Monday, April 21, 2008

Profiting from the market gurus: quotable quotes.

This is a weekly update on what I've been reading and watching. Here's what the market gurus are saying and how they are positioning themselves in the near future.

  • Lakshman Achutan (ECRI) : "There is a recession here. The earliest the recession would end would be the end of this year, but first we're going to see job losses, more foreclosures, and the credit situation is not going to be helped."

    • Warren Buffett: What Warren thinks..

      1. On the current turmoil:

        "It seems everybody says it'll be short and shallow, but it looks like it's just the opposite. You know, deleveraging by its nature takes a lot of time, a lot of pain. And the consequences kind of roll through in different ways. Now, I don't invest a dime based on macro forecasts, so I don't think people should sell stocks because of that. I also don't think they should buy stocks because of that. "

      2. On investment strategy:

        "You don't want investors to think that what they read today is important in terms of their investment strategy. Their investment strategy should factor in that (a) if you knew what was going to happen in the economy, you still wouldn't necessarily know what was going to happen in the stock market. And (b) they can't pick stocks that are better than average. Stocks are a good thing to own over time."

      3. On if people are fearful, and if this was a good time to be greedy.

        "You're right. They are going in that direction. That's why stocks are cheaper. Stocks are a better buy today than they were a year ago. Or three years ago. "

    • David Kostin, the chief US investment guru for Goldman Sachs : Expects the S&P 500 index of Wall Street equities to plummet a further 15pc over the "near term" as companies scramble to lower their outlook for this year. Expects the S&P index to reach 1,160
    • Scott Anderson, chief economist of Wells Fargo:
    1. "The equity markets have not yet priced in a prolonged downturn in economic growth in my opinion. We are still in the early stages of the credit crunch. Earnings estimates for the second half of the year are likely still far too high" He described the bullish views of some market players as "bordering on delusional".
    2. Mr Anderson said investors should pay attention when the International Monetary Fund cuts its global growth forecast for 2008 three times in less than five months. The Fund has put the odds of a world recession at 25pc and predicted $945bn in losses from the credit debacle spread across banks, hedge funds, pension funds, and insurers.
    3. "Even more alarming, the IMF estimates that only a quarter of these potential losses have been recognized," he said.
    1. Housing recession is getting worse not better.
    2. US consumer is shopped out and saving less, buffeted by falling housing prices and rising oil prices.
    3. Credit crunch

    Monetary policy will be less effective. Problem in economy is not of illiquidity but of insolvency. We have problems due to bankrupt households, bankrupt mortgage lenders, bankrupt corporates, bankrupt financial institutions, and bankrupt homebuilders.

    Jim O Neill on recession: The recession is in US domestic demand. Overall GDP is getting a big help from overall exports. This is softening the blow, and hence US recession will be shallow.

    Roubini on global coupling: Global coupling/decoupling depends on whether we have a severe or shallow recession. In a severe one, the transmission mechanism through the trade channel, credit crunch, weaker dollar, and the financial institutions would lead to a severe slowdown of the global economic growth.

    Roubini on Europe: We have the slowdown, deflation of the housing bubbles, the high oil prices, and a Fed that is cutting while ECB is on hold. A lot of Europe's growth was based on extra demand rather than income growth. The credit crunch is effecting European firms ability to borrow.

    • Gerard Minack, Morgan Stanley strategist: After-tax corporate profits relative to U.S. gross domestic product are "well above sustainable levels. A U.S. recession and increased competition will cause earnings to decline. " "If profits fall as much as I think they could, then markets are not cheap,'' Minack wrote.
    1. Healthy rotation, with techs, financials stepping up.
    2. Commodities lagging.
    3. Options expiration induced heavy volumes.
    4. Improving technicals:
      a) Dow breaks through Feb highs
      b) A/D line advancing
      c) New highs expanding
      d) VIX falls to four month low.

    1. Rotblut: Can earning’s momentum continue this week? More positive surprises than negative surprises. Lot’s of rallying in financials off negative news.
      Q1 scorecard: Median EPS growth 8.6%. Average EPS growth: -27.2%
    2. Mike: Big Pharma reports next week. Growth drivers are company specific. Most big pharma are bolstering earnings by huge cost reductions and buybacks on the back of the weak dollar.
    3. Charles: Hitting against some pretty tough resistance, especially with oil at $116 and inflationary pressure. Fed officials worried about inflation. Not sure if economic backdrop strong enough to sustain a rally. There is optimism that the second half will be better. Any upside breakout will be extremely bullish.
    4. Jim: Bar for the tech companies has been set really low. Meeting expectations should be a slam dunk. Based on what we saw from Intel, IBM and Google, this momentum should continue and take us right upto HP’s earning.

    1. Caution a bullish sign to contrarians
    2. As of Friday night, the HSNSI stood at 27.5%.That's exactly where the sentiment gauge stood Thursday night, and the previous Friday night as well.

    • Bill Gross on hedge fund pay:

      Well, it's a lot of money. I'm all for capitalism. PIMCO is a great capitalistic firm

      We make money. We sell lemonade. We sell it at 50 cents a glass however and hedge funds sell them at 5 bucks. If you're going to sell lemonade for 5 bucks you better have a shot of tequila or a shot of vodka in there to juice it up. And my point is that hedge funds over time don't have that vodka or tequila in that glass, and they are overpricing their products. That's fine, but over time the public will get wise and their lemonades will go to the PIMCOs of the world.

