Merry Christmas all!! Hope everyone had a wonderful holiday. I will be heading out for a couple of days for a bachelor party and than a couple of weddings next week (one on New Years Eve and one on New Years Day). So won't be on here much if at all.
Next week should see the same as last week. No volume with a propensity for the market to drift up. That assumes no major overseas news.
Going into 2010 the first few weeks will be interesting. You have some extremes that will have to work themselves out. The equity markets are way overbought but so is the dollar. I would expect a correction (may have already started) in the dollar and correspondingly rebound in gold. The dollar push up has been mostly technical. The fear in Europe with Greece and Dubai caused a technical break out and than the end of the year is typically bullish for the dollar because financial firms want dollars to show that they are strong. So there is an abnormal high demand for dollars. This should correct though I think Europe will continue to cause problems in 2010 and so after a correction I would expect continued dollar strength.
The equity markets could see a pretty big sell off at the beginning of the year or they may just bounce around as the dollar corrects. Not really sure.
The inventory build that investors have been talking about for months as a reason to buy and have continued not to happen I think will finally happen in Q1. That means Q1 GDP could be legitimate and there could be some decent economic data.
Interest rates have already been going up and this could end the rally if this continues.
Should be an interesting few weeks.
Saturday, December 26, 2009
Thursday, December 24, 2009
U.S. Ponzi Smoking Gun
I hardly ever link to another blog. I figure my readers read most of the same blogs I do and don't need repetition on this one. Well I am going to make an exception because Zero Hedge has an absolute MUST READ from Sprott Asset Management.
In early November I entitled a post called Ponzi Finance. I started seeing the financial system as a Ponzi Scheme. I had not read or heard anyone make that leap. Well others are starting to agree.
Eric Sprott entitled his latest letter "Is it all just a Ponzi scheme?"
A miraculous $510 billion of Treasuries (on pace for over $700 billion by year end) is being purchased by unknown buyers.
Eric isn't some fly by night conspiracy theorist. He spoke at the Value Investing Congress in New York City in October. His returns the last ten years are incredible.
Go to zero hedge to read it. A must read.
In early November I entitled a post called Ponzi Finance. I started seeing the financial system as a Ponzi Scheme. I had not read or heard anyone make that leap. Well others are starting to agree.
Eric Sprott entitled his latest letter "Is it all just a Ponzi scheme?"
A miraculous $510 billion of Treasuries (on pace for over $700 billion by year end) is being purchased by unknown buyers.
Eric isn't some fly by night conspiracy theorist. He spoke at the Value Investing Congress in New York City in October. His returns the last ten years are incredible.
Go to zero hedge to read it. A must read.
Tuesday, December 22, 2009
More Number Games
Remember that Q3 GDP number that originally came out at 3.5%??? Of course you don't. The government doesn't want you to. It was revised down originally to 2.8% or a 20% reduction. Today it was revised down to 2.2%, an additional 22%. This is a 37% total reduction. Who cares about Q3 GDP now? That is the whole point. Has the markets given back 37% of its gains from the original GDP report? Ha, no. Instead the thinking is that GDP will be higher in Q4 and Q1 now. We can get excited about that going forward. It is ridiculous. Put out really high numbers that everyone gets excited about. Revise them down months later creating a lower base for the next "eye-popping" number. Oh and we can get excited about the housing number as people rushed to buy government subsidized houses that has since got extended.
Meanwhile across the pond Great Britain is losing space to maneuver in their own games.
From the Guardian:
Gordon Brown received a twin blow today when a leading ratings agency warned Britain to get a tighter grip on its record budget deficit and figures revealed that the slump of the past 18 months was now officially the deepest since the second world war.
and
Confirmation that the UK is the only G20 nation still in recession sent the pound tumbling to a two-month low against the US dollar, with sterling dipping below the $1.60 level after the ONS announcement.
Ministers will now have to wait until the next set of growth figures are published in late January before receiving evidence that their attempts to boost activity have worked. Public investment in buildings helped provide the biggest boost to construction output for more than six years during the third quarter, while the "cash for clunkers" scheme led to a pick-up in demand for cars.
this is a big drop
Since the start of the downturn in early 2008, GDP has dropped by 6.03%, marginally worse than the 6% decline suffered during the deep manufacturing slump of 1979-81.
Meanwhile across the pond Great Britain is losing space to maneuver in their own games.
