Thursday, April 30, 2009

Gary Shilling: inflation or deflation and outlook on economy.

There’s been considerable debate on the inflation versus deflation issue. Last year, this was a little more contentious. (The deflation camp has been right so far and it looks to continue that way). The biggest deflation prognosticator has been "Mr. Long Bond" Gary Shilling. In fact, there was a link to an earlier interview on this blog. If you shorted commodities and went long bonds around then, you would have done well. For the record, he had a 100% accurate record for 2008. Shilling's forecasting an annual deflation of about 2% over the next few years, as consumers save more and the "overall supply of goods and services exceeds demand."

Anyways, came across a recent Bloomberg interview by Gary Shilling. Here's what he had to say. ( Click here or on the image.)

Outlook: His outlook is for a continuing weak economy:

  • Consumer spending in recessions even in real terms seldom declines. We’ve had the worst decline in consumer spending since any post world war recession.

  • PPI numbers clearly suggest we’re in deflation

  • Inventories are only beginning to be liquidated. Going to take economy down for at least next 2 quarters.

On being asked to choose between deflation or inflation, he is sticking to his deflationary thesis:

  • Economy will experience slow growth in the long run.

  • Consumers are on a savings spree after 25 years.

  • The corporate sector is deleveraging.

  • Commodity producers will have less money to spend.

  • Government involvement will slow us down further because of inefficiencies and protectionism.

  • No strong loan demand for a long while. Lenders are not going to lend.

  • So much liquidity has been destroyed in the private sector. Credit default swaps have been cut in half, taking them from 60 to 30 trillion. The total money supply M2 in the G-7 is 25 trillion. So much liquidity is being destroyed in the private sector that it dwarves what the central banks can do and have done.

On the new normal for the US economy:

The 1982 – 2000 period was a solid up phase with a big 3.6% average annual growth. He’s looking at 2% for the next 5-10 years, which is basically the secular down phase of the supercycle.
His recommendations:
  • Still likes long treasuries offering 3% yield on a 2-3% deflation for a 5-6% real return.

  • Likes US dollar as a safe haven.

  • Recommends high quality corporate and muni bonds.

I first came across the works of Gary Shilling(and many others) through John Mauldin’s Just One Thing which I highly recommend :

I’ll be especially interested in following him and watching when he stops recommending long bonds. This is something he’s been doing for over 25 years. It’s been the call to define a lifetime. Long bonds outperforming equities in the great equity bull of 1982-2000 has been a solid sucker punch to the “stocks for the long run" camp in my opinion.

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Tuesday, April 28, 2009

Missing the early bull market can be costly.

The bull-market versus bear-market-rally debate has been going on for a while. A few analysts have been advising caution and riding out the current uncertainty, suggesting investments in gold, TIPS or some fixed income /cash variant. For instance, this Yahoo video featuring John Mauldin has him suggesting that new bull markets go on for years and years (suggesting we’ll have plenty of time to be sure). Thus it’s better to be a few months late than a few months early.

Here’s what he says:

The great bull markets last for decades, so you'll have plenty of time. Those who bought at "the bottom" in 1974 had to suffer through the rest of the 1970s. So stop sitting on the edge of your seat waiting for that perfect moment to buy and just remain cautious for a while.

Well, maybe not. Here’s a few facts courtesy Fidelity:
  • While bull markets have often lasted for multi-year periods, a significant portion of the gains have typically accrued during the early months of a bull market rally.

  • Within six months, more than one quarter (27%) of an entire bull market’s performance (on average) was already in the books.

  • The first 12 months of the average bull market has provided more than 40% of an entire bull market’s price appreciation, yielding on average 45% for investors.

  • Those who choose to re-enter after a few months of positive performance—when the climate feels “safe”—may miss a sizable portion of a bull market’s overall gain.

Here's a chart showing the huge returns in the first few months of a new bull market.

Investing from the mid contraction point versus the mid expansion point can lead to very different results.

At the beginning of this bear market, when sentiment was bullish and this was just a bull market correction, charts like this were all over the place, warning investors against trying to time the markets. It’s a telling sentiment indicator that one does not hear too much from the long term buy-and-hold investors. This bear market has been hard on investor psychology.

Stock markets reward investors precisely because the investors are willing to invest despite the uncertainty. Hence the equity risk premium. In fact, if you miss the beginning of a new bull market, investing in bonds will outperform buy-and-hold indexing over the economic cycle.

Market timing is hard! Precisely because you need to get it right twice: knowing when to sell, AND when to buy back. Investing for the long term during volatile times like these feels hard. But this is exactly when one needs to be focusing on the long term.

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Sunday, April 26, 2009

Meredith Whitney on Bear Attack!