    1. On Profit Margins: Because CPI growth rate (4%) is less than PPI(7% growth), profit margins are falling from 12.5 cents on the dollar to 10 cents on the dollar, or roughly 20-22% fall, in parallel with the non financial domestic earnings fall. Business prices are higher than consumer prices, and businesses have to eat that difference
    2. Real wages are falling.
    3. Coincident indicators point to a flat economy, not a recession.
    4. Stefan Abrams: Domestsic profit margins are under pressure. International profit margins are expanding.
    5. Bad policy to fight the fed. Tbills are yielding almost nothing. This should encourage a movement into risky assets. It’s all about globalization.
    6. Kevin Kerr: Profit margins squeezed primarily because of energy costs.
    7. High LIBOR: cost of borrowing just went up.

    1. We think markets made a bottom in the middle of January. If we are going to have a shallow recession, markets will move before the end of the recession cycle. If that is a bottom, you should be invested and be a buyer of stocks, and we are fully invested in our accounts.
    2. We think it could go back and retest the bottom. If we go lower, then it would suggest that we are in a prolonged and protracted deflationary environment. There is just so much force at work in a stimulative way to avoid that, and I think that force will work.
    3. Big tech cycle ahead of us.

    • Teun Draaisma( famous for calling the market top in June 2007) :
    1. “2008 the Best Period for Shorting Since 2002"
    2. "You can expect years of deleveraging as leverage in the financial sector is very high," said Teun Draaisma, strategist at Morgan Stanley, adding that he expected markets to stay bumpy for a while.
      "On a 12-month view, earnings expectations are too high, but equities are quite cheap and there's no massive downside. We expect volatile markets that won't go anywhere for the next year," he said.
    3. Expects a reasonable first quarter but forecasts a 16% drop in earnings over the whole year.
    4. Predictions for the bear market rally till July 17th "The trigger for a bear market rally is invariably dramatic action by authorities. The ‘financial end of the world’ has been avoided, we believe, but that still leaves us with a big earnings recession. At some point, the earnings recession takes over again as the driving force in this market, but possibly not in the upcoming reporting season yet, as this one will not reveal the full extent of the earnings recession."

    1. S&P Midcap Index is the first of the major US indexes to break above the 200 day MA. This is a continuation and validation of the up move we've had since April 1st. Some of it is short covering. I Suspect we have further to go on the upside. Looking at 1450 on the S&P 500.
    2. Gold has made at least an intermediate term top.

    1. UBS: Gearing for a big rebound, convinced that the Fed's move to shoulder $30bn of Bear Stearns liabilities has changed the game. In its latest report -"Ready for a Rally" - it said financial shares rose 448pc in the 12 months after the Swedish rescue in 1992, 88pc after Japan's Revitalisation Law in 1998; and 82pc after Roosevelt's Emergency Banking Act in 1933.
    2. Societe Generale: Pessimistic. "We expect global equity prices to fall by up to 75pc from their peaks as a deep global economic downturn unfolds over the next few years," said Albert Edwards, their global strategist. He fears a 50pc collapse in earnings, compounded by an "Ice Age derating of equities".

      It may echo the Lost Decade in Japan, where stocks fell 80pc. The yields on state bonds kept falling as debt deflation engulfed the banks, thwarting efforts to nurse lenders back to health by the usual device: "steepening yield curve". The authorities were left chasing their own tails. Having lived through this, Japan's chief regulator Yoshimi Watanabe has advised Washington to go for a quick taxpayer rescue, rather than trying "to fix the hole in the bathtub".

      Whatever happens, there will always be tactical rallies. Mr Edwards cites four Wall Street bounces above 25pc in the 2001-2003 bust. The buying cue is when investor gloom nears black despair. The put/call ratio on options is now at a bearish extreme of 0.90.

      "That would historically suggest that a joyous 25pc spring rally is close at hand," he said. Yet Mr Edwards remains wary as long as analysts cling to their belief that earnings will rise 11pc in 2008. This is not the sort of "washout" level of gloom required to clear the air.

    3. Draaisma: Expects the current rally to boost Europe's MSCI 600 index by 21pc from its trough in late January, with similar moves on the S&P 500. Prefers builders and banks

      "The Federal Reserve's actions have averted financial Armageddon, but they cannot avert an earnings recession. We don't expect a new bull market until early 2009,"

      Morgan Stanley says earnings will fall 16pc this year as debt leverage kicks into reverse.

      "Bear markets are terrible for the human psyche. You get one profit warning after another. People see their hopes dashed so many times that they stop believing," He is not predicting a bloodbath along the lines of 1929-1933 (-88pc) or 2001-2003 (-49pc): just a long slog, with failed rallies.

      For now, the markets are flashing a tactical buy signal. Mr Draaisma's "capitulation indicator" has crashed to the lowest level since the 1998 LTCM crisis: the share "valuation indicator" is near an all-time low.

    Disclosure: None