From the Guardian:
Gordon Brown received a twin blow today when a leading ratings agency warned Britain to get a tighter grip on its record budget deficit and figures revealed that the slump of the past 18 months was now officially the deepest since the second world war.
and
Confirmation that the UK is the only G20 nation still in recession sent the pound tumbling to a two-month low against the US dollar, with sterling dipping below the $1.60 level after the ONS announcement.
Ministers will now have to wait until the next set of growth figures are published in late January before receiving evidence that their attempts to boost activity have worked. Public investment in buildings helped provide the biggest boost to construction output for more than six years during the third quarter, while the "cash for clunkers" scheme led to a pick-up in demand for cars.
this is a big drop
Since the start of the downturn in early 2008, GDP has dropped by 6.03%, marginally worse than the 6% decline suffered during the deep manufacturing slump of 1979-81.
Monday, December 14, 2009
Top of the Trading Range
As previously thought we have moved back up to the top of the trading range. Now the question is will we hold it or get a squirrly new high going into the new year.
Sorry for the lack of posts. I am in Houston doing due diligence on a bankrupt company. Will probably be here all week but will try to post a few market thoughts later.
Sorry for the lack of posts. I am in Houston doing due diligence on a bankrupt company. Will probably be here all week but will try to post a few market thoughts later.
Wednesday, December 9, 2009
Today's Recap
Today is just one of those scratch your head days. We again couldn't break resistance and I would think it would set up fairly bullish the next couple of days. The dollar is basically overbought and due for a pullback. Europe is oversold and due for a rebound. Commodities are oversold and due for a rebound. All this occurred while the U.S. stock market indexes barely went down. The guess is when these things correct the market will go up so a move to the upper end of the trading range seems likely at this point. The destruction in Europe has been pretty widespread. Greece stock market is down 16% in a week and 30% since its tops in October. Autria is down 6% in the last two days. Dubai has given all of its gains up for 2009. And yet the U.S. stock market remained gridlocked in its trading range. In the short term fairly bullish. In the slightly longer term probably bearish as things have shifted. I would be surprised to see a new low in the dollar for quite awhile. Their is simply to much stress on the Euro. A correction of the fairly violent move the last few days is definitely possibel though.
This one has to go in the stupid pile. Not only is Dubai in huge financial troubles for its ridiculous ideas on how to spend wealth, but one of the most audacious, the The Palm Jumeirah man made island is sinking.
From CNBC
One of the crown jewels of its real estate empire, The Palm Jumeirah, is literally sinking into the ocean, one scientist told the Wall Street Journal.
The man-made island, which was dredged from seabed and shaped into a palm for luxury housing, is sinking by an average of 5 millimeters a year, an executive at leading European ground survey company Fugro NPA told the paper.
One of the crown jewels of its real estate empire, The Palm Jumeirah, is literally sinking into the ocean, one scientist told the Wall Street Journal.
and
The man-made island, which was dredged from seabed and shaped into a palm for luxury housing, is sinking by an average of 5 millimeters a year, an executive at leading European ground survey company Fugro NPA told the paper.
News was bad bad bad today. But one bullish article caught my eye. I try to read all sides and it is hard to go against John Paulson.
From the Financial Times:
John Paulson, the hedge fund manager whose bearish positions in the mortgage market three years ago were among the most lucrative trades, has changed his views dramatically.
"Our net longs are the highest ever," Mr Paulson said in a speech in New York yesterday. "There are lots more long opportunities than short opportunities in the market. Zero interest rates are a huge tonic."
Personally I think his view is close to Buffett and it is more of a massive inflation view. The key to this is further down in the article.
"The amount of quantitative easing has stimulated financial markets and will start to appear in the real sector," he said.
Sounds like John Paulson has been hanging out with Jim Grant to much. I would agree that the only position that isn't defensible is a muddled economy. I think there are only two positions and that is either insanely bullish or insanely bearish. A muddled economy over another twelve to twenty four months will make the solvency issues that much more pronounced causing bigger and bigger imbalances. So far that I give Paulson kudos.
To the bad news of the day, there was alot of it.
1)Bad Treasury auction.
2)ABC Consumer Confidence dropped from -45 to -47. The reason this is interesting is this is the first confidence number measured since the BLS BS jobs numbers were released last week,
3) The one time 50% tax by Great Britain on bonuses over 40k. This could be replicated in the U.S. just like the shelling ban. If nothing else it will be very expensive for some US banks. A Goldman banker working in London will suddenly be faced with a much higher marginal tax rate that his associate in New York. If the IRS doesn't do something similar Goldman will have to make up the difference for their bankers in London or expect revolt.