Watched Meredith Whitney on Bear attack on BNN. Here's what she had to say:

  • Bank stocks : Things on a tangible book value basis could improve.The basis on which these stocks are valued could improve, for the quarter anyways. TCE will look better because of these writeups.

  • Tier 1 capital ratio could get worse..

  • BAC has some good businesses so should be first to enter the yard sale of assets. Citi has so many disparate businesses and small share that it’s hard to see how Citi sales work out on a long term.

  • The greatest export the US has had over the last 30 years has been the financial services. That obviously is not going to happen going forward. Will go to something else than exporting leverage. We can do this from a core basis. Definitely not a death knell. But there’s some significant restructuring which could be painful in the intermediate term.

  • Municipal markets and the local economies are dependant on mortgages. That’s gotta change. Painful uprooting of the entire US economy. Can get done. It’s just going to take a long time.

  • I’ve never made the claim that any institution was insolvent except Bear Stearns which was clearly insolvent.

  • Specific to the banks: sitting on trillions on dollars of overvalued assets. Loans written on bad math. Mortgages written with an assumption of 6% unemployment. Expecting 30% peak to trough real estate price decline.

  • Banks are not going to earn that much over the next couple of years, whether they are insolvent or not.

  • Homeownership rate currently 67%, trending down. It’s not justifiable to keep people as homeowners when they are not owning anything (in equity). So we are going to have a supply jam that’s going to drive foreclosures. We’ll see a sharp leg down.

  • Credit cards: not really the defaults, but the contraction in liquidity is the concern. US consumers have grown dependent on credit as a cash flow management vehicle. 90% of Americans revolve credit lines at least once a year. 45% revolve every month.

  • $2.7 trillion credit lines cut. 55% of all credit card lines in the US will be cut from peak. Psychologically damning effect on willingness or ability to go out and spend.

  • The earlier banks sell their assets, the more they’ll get.

  • Will XLF set new lows? It’ll come pretty close.

  • By the time of summer I expect that to take place. There’s going to be great things to buy but it’s just not there yet. Banks will sell great things: processing vehicles etc. Distressed assets that have huge operational leverage. Their asset structures are built on declining asset values, High premiums and bad maths.

  • I’m surprised that there’s a willingness to give banks so much credit. I hope investors don’t enter banks. They’ve been fooled over and over again.

On the whole it was a good interview. I haven't mentioned the guy who was with her during this as he was wayy to bearish, predicting Dow 1000..

Go watch him if you care to know why!

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Thursday, April 23, 2009

Jim Rogers: interesting ideas.

Jim Rogers appeared on Bloomberg a few weeks back. I found this video through Part I, Part II and Part III can be found here. Made some notes and thought of sharing his thoughts:

Part I

  • We’ve been due a rally. When you’ve had that kind of a collapse you do have rallies. This is similar to 1929-1932. We’ve seen A bottom. Is it THE bottom? I don’t think so. I think we’re going to see more bottoms in the next few years.

  • I would expect to see more problems probably this fall or next year. We’re going to see currency problems. Crisis in the currency markets. More bankruptcies as a result. More problems in the financial markets. I’m not participating in the stock market rally.

  • If the world economy is going to be better, commodities is going to be the place to be. If not, the commodities would be the least bad place to be.

  • We’ve been in a period of forced liquidation.

Part II
  • How long can this rally in the US last? This rally has been very powerful, and based on my experience of the last 40-50 years, when you get a rally like this off the bottom, it lasts longer than anyone expects it to last. There’s a lot of pent up demand.

  • I’m not selling this rally short at all. Maybe in May or June, I’ll let you know. We’ll just have to see how this unfolds.

  • Best way to short US bond markets and good time to short? I’m not short the US bond market. I was earlier. I covered when Bernanke said he will buy the bonds. US bond market is the last bubble left. You don’t short bubbles when they are going up. I fully expect to short the US bond market in the considerable future.

  • Bonds could possibly spike up in the future. Something will happen in the future which will cause the bonds to go up a lot. In Japan bonds were yielding 0.5% when they topped. These go a long way.

  • Bought some baby stocks in Japan because the birth rate has been a disaster, and the govt. is encouraging people to have kids.

  • Biggest litmus test would be a currency crisis in the west and this is something not factored in yet. I would suspect these are coming next. There are many currency imbalances. US largest debtor nation in the world. Swiss Franc etc.

Part III
  • If you can buy real estate in natural resource rich areas of China and Brazil you are going to make a fortune over the next decade or two. I wouldn’t buy real estate in Shanghai or Beijing where the bubble developed.

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Mark to market benefits on the way to bankruptcy.

