sake of control over yield curves if, as I fear, the grwth story does not materialise as discussed. A 20% move lower in the USD would not shock me.

* In EM the relative winners in the grwth + risk asset front will be the strong balance sheet, no/low deficit economies, and the big commodity plays. However equity performance in particular will only be a ‘relative’ win.

* Clearly I like crude and gold, esp. longer terms (12/24 mths) where I see $150 crude/$1500 gold.

* And finally in credit, no longer the lead indicator but very much an asset class that will be pushed around by rates, FX and equity moves, as well as by policy involvement, if the scenario I have outlined and favour plays out I expect to see new wides in HY/SME credit driven by default risk, and a revisit to wides in the IG/big cap arena driven by technical imbalances in supply/selling, vs demand/dealer bid. Essentially, illiquidity and gap moves. I expect to see cash to underperform, big senior fins to relatively outperform IG corps, and in indices I am looking for a ITraxx X0 S11 up at 1250, Main up above 200, with HY12 in the 60s and IG12 up at 200.

6 – No doubt there will be twists and turns, as well as other, maybe even unexpected developments. I will do my best to stay in touch, but don’t bank on anything too timely. Andy Chaytor will be here for you in any case.

7 – Clearly the mini-May turn did not quite wrk out. Rather than a decent interim sell-off we saw something smaller – S&P peaked in early May at 930 and bottomed in mid/late May at 880-ish. So more of a sideways consolidation. The driver seems to be fear/greed/hope/liquidity, but as is clear from all of the above, this fear/greed/hope/liquidity driven trade now needs to start seeing real data validation. Plse see above for where we go from here (better in risk over the next few weeks, and then the risk outlook turns much more bearish).

8 – If Kevin and I are wrong abt the V and the data does provide validation that the V is real (less than 1 in 5 chance based on what we see now, vs what seems to us a 4 in 5 chance that the data shows a failure in the V), then we need some stop losses to protect ourselves. In the V environment Risk will Win, esp Equities, HY, EM, and Commodities, and Govvies (esp US) will do badly. And, in a V, Europe will have ‘less’ of a V so we will see Bunds relatively outperform USTs, and European risk relatively underperform. The EASY stop-loss is at 1050 on the S&P, based on 4 consecutive closes above this level. The tougher stop-loss levels, again based on 4 consecutive closes, are 950 S&P or 1000 S&P. I think the right one to use is somewhere between 1000 and 1050, and talking to Tom Pelc 1022 S&P seems like an good level. So, in case we are wrong on the V (becoming a U or W), I am gonna go with S&P 1022 stop loss, based on 4 consecutive closes. BASED on the current 940 S&P closing level, one is risking 8/9% downside vs potentially 30/40% upside if I am right and we rollover during Jul/Sept and do end up, as I fear, down at new lows on equities in H2 09/early 10.

The key going fwd is data, focused on the private sector demand indicators/drivers, and the policy responses. The risk is of significant spikes in VOLA, the breakdown of old correlations and the beginning of new paradigms/paradigm shifts. As such, one has to keep an open mind and not rely too heavily on conventional thinking.

I think we are gonna have some fun.

Cheers. Bob.


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