4) Spain revised from stable to negative watch by S&P.
5) Census Bureau update today not pretty. State governments took in nearly $1.7 trillion in total revenues in fiscal year 2008, a 15.8 percent decrease from 2007, according to new data on state government finances released by the U.S. Census Bureau.
This matches the tax withholding information from a couple of days ago. And the S&P has gone up how much and the corporate withholdings are down how much?
6) NFIB (national federation of independent business) (index of small business) dropped from 89.1 in October to 88.3 in November. A 4 month low.
7) Redbook sales running at 1.2% yoy versus expected 2.1%. Redbook said "retailers described the week as a lull." New Gallup survey found the average spending per shopper is down 21% from a year ago.
8) New IBD/TIPP economic optimism x dropped to 46.8 in December from 47.9 in November. A five month low.
9) The JOLTS survey showed that job openings fell by 80k in October and new hires plunged 95k. (another data point that doesn't jive with the BLS)
10) Finally - NFIB job openings just hit a series low.
This one has to go in the stupid pile. Not only is Dubai in huge financial troubles for its ridiculous ideas on how to spend wealth, but one of the most audacious, the The Palm Jumeirah man made island is sinking.
From CNBC
One of the crown jewels of its real estate empire, The Palm Jumeirah, is literally sinking into the ocean, one scientist told the Wall Street Journal.
The man-made island, which was dredged from seabed and shaped into a palm for luxury housing, is sinking by an average of 5 millimeters a year, an executive at leading European ground survey company Fugro NPA told the paper.
One of the crown jewels of its real estate empire, The Palm Jumeirah, is literally sinking into the ocean, one scientist told the Wall Street Journal.
and
The man-made island, which was dredged from seabed and shaped into a palm for luxury housing, is sinking by an average of 5 millimeters a year, an executive at leading European ground survey company Fugro NPA told the paper.
News was bad bad bad today. But one bullish article caught my eye. I try to read all sides and it is hard to go against John Paulson.
From the Financial Times:
John Paulson, the hedge fund manager whose bearish positions in the mortgage market three years ago were among the most lucrative trades, has changed his views dramatically.
"Our net longs are the highest ever," Mr Paulson said in a speech in New York yesterday. "There are lots more long opportunities than short opportunities in the market. Zero interest rates are a huge tonic."
Personally I think his view is close to Buffett and it is more of a massive inflation view. The key to this is further down in the article.
"The amount of quantitative easing has stimulated financial markets and will start to appear in the real sector," he said.
Sounds like John Paulson has been hanging out with Jim Grant to much. I would agree that the only position that isn't defensible is a muddled economy. I think there are only two positions and that is either insanely bullish or insanely bearish. A muddled economy over another twelve to twenty four months will make the solvency issues that much more pronounced causing bigger and bigger imbalances. So far that I give Paulson kudos.
To the bad news of the day, there was alot of it.
1)Bad Treasury auction.
2)ABC Consumer Confidence dropped from -45 to -47. The reason this is interesting is this is the first confidence number measured since the BLS BS jobs numbers were released last week,
3) The one time 50% tax by Great Britain on bonuses over 40k. This could be replicated in the U.S. just like the shelling ban. If nothing else it will be very expensive for some US banks. A Goldman banker working in London will suddenly be faced with a much higher marginal tax rate that his associate in New York. If the IRS doesn't do something similar Goldman will have to make up the difference for their bankers in London or expect revolt.
4) Spain revised from stable to negative watch by S&P.
5) Census Bureau update today not pretty. State governments took in nearly $1.7 trillion in total revenues in fiscal year 2008, a 15.8 percent decrease from 2007, according to new data on state government finances released by the U.S. Census Bureau.
This matches the tax withholding information from a couple of days ago. And the S&P has gone up how much and the corporate withholdings are down how much?
6) NFIB (national federation of independent business) (index of small business) dropped from 89.1 in October to 88.3 in November. A 4 month low.
7) Redbook sales running at 1.2% yoy versus expected 2.1%. Redbook said "retailers described the week as a lull." New Gallup survey found the average spending per shopper is down 21% from a year ago.
8) New IBD/TIPP economic optimism x dropped to 46.8 in December from 47.9 in November. A five month low.