Jamie Dimon on booking mark to market gains on liabilities as per FAS 157.:

"The theory is interesting, but, in practice, it is absurd. Taken to the extreme, if a company is on its way to bankruptcy, it will be booking huge profits on its own outstanding debt, right up until it actually declares bankruptcy–at which point it doesn't matter."

Hmmm..As a company is more likely to default, it's CDS spreads widen, and their liabilities lose value. The banks can actually reduce their liability and book this reduction on their income statement!

Of course if a company is to remain a going concern, it has to pay back the entire amount. So booking such gains doesn't make sense unless you're on your way to bankruptcy, when equity holders would most probably get wiped out anyways..

Curiouser and curiouser!

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Tuesday, April 21, 2009

Interesting videos on the current markets

Five videos for an interesting perspective on things :

  1. The Dow may challenge the 2007-2008 lows from mid-May onwards, according to the charts of Ray Barros, CEO of Ray Barros Trading Group.

  2. Global stocks have been experiencing a rally over the past few weeks, but this is not a bull market, according to Nick Batsford from Hobart Capital

  3. Mohd. El-Erian with Jack Welch:

  4. Jim Bianco, of Bianco Research, interesting discussion that the leaders of this nascent bull market have been of suspect quality. Also touches on quants losing a lot of money (something which Zero Hedge has spoken a great deal about).

  5. Bear-Market Rally to Last into May: Chartist
    When looking at charts for the FTSE 100 index and Dow Jones Industrial Average, Sandy Jadeja from ODL Securities sees a pullback from the recent rally over the next 3 days. But he also sees the current bear-market rally extending into May.

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Monday, April 20, 2009

Apple: Stuck in a trading range?


I’m an Apple fan. I own multiple Apple products, and am a regular visitor to the Mac store. I’ve thought of owning Apple stock, but have not done so because everyone I know is so admittedly smitten by them. When a company is that well known and loved, a lot of its growth is already baked in.

Back in 2005, I considered buying Apple(AAPL) when it was around $80. Times changed, things happened. I remember there was this investigation against Apple by the European Union. Then we had the legendary iPhone release and the stock shot up to $200. After a spectacular double top, it traded a few weeks back at or around the $80 mark I had considered back in 2005. A nice cyclical gut wrenching round trip, in spite of everything that’s happened in between.

(Before everyone get’s really excited, I know Apple is up 50% in this rally. But up 50% in a 30% up market for a high beta stock like Apple (Beta is 1.5) is par course for the stock).

Issue #1: Overoptimistic and overenthusiastic fan and investor base:

Now consider this well-researched but overoptimistic recent article:

Back in 1982, you could have purchased 100 shares of this company’s stock for $160. Those same 100 shares would be worth roughly $92,000 dollars at today’s split-adjusted share prices.

That’s a 57,400% return, something most people won’t ever see in a lifetime of investing.

Fortunately for us, this company’s prospects are only looking brighter. In fact, it has plenty of space to grow and do it all over again. And it won’t matter whether you’ve been there from the beginning or jumping into the bandwagon today - the ride looks to be profitable nonetheless.

Issue #2: Fundamentals:
  • That really sounds like a siren call to own Apple and ride the road to riches! Problem with this argument is SIZE. Apple is already a $100 billion dollar company. A growth of 57400 % would imply a market valuation of $57 trillion, or 4 times the current US GDP. That’s also close to the total world GDP! Trust me, it AIN’T gonna happen in your lifetime. Even arguing for a TEN bagger from here sounds like a stretch.

  • Here’s my problem with a large cap high PE company: The growth assumptions imply that it’s market cap would be x% of the US GDP. Walmart(WMT) was a high growth high PE flyer in the late 80s/early 90s.. Someone in the early 90s did an analysis that if the growth assumptions of Walmart were true, it's market cap would be 10%+ US GDP in another 10 years. It pretty much went sideways for the next few years. Apple will also go through this growth stock to value stock transition sometime in the near future. Note that this valuation argument is also true for most of the current tech horsemen, like Google(GOOG) and Amazon(AMZN). Earlier growth stocks like Microsoft(MSFT) have already made that transition, but only after years and years of sideways movement.
  • The other thing is that Apple does not have a dividend. You might say that it’s reinvesting all that cash flow into high growth areas, but the growing cash balance earning rock bottom interest rate is inconsistent with that statement. We’re headed to a low growth world where investors will increasingly demand yield, and non dividend companies with optimistic growth assumptions will suffer.

