Investing legend, Jim Rogers, says that he is not buying any stocks in China right now nor is he selling any, but says he will buy more Chinese stocks when they collapse. Stocks have doubled in 9 months. Instead, he says the best way to invest in China is via commodities.
No matter what, the Chinese will pay all their bills because they absolutely need to buy all the commodities they don’t produce themselves. Cotton, Nickel, iron ore, steel, and Agricultural Commodities are among their biggest requirements.
Click to view this July 27, 2009 interview with Bloomberg.
Jim Rogers was interviewed by the Globe and Mail on July 30, 2009 and re-iterated his convictions about commodities:
So you see commodities, even after a 10-year bull run, as still offering the best investment opportunities? Isn’t that dependent on a global economic recovery?
If the world economy is going to get better, commodities will lead the way, because of the shortages. I cannot imagine a better place to be. When you come off periods like this, you want to be in the things where the fundamentals are getting better – those are the ones that always lead the next bull market.
If the economy is not going to improve, commodities are still the best place to be … because governments are printing huge amounts of money all over the world.
Throughout history, when people have printed lots of money, it has always led to higher prices. Throughout history, when governments printed, the money has to go somewhere. Historically, it has always gone into real assets, as people try to protect themselves. … It’s not going to go into people buying new cars, it’s going to go into wheat and silver and oil first. It may go into new cars eventually, but it’s going to go into real stuff first – at least it always has. I’d rather own commodities than just about anything I can think of in a period when the whole world is debasing paper money.
Source: Bloomberg, Youtube | Globe and Mail, July 30, 2009
This post is a guest contribution by MarketFolly.com. MarketFolly.com compiles an excellent compendium of the profiles and activities, and tracking the SEC filings of the most prominent hedge funds, shedding light on the activities of some of this era’s most successful investors.
This is the latest edition in a new series of posts we’re doing here at Market Folly entitled, ‘hedge fund news summaries.’ And, as as the title obviously states, the goal is to give you the quick hits of everything that is happening in hedge fund land. So far, reader response has been very positive and we thank you for the feedback. As such, we will continue posting them since many have found them useful. You can check out our most recent hedge fund news summary to catch up to speed as well.
Seth Klarman (Baupost Group) – The value master himself has recently been “up to no good.” And, by that, we simply mean he has been active making investments. Intriguingly enough, Klarman’s latest target has been CIT Group (CIT). Before you avid Klarman-ites become appalled and outraged at this move, settle down… this is a pretty good deal for him. (Obviously, right? Why else would he do it?) Klarman’s hedge fund Baupost Group was part of the assembly of funds that provided financing for CIT. Baupost joined Centerbridge Partners, Oaktree Capital Management, Pacific Investment Management, and Silver Point Capital, among others. The reason this deal was so enticing to Klarman and others is that the deal was heavily over-collateralized. Supposedly, the loan is backed by $30 billion worth of assets. Additionally, Klarman and the others will be receiving an enticing interest rate of Libor + 10 points with a 3% floor. Later, it was also revealed that this group of lenders also received an upfront 5% fee. So, what’s not to love about that deal? CIT was desparate for help, and they got it. We ponder if this is another situation where a prominent investor gives his ‘stamp of approval’ to a company in return for a great return on capital. While we think this specific situation is more-so due to CIT’s dire situation, we’re sure they don’t mind being associated with Klarman & Baupost. In other recent Baupost news, we saw that they sold completely out of their Omnova (OMN) position. You can check out the rest of Baupost’s portfolio here.
Pav Sethi (Gladius Investment Group) – Pav formerly worked as the head of volatility arbitrage at Citadel Investment Group and will be starting his own firm Gladius. With Pav also goes Rajesh Kedia and Bertrand Divet as Citadel loses a few more team members. They will be focused on what they excelled in at Citadel: volatility.
Paul Tudor Jones (Tudor Investment Corp) – Back in 1987 a documentary was filmed on Paul Tudor Jones and his hedge fund entitled ‘Trader: The Documentary.’ This film has become scarce and almost a form of trader contraband as Jones reportedly bought almost all available copies in the 1990′s since he didn’t want the flick floating around anymore. But, as with all great information, this video wanted to be set free. As such, the film was recently leaked onto the web and we posted it up yesterday. So, if you missed it, you can watch and/or download the video here.