9) The JOLTS survey showed that job openings fell by 80k in October and new hires plunged 95k. (another data point that doesn't jive with the BLS)
10) Finally - NFIB job openings just hit a series low.
Tuesday, December 8, 2009
Japan With a Huge Miss
WOW!!! I thought the United States was bad in some of their reporting in economic data. Go to Bloombergs home page and the top story is a MASSIVE revision for Japanesse GDP growth estimation. How bad? Like almost wiped it out.
From Bloomberg:
Japan’s economy expanded less than initially estimated in the third quarter as companies cut spending in the wake of the country’s deepest postwar recession.
Gross domestic product rose at an annual 1.3 percent pace, slower than the 4.8 percent reported in preliminary figures last month, the Cabinet Office said today in Tokyo.
and
Investment by companies drove the downward revision in last quarter’s growth. Capital spending fell 2.8 percent in the three months through September from the previous quarter. That compares with the 1.6 percent increase reported last month.
Those are big revisions. Especially when you are talking about the debt load Japan is carrying.
From Bloomberg:
Japan’s economy expanded less than initially estimated in the third quarter as companies cut spending in the wake of the country’s deepest postwar recession.
Gross domestic product rose at an annual 1.3 percent pace, slower than the 4.8 percent reported in preliminary figures last month, the Cabinet Office said today in Tokyo.
and
Investment by companies drove the downward revision in last quarter’s growth. Capital spending fell 2.8 percent in the three months through September from the previous quarter. That compares with the 1.6 percent increase reported last month.
Those are big revisions. Especially when you are talking about the debt load Japan is carrying.
Default Candidates
The markets got hit today on world issues. Why today? I have no idea. The talk was about Greece and Dubai but those were issues yesterday. Why does the market care today? Greece was downgraded by S&P today but I don't understand why markets really care about a rating by some third party so much. I have mentioned Greece's problems several times. There well known. Why does the market all of a sudden care?
Anyway, the the Business Insider has an article on the top 10 countries likely to default. National sovereignty issues is being talked about more and more.
Who are the top 10?
From The Business Insider
10) Lebanon
9) California
8) Lithuania
7) Iceland
6) Emirate of Duabai
5) Latvia
4) Pakistan
3) Pakistan
2) Ukraine
1) Venezuela
I actually disagree some with this list. Greece, Spain, and maybe even Mexico should be included. Not to mention potentially Japan in the next three years. Either way this is starting to enter the mind of investors. Seemed obvious. Always amazed how long people are willing to ignore things.
As far as the market action. Yes it was down but we are still snugly in our trading range. Until we break 1080ish on the downside or 1013ish on the upside, there is not much going on. Just bouncing like a pinball. Financials continue to weaken though which may be a tell tell sign.
Thanks goes to Ron
Anyway, the the Business Insider has an article on the top 10 countries likely to default. National sovereignty issues is being talked about more and more.
Who are the top 10?
From The Business Insider
10) Lebanon
9) California
8) Lithuania
7) Iceland
6) Emirate of Duabai
5) Latvia
4) Pakistan
3) Pakistan
2) Ukraine
1) Venezuela
I actually disagree some with this list. Greece, Spain, and maybe even Mexico should be included. Not to mention potentially Japan in the next three years. Either way this is starting to enter the mind of investors. Seemed obvious. Always amazed how long people are willing to ignore things.
As far as the market action. Yes it was down but we are still snugly in our trading range. Until we break 1080ish on the downside or 1013ish on the upside, there is not much going on. Just bouncing like a pinball. Financials continue to weaken though which may be a tell tell sign.
Thanks goes to Ron
Monday, December 7, 2009
Stupid Things of the Day
Front page of Bloomberg had this story:
Hiring by U.S. discount, grocery, restaurant and specialty chains in November rose to the highest level in 2009, signaling that retailers may be anticipating a gradual recovery in consumer spending, a monthly survey found.
In November, 3.87 percent of applications resulted in hires, the most this year according to seasonally adjusted figures compiled by software maker Kronos Inc. Job applications last month fell to 1.27 million, the lowest since March, after 10 straight months of increases, the closely held Chelmsford, Massachusetts-based company said today in a statement.
And this is news. Temporary holiday season would help those numbers not to mention that number of applications went down. This is about as ridiculous as the jobs report on Friday.
The latest thing I have read that blows that report out of the water. From David Rosenburg.