Issue #3: Risks

  • The risk is that a lot of Apple’s sales are in the developed world (US, Europe). In a world where consumers in emerging markets are expected to make up for any slack, I count that as a risky attribute of Apple. (For instance, the iPhone is a big flop in India.)
  • In the PC area, the current slowdown should accelerate the trend of budget conscious buyers gravitating towards cheaper products (check out the new Microsoft ad).
  • Further, the handset market is ultra-competitive with low barriers to entry. Even a revolutionary product gives you maybe a year’s headstart before the competition hits back with competitive but lower priced products. The handset market looks ripe for a shakeout in the next few years. Sooner rather than later, your margins are going to contract. Just ask Motorola(MOT) about their Razr experience.
Hmm.. let's see what else we have. Handset revenues recognized over multiple quarters? It’s already been priced in. High cash reserves? That’s never been a reason to buy a company.

When the iPhone was released, everyone was talking about how Apple was getting a slice of the carrier revenues. With the release of the 3G version, the story changed to how carrier subsidies would drive handset volumes. Nevermind that no one’s talking of Ipod growth anymore. Nevermind that most Mac sales are in the slow-growth developed world, where consumer demand has taken a hit.

My point is that I’ve seen the story change repeatedly to justify Apple’s growth prospects. A lot of the good stuff is baked in.

Issue #4: Technicals:

Firstly, you cannot possibly ignore the massive double top. (And in case you think I'm imagining this, Louise Yamada seems to concur.)

More importantly, Apple was the darling of the previous bull market. New bull markets always bring with them new leadership. Leaders of the previous bull sit the next one out. Chances are, Apple may not go to the stratosphere as the article claims, but might be stuck in a trading range. The fundamentals based argument made above would also support this conclusion.

Fan boy articles arguing for Apple market cap to reach 4 times US GDP should give risk-averse investors cause for concern. Apple is and will continue to be a great company. Much of that is priced into the stock.

Stocks mentioned: AAPL, RIMM, PALM, MSFT, AMZN, GOOG, WMT.

Full Disclosure: No positions

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Bear or bull Market: Week's Best Stock Blogs.

Many thanks to Mick Weinstein for linking my article on "Bear or Bull Market? The Gurus Weigh in" as one of the Week's Best Stock Blogs in his weekly review..

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Inflation since 1872.

Great chart from dshort.

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Sunday, April 19, 2009

Sunday links.

      Interesting:What good are economists anyways? Click here

      Shiller Depression Lurks Unless There’s More Stimulus Click here

      Roubini Global Economics: Banks in the spotlight Click here

      Economist: Home ownership, shelter or burden? Click here

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Saturday, April 18, 2009

Green shoots.

The search for green shoots goes on. Here's the google search trends:

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Wednesday, April 15, 2009

Used car prices: a stock market indicator?

Bespoke came out with an article comparing the chart of S&P 500 with the used car sales prices. They say:

In the second chart below, we compare the used car index to the S&P 500. Regardless of the reason for the spike in used car prices, it has historically tracked US equity markets pretty closely. But based on the chart, the used car index seems to lag the markets at peaks and troughs. However, it's a good sign that the used car price trend is now moving upward instead of downward.

Hmm.. aren’t used car sales counter cyclical?! WSJ seems to concur:

In Tough Times, Auto-Parts Firms Receive a 'Countercyclical Boost'

These stocks have strengthened while most retailers have weakened in a "stretch the family dollar" trade -- consumers, out of necessity, are keeping their autos longer, and electing to get cars fixed rather than trading them in for new vehicles. Those buying cars are increasingly looking to used cars -- about 511,000 used cars have been sold the past three months that in normal economic times would have resulted in a new-car purchase, according to, an auto-information company.

A slowdown in the economy results in more people opting for used cars, which drives up used car sales. (Or at least, used car sales would hold up.) Of course idiosyncratic risks like credit availability, car mileage, gas prices, etc play as much a role in used car (and new car) sales as the economy. I would argue that new car sales and new car prices would be a better predictor to the economy, like this article suggests.

Further, why should used car sales prices track the stock market? The used car prices should track roughly the rate of inflation. The stock market would track the growth in corporate profits, which over the long term, has tended to track the real GDP growth. Thus the nominal stock market return is the real GDP growth plus the rate of inflation.

While I’m sure I’m missing several factors here, the correlation apparent in the chart above probably does not imply causation.Using used car prices(pun intended) to make a case for the equity markets sounds like a stretch to me.

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Tuesday, April 14, 2009

Bear or bull market? The Gurus weigh in.

Well, given that everyone's been trying to decipher the market trend, I’ve tried to cull together predictions from famous market investors and technicians. (Caution: lengthy!). A number of credible strategists have called this a bear market rally and not a new bull, with an intermediate term price target around 875-880. The markets could rollover in the next week or so.

So let’s see what they have to say:

      Ambrose Evans-Pritchard "Enjoy the "bear-trap" rally on global bourses this spring. But remember, we have only just begun to see the mass lay-offs and hardship caused by this slump. The politicians will act to save their skins. Markets may not like the result."