It’s remarkable nobody talks about this. The big surprise in the payroll data was the service sector component; it rose 58k. But we know from the ADP report that service sector employment fell 81k, which was fractionally worse than the 79k decline in October. Such a discrepancy has occurred less than 3% of the time in the past, and each time, the following month after the big gap, there was a convergence ... with headline nonfarm payrolls swinging 100k lower on average, which would imply a 111k decline when December’s figure comes out.
Also take note that the +58k print in the service sector payroll was completely at odds with the 41.6 reading in the ISM non-manufacturing employment index in November — a figure that in the past was consistent with a -192k tally in service sector payrolls and never before aligned with a positive number. Go back to the 2001 recession, and the worst ISM non-manufacturing jobs subindex was 43.9 (right after 9/11) and here we published a figure that was more than two points shy of that!
There was some good things in the report and the report may get better as we hire 1.5 million people for a few months for the 2010 census. We really need one person for every 300 people?
Finallt this is just incredible. From the Financial Times.
HSBC estimates that 85 per cent of UK loans made in the past five years are in breach of lending agreements. But banks are ignoring such problems. Instead they are rolling over loans as these near maturity, in the hope that capital values and loan-to-value (LTV) ratios will rise once again to refinanceable levels.
Analysts fear banks are storing up losses, particularly for lesser quality property. CB Richard Ellis, a consultancy, estimates that there are about £80bn ($132bn, €88bn) of poor quality property loans in the UK alone, or 27 per cent of all the British sector’s debt. More than £30bn worth are in breach of debt agreements or in default, according to De Montfort University – a tally that has doubled in just six months.
If you sit there and think about tose numbers, they should just blow your mind. 85% of UK loans made in the past five years are in breach of some sort of lending agreement? WOW
Hiring by U.S. discount, grocery, restaurant and specialty chains in November rose to the highest level in 2009, signaling that retailers may be anticipating a gradual recovery in consumer spending, a monthly survey found.
In November, 3.87 percent of applications resulted in hires, the most this year according to seasonally adjusted figures compiled by software maker Kronos Inc. Job applications last month fell to 1.27 million, the lowest since March, after 10 straight months of increases, the closely held Chelmsford, Massachusetts-based company said today in a statement.
And this is news. Temporary holiday season would help those numbers not to mention that number of applications went down. This is about as ridiculous as the jobs report on Friday.
The latest thing I have read that blows that report out of the water. From David Rosenburg.
It’s remarkable nobody talks about this. The big surprise in the payroll data was the service sector component; it rose 58k. But we know from the ADP report that service sector employment fell 81k, which was fractionally worse than the 79k decline in October. Such a discrepancy has occurred less than 3% of the time in the past, and each time, the following month after the big gap, there was a convergence ... with headline nonfarm payrolls swinging 100k lower on average, which would imply a 111k decline when December’s figure comes out.
Also take note that the +58k print in the service sector payroll was completely at odds with the 41.6 reading in the ISM non-manufacturing employment index in November — a figure that in the past was consistent with a -192k tally in service sector payrolls and never before aligned with a positive number. Go back to the 2001 recession, and the worst ISM non-manufacturing jobs subindex was 43.9 (right after 9/11) and here we published a figure that was more than two points shy of that!
There was some good things in the report and the report may get better as we hire 1.5 million people for a few months for the 2010 census. We really need one person for every 300 people?
Finallt this is just incredible. From the Financial Times.
HSBC estimates that 85 per cent of UK loans made in the past five years are in breach of lending agreements. But banks are ignoring such problems. Instead they are rolling over loans as these near maturity, in the hope that capital values and loan-to-value (LTV) ratios will rise once again to refinanceable levels.
Analysts fear banks are storing up losses, particularly for lesser quality property. CB Richard Ellis, a consultancy, estimates that there are about £80bn ($132bn, €88bn) of poor quality property loans in the UK alone, or 27 per cent of all the British sector’s debt. More than £30bn worth are in breach of debt agreements or in default, according to De Montfort University – a tally that has doubled in just six months.
If you sit there and think about tose numbers, they should just blow your mind. 85% of UK loans made in the past five years are in breach of some sort of lending agreement? WOW
Friday, December 4, 2009
Jobs
No surprise, the jobs number came in better than expected. It is surprising just how good it was. Definitely not confirmed by the jobless claims data during the month of November, ISM data, or the ADP employment data.
Now the question becomes what will the market do? A good unemployment number I thought would be bearish. This is so good the outcome is unclear. Unfortunately, you probably won't really know until 9:00ish. If your trading trying to adjust exposure it will be really difficult. Dollar is moving higher and gold is moving lower.
Should be an interesting day.
Now the question becomes what will the market do? A good unemployment number I thought would be bearish. This is so good the outcome is unclear. Unfortunately, you probably won't really know until 9:00ish. If your trading trying to adjust exposure it will be really difficult. Dollar is moving higher and gold is moving lower.
Should be an interesting day.
Thursday, December 3, 2009
Jeremy Grantham Goes Back to the Dark Side
After making an unbelievable bullish call and riding the market from its March lows Jeremy Grantham has officially rejoined the bears (he really never left) and has joined the darkside. He gives 14 reasons why a Great Depression 2 is probable.
From marketwatch:
First: Kiss the rally good-bye, says Jeremy Grantham, legendary CEO of the $101 billion GMO money-management firm.
Why? The market is overvalued 25%. A minimum 15% correction is coming in 2010, putting the Dow in the 8,000-9,000 range. The S&P 500? Not at 666 like last spring; maybe 800. Why a top? Black Friday? Dubai? Tiger Woods? All the dark films? The "2012" end of civilization? The post-apocalyptic "The Road?" Stop guessing, timing market turns is irrational.
Grantham's shift from bull to bear appears rational.
and
Now Grantham's warning us again: America's irrational nightmare will repeat. First, the short-term correction, 15% to 25%. But then long-term, a deadly warning: Disaster ahead. Why? Because America has "learned nothing," we are "condemning ourselves to another serious financial crisis in the not too-distant future."
The article goes on to mention 14 points that Jeremy brings up. Of course of the all the critics of Greenspan and Bernanke Grantham is one of the loudest.
From marketwatch:
First: Kiss the rally good-bye, says Jeremy Grantham, legendary CEO of the $101 billion GMO money-management firm.
Why? The market is overvalued 25%. A minimum 15% correction is coming in 2010, putting the Dow in the 8,000-9,000 range. The S&P 500? Not at 666 like last spring; maybe 800. Why a top? Black Friday? Dubai? Tiger Woods? All the dark films? The "2012" end of civilization? The post-apocalyptic "The Road?" Stop guessing, timing market turns is irrational.
Grantham's shift from bull to bear appears rational.
and
Now Grantham's warning us again: America's irrational nightmare will repeat. First, the short-term correction, 15% to 25%. But then long-term, a deadly warning: Disaster ahead. Why? Because America has "learned nothing," we are "condemning ourselves to another serious financial crisis in the not too-distant future."
The article goes on to mention 14 points that Jeremy brings up. Of course of the all the critics of Greenspan and Bernanke Grantham is one of the loudest.
Another Failed Attempt
Another failed attempt at the 1110 to 1113 range. I don't know how many times the market can make a run at it, fail, and gear up for another run. Cannot be considered bullish.
The jobs number is very interesting tomorrow. If your a bull you have to be nervous. Most are expecting a surprise to the upside because of seasonal factors. If you get this good jobs number I am not sure the market goes up. It could be sell the news or it could be sell the fact that the economy may be stabilizing so the government may slow on pumping liquidity. The inverse is if the number is bad. That may not be good for the stock market either.
Dangerous day for bulls tomorrow.
The jobs number is very interesting tomorrow. If your a bull you have to be nervous. Most are expecting a surprise to the upside because of seasonal factors. If you get this good jobs number I am not sure the market goes up. It could be sell the news or it could be sell the fact that the economy may be stabilizing so the government may slow on pumping liquidity. The inverse is if the number is bad. That may not be good for the stock market either.
Dangerous day for bulls tomorrow.
Tuesday, December 1, 2009
Hussman Hits It Out of The Park
Hussman in his weekly column hit it out of the park. He said almost perfectly what has been bottled up in frustration inside me for months. Is he right on 2010? I don't know. It mimicks my thoughts very well. In the interim, us bears continue to watch the market that never stops moving up with very little conviction whatsoever. How people can buy is beyond me but I have been on the wrong side of the trade so what do I know?
The entire piece is a must read. Thanks goes to Cason and Terry.