      Marc Faber "We need some kind of correction, maybe around 5 to 10 percent, and after that we can maybe rally more into July. Gold will be “dead money” for the next three to six months. Bonds are entering a long bear market and should be avoided. I think the market became extremely oversold March 6, when the S&P touched 666. That was probably a false breakout on the downside from the previous low of 741, reached Nov. 21. On March 6, most stocks didn't make new lows from November.

      Sentiment had turned extremely negative. So the market wanted to go up anyway. I think this rally may have more legs, because if you print money, it liquefies the system for a while, and asset prices move up accordingly."

      Faber forecasts the S&P rising to around 880.

      Louise Yamada In the current move, Yamada notes that the Dow Jones Industrials and the Standard & Poor's 500 have broken above respective 10-year support levels of 7286 and 777; rallied into the support levels where the averages broke down last November; and moved above their 50-day moving averages. All are positive developments from a technical perspective.

      Yamada would like to see a penetration of downtrend lines in the S&P and Dow and a break above their December peaks. Still, the 200-day moving averages and downtrend lines from peaks of a year ago present formidable resistance. The charts show that perhaps only 10% of stocks are trading above their 200-day moving average. That measure is a widely watched indicator of a medium-term trend; as long as the current price is below the 200-day moving average, it's hard to argue that a sustained uptrend has started. Similarly, many stocks and averages still remain below their downtrend lines.

      As for numbers, "the first step is 945" on the S&P. “I'd be a lot more comfortable with 1012," which also seems miles away but was where the S&P traded in early October -- after the Lehman Brothers bust.

      "What you'd really like to see is the 200-day moving average turning up, and then some backing and filling," she continues. That means a considerable period of healing, as opposed to the hopes for a sharp recovery off of the early march lows. "You can't fix in six months what's happened over six years."

      Ultimately, Yamada remains concerned about the technical damage wrought by breaching of the market's 2002 lows, which could make the recent advance a "bear trap." The current market differs from other major turning points, as in 2003 or 1982, which had major groups that had gone through long consolidation periods.

      Niall Ferguson "Only somebody who studies financial history could say, as I was trying to say, ‘Look, something as big as the liquidity crisis of 1914 or as big as the banking crisis of 1931 is imminent.' We don't really have a great many options here. If we stay the present course, you're going to see the tailspin continue. To be effective, a large-scale restructuring of household indebtedness would need to be mandatory. The Great Depression was initially a U.S. financial crisis. But what made it a depression was its global contagion, and then the breakdown of trade and the retreat into protectionism. All of that can happen. All of that is in fact happening with terrifying speed."

      Richard Russell "I was wrong. It looks as though this rally has legs. Lowry’s Selling Pressure Index has stopped rising and now appears to be topping out. At the same time, Lowry’s Buying Power Index is in a rising trend. The look of the Lowry’s chart suggests that the [short-term] direction of least resistance is up."

      I believe that we’re in a secondary (upward) correction of a bear market. I’m going to guess that this correction could rise further or at least last longer than most people are expecting. A bear market rally is supposed to convince the majority that a new bull market has started. The rally will often continue until a large number of investors are back on board, and then the bear will kill them as it fades away, leaving the new optimists high and dry and with losses.

      George Soros "The recent rise in global stockmarkets is a bear market rally because we have not yet turned the economy around. This isn’t a financial crisis like all the other financial crises that we have experienced in our lifetime."

      "I don’t expect the US economy to recover in the third or fourth quarter so I think we are in for a pretty lasting slowdown." He added that there might be “something” in terms of US growth in 2010. "The recovery will look like ‘an inverted square root sign. You hit bottom and you automatically rebound some, but then you don’t come out of it in a V-shape recovery or anything like that."

      James Montier "In general, sustainable post-bubble rallies are not led by those stocks which are the bubble darlings. The prominence of emerging markets, mining and financials in the recent rally gives me pause for thought. Especially when neither emerging markets nor mining are at bargain basement levels of valuation.”

      Albert Edwards "Apparently there are green shoots to be spotted. Not in Japan there ain't. We don't fully realise in the West what a catastrophic collapse Japan has suffered. They have paid the price for a strong currency. In fact, the Western nations have exported much of their depression eastwards. Going forward, the unfolding collapse in the yen will unleash an intensification of the depressionary forces in the West. Toasted green shoots anyone?"

      There is disbelief in Edwards' prose about how so many of the commentators now spotting green shoots turn out to be the same commentators who failed to see the current economic disaster unfolding in front of their eyes. Even the largest and most rapid economic collapse in a generation has failed to wipe out their deeply ingrained optimism.

      Yet the West has effectively dumped a large part of its economic woes on the Japanese by devaluing against the yen. That will come back to bite. It is almost certainly the case that the horrendous effects on jobs, corporate bankruptcies and bank balance sheets have simply not yet been seen given that we are still so early into this downturn.