Hussman:
We face two possible states of the world. One is a world in which our economic problems are largely solved, profits are on the mend, and things will soon be back to normal, except for a lot of unemployed people whose fate is, let's face it, of no concern to Wall Street. The other is a world that has enjoyed a brief intermission prior to a terrific second act in which an even larger share of credit losses will be taken, and in which the range of policy choices will be more restricted because we've already issued more government liabilities than a banana republic, and will steeply debase our currency if we do it again. It is not at all clear that the recent data have removed any uncertainty as to which world we are in.
and
Frankly, I've come to believe that the markets are no longer reliable or sound discounting mechanisms. The repeated cycle of bubbles and predictable crashes over the recent decade makes that clear. Rather, investors appear to respond to emerging risks no more than about three months ahead of time. Worse, far too many analysts and strategists appear to discount the future only in the most pedestrian way, by taking year-ahead earnings estimates at face value, and mindlessly applying some arbitrary and historically inconsistent multiple to them.
I couldn't agree more. There has been a disconect.
In my estimation, there is still close to an 80% probability (Bayes' Rule) that a second market plunge and economic downturn will unfold during the coming year. This is not certainty, but the evidence that we've observed in the equity market, labor market, and credit markets to-date is simply much more consistent with the recent advance being a component of a more drawn-out and painful deleveraging cycle. Meanwhile, valuations are clearly unfavorable here, and even under the “typical post-war recovery” scenario, we are observing an increasing number of internal divergences and non-confirmations in market action.
I have been seeing these divergences also. They screamed out last week and yesterday. Market ignored them today and instead cheered a horrble ISM number.
Andrew Smithers, one of the few other analysts who foresaw the credit implosion and remains a credible voice now, concurred last week in an interview with my friend Kate Welling (a former Barrons' editor now at Weeden & Company): “The good news so far is that the stock market got down to pretty much fair value or even, possibly, a tickle below it, at its March bottom. But now it has gone up… we probably have a market which is, roughly, 40% overpriced. In order to assess value, it is necessary either to calculate the level at which the EPS would be if profits were neither depressed nor elevated, or to use a metric of value which does not depend on profits. The cyclically adjusted P/E (CAPE) normalizes EPS by averaging them over 10 years. It thus follows the first of those two possible methods. Using even longer time periods has advantages, particularly as EPS have been exceptionally volatile in recent years - and using longer time periods raises the current measured degree of overvaluation. The other methodology we use measures stock market value without reference to profits: the q ratio. It compares the market capitalization of companies with their net worth, also adjusted to current prices. The validity of both of these approaches can be tested and is robust under testing - and they produce results that agree. Currently, both q and CAPE are saying that the U.S. stock market is about 40% overvalued.”
This is what is so frustrating for investors like myself. It is assumed that we missed the buyng opportunity of a lifetime and maybe we did but the market was never that cheap on the March lows. It was maybe a little cheap but compared to the mess we are in how could one go all in on a little cheap? There is a chart following this paragraph that speaks volumes.
What matters is sustainability, and unfortunately, it is clear that credit continues to collapse. Banks are contracting their loan portfolios at a record rate, according to the latest FDIC Quarterly Banking Profile. Even so, new delinquencies continue to accelerate faster than loan loss reserves. Tier 1 capital looked quite good last quarter, as one would expect from the combination of a large new issuance of bank securities, combined with an easing of accounting rules to allow “substantial discretion” with respect to credit losses. The list of problem institutions is still rising exponentially. Overall, earnings and capital ratios have enjoyed a reprieve in the past couple of quarters, but delinquencies have not, and all evidence points to an acceleration as we move into 2010.
It has been a statistical recovery at every level. Not an intrinsic recovery.
From a policy standpoint, it is effectively too late to forestall further foreclosures absent explicit losses to creditors. The best policy option now is to make sure that the second wave does not result in a debasement of the U.S. dollar.
I think he is dreaming here.
Emphatically, the trillions of dollars spent over the past year were not in the interest of protecting bank depositors or the general public. They went to protect bank bondholders. Instead of taking appropriate losses on those bonds (which financed reckless mortgage lending), those bonds are happily priced near their face value, for the benefit of private individuals, thanks to an equivalent issuance of U.S. Treasury debt. But that's not enough. Outside of a very narrow set of institutions that are subject to compensation limits, just watch how much of the public's money – which benefitted several major investment banks following a very direct route – gets allocated to Wall Street bonuses in the next few weeks.
It has been a taxpayer rapeathon. Strong nasty word that really does not capture what truly happened and what we will all pay for.
The entire piece is a must read. Thanks goes to Cason and Terry.
Hussman:
We face two possible states of the world. One is a world in which our economic problems are largely solved, profits are on the mend, and things will soon be back to normal, except for a lot of unemployed people whose fate is, let's face it, of no concern to Wall Street. The other is a world that has enjoyed a brief intermission prior to a terrific second act in which an even larger share of credit losses will be taken, and in which the range of policy choices will be more restricted because we've already issued more government liabilities than a banana republic, and will steeply debase our currency if we do it again. It is not at all clear that the recent data have removed any uncertainty as to which world we are in.
and
Frankly, I've come to believe that the markets are no longer reliable or sound discounting mechanisms. The repeated cycle of bubbles and predictable crashes over the recent decade makes that clear. Rather, investors appear to respond to emerging risks no more than about three months ahead of time. Worse, far too many analysts and strategists appear to discount the future only in the most pedestrian way, by taking year-ahead earnings estimates at face value, and mindlessly applying some arbitrary and historically inconsistent multiple to them.
I couldn't agree more. There has been a disconect.
In my estimation, there is still close to an 80% probability (Bayes' Rule) that a second market plunge and economic downturn will unfold during the coming year. This is not certainty, but the evidence that we've observed in the equity market, labor market, and credit markets to-date is simply much more consistent with the recent advance being a component of a more drawn-out and painful deleveraging cycle. Meanwhile, valuations are clearly unfavorable here, and even under the “typical post-war recovery” scenario, we are observing an increasing number of internal divergences and non-confirmations in market action.
I have been seeing these divergences also. They screamed out last week and yesterday. Market ignored them today and instead cheered a horrble ISM number.
Andrew Smithers, one of the few other analysts who foresaw the credit implosion and remains a credible voice now, concurred last week in an interview with my friend Kate Welling (a former Barrons' editor now at Weeden & Company): “The good news so far is that the stock market got down to pretty much fair value or even, possibly, a tickle below it, at its March bottom. But now it has gone up… we probably have a market which is, roughly, 40% overpriced. In order to assess value, it is necessary either to calculate the level at which the EPS would be if profits were neither depressed nor elevated, or to use a metric of value which does not depend on profits. The cyclically adjusted P/E (CAPE) normalizes EPS by averaging them over 10 years. It thus follows the first of those two possible methods. Using even longer time periods has advantages, particularly as EPS have been exceptionally volatile in recent years - and using longer time periods raises the current measured degree of overvaluation. The other methodology we use measures stock market value without reference to profits: the q ratio. It compares the market capitalization of companies with their net worth, also adjusted to current prices. The validity of both of these approaches can be tested and is robust under testing - and they produce results that agree. Currently, both q and CAPE are saying that the U.S. stock market is about 40% overvalued.”
This is what is so frustrating for investors like myself. It is assumed that we missed the buyng opportunity of a lifetime and maybe we did but the market was never that cheap on the March lows. It was maybe a little cheap but compared to the mess we are in how could one go all in on a little cheap? There is a chart following this paragraph that speaks volumes.
What matters is sustainability, and unfortunately, it is clear that credit continues to collapse. Banks are contracting their loan portfolios at a record rate, according to the latest FDIC Quarterly Banking Profile. Even so, new delinquencies continue to accelerate faster than loan loss reserves. Tier 1 capital looked quite good last quarter, as one would expect from the combination of a large new issuance of bank securities, combined with an easing of accounting rules to allow “substantial discretion” with respect to credit losses. The list of problem institutions is still rising exponentially. Overall, earnings and capital ratios have enjoyed a reprieve in the past couple of quarters, but delinquencies have not, and all evidence points to an acceleration as we move into 2010.
It has been a statistical recovery at every level. Not an intrinsic recovery.
From a policy standpoint, it is effectively too late to forestall further foreclosures absent explicit losses to creditors. The best policy option now is to make sure that the second wave does not result in a debasement of the U.S. dollar.
I think he is dreaming here.
Emphatically, the trillions of dollars spent over the past year were not in the interest of protecting bank depositors or the general public. They went to protect bank bondholders. Instead of taking appropriate losses on those bonds (which financed reckless mortgage lending), those bonds are happily priced near their face value, for the benefit of private individuals, thanks to an equivalent issuance of U.S. Treasury debt. But that's not enough. Outside of a very narrow set of institutions that are subject to compensation limits, just watch how much of the public's money – which benefitted several major investment banks following a very direct route – gets allocated to Wall Street bonuses in the next few weeks.
It has been a taxpayer rapeathon. Strong nasty word that really does not capture what truly happened and what we will all pay for.
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