      In Edwards' words: "We have only just begun."

      Laszlo Birinyi "Buying stocks is like crossing Fifth Avenue when the light is red.You might make it, but the odds are not with you.

      Mistaking a temporary jump for a sustained bull market can be costly. In 41 so-called bear market rallies since 1928 -- gains of more than 10 percent that are later wiped out -- equities fell an average 25 percent after peaking.

      Mohd. El-Erian "Investors can still lose a lot of money in the stock market, but US government bonds aren’t the solution either for those seeking safe havens. Certain bonds aren’t worth owning, like government bonds for instance"

      "I am very underweight equities," he said, adding that he has cut his exposure to stocks to 30% compared with around 60% in normal market conditions.

      Jim Rogers The rally in global equities has been “powerful,” though problems in financial markets may cause indexes to revisit lows. When you see a rally like this coming off the bottom, it lasts longer than anybody expects. I would expect to see more problems, probably this fall.”
      "The world is in difficult economic times and politicians keep making mistakes so I don't see stock markets making their final bottom for a while. The global stock market might have hit rock bottom but it is possible that the bottom is in fact deeper. It will be awhile until we see the actual bottom."

      Nouriel Roubini "There's still bad news ahead for the U.S. economy -- and by extension for Canada -- and the bear market for stocks is not over yet. There will be a light at the end of the tunnel somewhere down the line, later rather than sooner. Macro news, earnings news and financial shocks are going to be worse than expected and that's why I believe this is still a bear market rally"

      "The stock market is a bit ahead of the real macroeconomic and financial news. We’ll have some major banks going belly up that will need to be taken over."

      Art Cashin This market is a little overextended here. It’s option expiration week I’m a little nervous for the next several days.

      David Rosenberg As best we can tell, the market is now pricing in $70 of earnings (operating) [for the Standard & Poor's 500], which would represent a 75% surge from where we are today. Not likely, in our view,"

      As for this 25% rally in three weeks - the consensus has swung to the view that this is a real inflection point. One warning. We saw this happen in late 2001 and early 2002 too … big, big rally; early cyclicals flew; the markets thought we were in for a V-shaped recovery … it was longer away than many at the time believed and many were burnt as a result. And keep in mind that the ‘second derivative’ on growth began to improve in the fourth quarter of 2001, and the S&P 500 still did not bottom for another year.

      The only times we have ever seen the stock market surge close to this much in such a short time frame were: December 1929, June 1931, August 1932, May 1933, July 1938 and September 1982.

      "Only in September 1982 and in May 1933 was the equity market embarking on a new bull phase. But guess what? By the time the S&P 500 surged 25%, it had already crossed above its 200-day moving average. So call us when the S&P 500 crosses the 1,000 mark - another 20% to go. That is how deeply entrenched this particular bear market has been - that even after this massive rally, the onus is still on the bulls! Consider as well that on four of the six occasions that the equity market staged such a huge rally over such a short time period, it relapsed. So we are going to wait this out, acknowledging that we could be late to the party. We still feel the downside risks are too high to be involved.

      Investors seem to have confused an actual recovery with the fact that the economy isn't detonating anymore. Markets right now are dangerously extrapolating an improvement in the rate of change to an improvement in the actual level of economic activity. These are two very different events."

      Michael Kahn "Jason Goepfert, proprietor of points out that the AAII survey of individual investors and other sentiment-related indicators -- specifically put/call ratios and Rydex mutual-fund asset flows -- are indeed showing a quick acceptance of the rally.

      This is why I think that the next decline that takes place will be psychologically devastating for investors. And devastated investors will stop looking for a bottom. They will turn off the financial media, resign themselves to their losses and work on their hobbies instead.

      The widely followed relative strength index has barely been able to escape a merely neutral level, and that suggests that there has not been a lot of force behind the move. In fact, over the past three weeks, the market has been able to rally three consecutive days only one time. That is not how a rally should work.

      When we examine volume, we see that the number of shares changing hands each day has been declining, too. This leads to the conclusion that it was a lack of selling, rather than a surge in buying, that is behind the gains. Again, that is not how a rally should work.

      Put together the mediocre momentum, falling volume and sentiment that shows the rapid loss of fear and we get a recipe for a selloff."

      BCA Research :Global equities have likely made their recessionary lows. Emerging markets and commodity plays will outperform. The equity markets of the U.S. and the U.K. will do better than euro area stocks. Japan is a trading market, one that is due for a period of outperformance.”

      Teun Draaisma "We continue to prefer cash over equities as we have done throughout most of this bear market, and we continue to prefer earnings stability, strong balance sheets and low valuations. After the recent strength in equities, we now move 5% out of equities into bonds. Thus, our new asset allocation is +5% overweight cash, neutral bonds, -5% UW equities."

      "We have to decide whether this is towards the end of another bear market rally that we should sell into now that hope has grown, or the start of a much larger advance, maybe even a new bull market. Our decision is to sell into strength now."

      "Other reasons to sell: after the biggest valuation overshoot ever, in 2000, we have not had a meaningful valuation undershoot. Weekly unemployment claims have continued to rise. Some fixed income markets have fallen to new lows even recently.

      Cleve Rueckert, a Birinyi analyst. “Steeper jumps for small-cap stocks one month into a rally are signs of indiscriminate buying and usually come before equities fall”

      “It’s unusual for a new cycle to start with such an abrupt gain. Bear market rallies are broad. Everything goes up really sharp, really fast and not necessarily for a particular reason.”

      Kevin Lane Fusion IQ “It is a very fine line between a rally extension call and a retest call, though we are leaning towards the former after a pullback/pause. However, since both calls - rally or retest - are plausible we continue to suggest investors tighten up stops and portfolio VAR (Value At Risk) until more evidence unfolds. Until more clarity occurs either technically or fundamentally, I can think of worse things in the world than locking in some gains or getting stopped out at a profit on trailing stops.

      “So over the next few sessions watch the skew of decliners to advancers and down to up volume. As long as we don’t get ratios of 5 to 1 or higher on both indicators the likelihood of a retest in the near term is lessened.”

      Barry ritholtz: “ those investors who made recent bets that Green Shoots are a great entry for investing - well, they may be somewhat disappointed …”

      Bear markets call for a very different set of plays: You sell the rallies; higher prices are opportunities to sell equities at premium valuations. Most buys are disappointing, as prices eventually go lower. Buy & hold is a losing strategy – trading what the market presents to you is the best risk management strategy.
      The goal during bull markets is to grow your capital; the goal during bear markets is to protect your capital.

      Jordan Kotick Barclays Capital's head of technical strategy: "We believe it is a bull market in the second quarter. We perhaps think it will be a bull market in the third quarter as well. If you are a very long-term trader, you will probably still assume it is a bear market and we think rightfully so."

      Dylan Ratigan
      So is this a new bull market, or is this another suckers' rally?

      "Suckers' rally. No question. That's not an indictment of the judgement of the market. That's just my perception of the ability of the banks to function in a timely fashion, the ability to create meaningful amounts of jobs in the immediate future, and the as-yet unrecognized meaningful losses to come in commercial real-estate and other asset classes... We've gone through a transition where things were getting bad in a freefall, and now they're just getting slowly worse. So it's a transition from jumping out a plane without a parachute, and now, after a year of free-fall, we've pulled the parachute, which feels a hell of a lot better than the freefall... I think we're dealing with a problem that has a few years in it, not a few months."

      Jeff Saut “While many pundits term the current rally a short-covering bear market rally, we have noted that ALL new bull markets begin as short-covering bear market rallies and have referenced the late 1974 “undercut low” affair as an example. Therefore if, and we repeat “if,” the DJIA and D-J Transportation Averages can better their early January 2009 closing highs of 9034.69 and 3717.26 respectively, it would be the first Dow Theory “buy signal” in years and should be viewed positively.

      So far the “buying stampede” is still in force since there have been no pauses/corrections that have lasted more than 1 – 3 sessions. As often stated, that is typical of such skeins. But, the equity markets are very overbought as can be seen in the attendant chart. Consequently, we are again cautious. If I could script the action from here, it would call for a “trading high” this week followed by a pullback, which holds above last Monday’s (3-30-09) intraday low of 779.81 (basis the SPX), and then a re-rally. In that re-rally, if the SPX fails to trade to higher highs, it would be a large red warning flag.

      We still feel a pullback will occur in the weeks ahead. Our sense is that such a correction, if it holds above March lows, creates a buying opportunity for a tradable rally into the summer. The sentiment of “selling the bear market rallies” could very well give way to “buying the dips”

      Royce Tostrams "We see some improvement because the falling trend has been broken and we have formed a series of higher bottoms in the past few weeks, however, upside potential is limited."

      "The first target for the index is 878, while the second target is about 944. For the next three to six months, I expect a new sideways movement between 700 and 900. This would not be a new bull market, but it would be a sideways market. Investors have to be very selective to get some gains, but they can't stay in the market too long because upside potential is limited."

      John Hussman Market action continued to demonstrate good breadth (advancing versus declining issues), prompting us to hold about 1% of assets in index call options on that basis, but the overall price-volume behavior still appears more consistent with a standard bear market rally, punctuated by periodic short-squeezes.

      Very simply, new bull markets are generally not widely heralded, and investors should be awfully suspicious when there is a consensus that “the bottom is in.”

      “Strong intermittent advances are typical during bear markets, and can often achieve gains of 20% as we've seen in recent weeks, and sometimes substantially more. But the very existence of bear market rallies can be a problem for investors, because they clear the way for fresh weakness. The scariest declines in bear markets are typically the ones when investors think they are making progress and recovering their losses, only to see stocks go into a new free-fall. The largest losses during bear markets tend to come on the heels of overbought advances, and our measures presently don't offer happy green-shoot optimism that the market's difficulties are now behind it.

      On the basis of market action, one of the features of the recent advance that has me concerned is the unimpressive, waning trading volume that we've observed. A strong advance on heavy trading volume is a measure of determined sponsorship in the face of disagreement. A strong advance on waning volume is probably a short-squeeze – forced purchases in the face of sellers who have temporarily backed off. Moreover, stocks are currently overbought to the same extent that they were near the end of the bear market rallies we observed during the 2000-2002 decline.

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Wednesday, April 8, 2009

New recovery shape: diminishing sine wave!

We’ve had the alphabet soup (U, V, W, LMNOP) shaped recessions being tossed around. Well, caught this new shape from FT Alphaville: the diminishing sine wave! (I kid you not):

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Monday, April 6, 2009

Shanghai exchange: 50 day / 200 day moving average crossover?

Don’t look now, but the Chinese Shanghai index is about to experience a bullish 50 day – 200 day moving average crossover. This could be a technical positive for the Chinese and indeed the global markets.

As can be seen from this chart, the crossover has a pretty good timing record. Here’s how investing on the basis of this crossover would have performed going back 4 years. It would have got you in early 2006, through most of the bull market, and out in early 2008, before the bear market crash.

Well, it just might be telling you to get back in!

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Saturday, April 4, 2009

Weekend CNBC guru marathon.

Nassim Taleb:

Robert Shiller :

Nouriel Roubini

George Soros

Jim Rogers

Bill Gross

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Thursday, April 2, 2009

McKinsey on why this might not be the next Great Depression.

Nice article from McKinsey on getting history right. Compares the current political system to the Great Depression era and makes a compelling argument on why comparisions to that period are overblown and not relevant today. Excerpts follow:

"The key differences between the current crisis and the past are less economic than political. The Great Depression was the offspring of the killing fields of Europe: the First World War had destroyed trading patterns, undermined currencies, and produced massive public debts. Who would foot the bill for this catastrophe? The Americans had financed the British and French victories, and expected to be paid back in full. The British and French demanded that Germany carry the cost by paying reparations. Germany —which been victorious on their Eastern front and had prevented Allied forces from entering their territory—had agreed to end the war in part because of Woodrow Wilson’s promise not to impose a victor’s peace. When this promise was broken and massive reparations were imposed, a bitter decade-long battle over who would pay what ensued. From this toxic environment of distrust and enmity emerged a series of unsustainable deals, whereby America financed Germany’s reparations to Britain and France, which were recycled back to the United States in the form of war debt payments. If American financing dried up – which it did during the late 1920s—the whole scheme would collapse, taking the international monetary system with it. "

"Looking back, we tend to forget that growth in the developed world after World War II was the less the product of globalization than the recovery of war-devastated economies, the one-time productivity increases from the so-called green(agricultural) revolution, and preferential trade regimes like the European Economic Community (today’s European Union). "

"We live in an era when the threat of a great power war in the developed world is remote. The major players may have their political differences, but nothing approaching the bitterness and distrust that marked international relations in the last century. In addition, the greater interconnectedness of the world that has grown up over the past 20 years will act as a counterweight to the tendency to pursue purely self-interested policies. This backdrop will make continued cooperation much easier, and should make another Great Depression far less likely. "

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Long term bear turns bullish.

I enjoyed watching this clip on CNBC:

      Used car sales prices have gone up in UK, US, and Germany.

      Mortgage payments have been cut by 50-80%, and that is very significant when 30-40%of your average income goes into paying these mortgages.

      IFO stats has been going up past 2-3 months.

      If you look at consumer trends in the early part of 1930s and if you did keep your job (which ~80-90% people did), they had a 20% increase in their real living standards: their wages went down 10%, prices fell 30% so in effect you’ve got an increase.

      Things to keep an eye on:
      First: How do equities react to the news? A lot of very negative numbers are already publicly known and discounted.
      Second: To see a confirmed bottom here we need to see value outperform

      What to avoid? What about sector rotation?
      Don’t want to be in branded food companies: squeezed on price from all sides. Branded food companies with high debt on their balance sheet is perfect. Pharma is same thing.Big leadership and fully valued. Don’t want to be involved.

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