5:15 Capital – In our last hedge fund update we mentioned the formation of a new hedge fund by some Brevan Howard alums. Named after a song from ‘The Who’, 5:15 has recently gotten an injection of $50 million from Man Group, one of the largest hedge fund managers on the globe. As part of the setup, Man Group will take a portion of 5:15′s revenue. The Man Group sees 5:15 stepping into a nice niche in terms of hedge fund strategies, as the crisis has left the field relatively empty in their type of arbitrage.
Warren Buffett (Berkshire Hathaway) – We aren’t limiting our hedge fund updates to just hedge funds, as we’re now also covering gurus and market strategists. Obviously, Buffett falls into this category. Buffett recently filed a 13D on Moody’s (MCO) that disclosed he had sold 7,986,300 shares of the company ranging in prices from $26.59-$28.73. Despite the sales, Buffett still owns well over 40 million shares of the company. But, this filing is interesting to note because Buffett had previously championed the ratings agencies in public as solid investments. Has he had a change of heart? We’ll continue to monitor the filings to see if he sells even more. Our immediate reaction was to wonder if he had been chatting with fellow value player David Einhorn of hedge fund Greenlight Capital. Einhorn recently presented the case for shorting Moody’s at the Ira Sohn investment conference. It’s always interesting to see a difference of opinion among smart minds, so that’s why Buffett’s selling becomes all the more curious. For further interesting reading, you can view Berkshire Hathaway’s Annual Report here and investment ideas from hedge fund managers at the Ira Sohn conference here.
John Burbank (Passport Capital) – We just covered Passport’s recent investor letter and saw some interesting developments in their portfolio. Most notably, we found out that they had been playing with interest rate bets including a curve steepener. Additionally, they have started to bet on the Japanese Yield Spread via 5-year CMS caps (calls), anticipating a rise in 10-year rates. Passport also likes Healthcare stocks as they are at the highest allocation in the fund’s history. To read about the latest from Passport Capital, check out their latest investor letter update.
Jim Rogers (ex-Quantum Fund) – The market guru himself has been out and about in the media talking about his usual theses and positions. So, we don’t really have a whole lot of new information to report in this regard. We just want to point out that (yet again) Rogers is very bullish on commodities.
Fortress Investment Group – The massive $27 billion hedge fund Fortress Investment Group is on the prowl for potential investments. However, they’re not looking for market investments in the typical sense. Instead, they’re looking to acquire other hedge funds and financial firms. Daniel Mudd, Fortress’ new CEO, has said they will try to acquire money managers, banks, insurers, hedge funds, and the like. The industry in general has definitely seen a contraction as the weak fall by the wayside during the crisis. Since there have been many opportunities in the markets throughout the course of the crisis, it will be interesting to see if Fortress finds any ‘deals’ in the hedge fund landscape.
Andreas Halvorsen (Viking Global) – A few days ago we also covered Viking Global’s latest investor letter. In the letter, we found out that they had lagged the market in the 2nd quarter of 2009 due to their short positions. More interestingly though, was the fact that they added a ton of new positions over the past quarter, 68 in all. They warned that all the new additions were not a bet on rising markets, but rather a result of their fundamental, bottom-up analysis. Their top 10 long positions as of the end of June were Invesco, Mastercard, Visa, Unilever, DirecTV, Google, JPMorgan Chase, Walt Disney, Bank of America, and Qualcomm. To find out what Viking Global has been up to, check out their portfolio update.
The Fine Violins Fund – No, we are not joking. Florian Leonhard is trying to raise capital for a Fine Violins Fund. Leonhard is a well-known violin restorer from London and has so far raised 16 million euros for the fund. He hopes to raise 60 million euros in total and seeks to invest in pre-19th century violins, primarily from Italy. Leonhard is targeting a portfolio of 50 violins and he will loan the violins out at no charge to musicians. In the past, we’ve touched on other obscure investment funds, such as a fund that invests in wine, a few funds that are investing in lawsuits, and another fund that invests in guitars. The musical instrument theme seems to be picking up steam and we’ll have to see if a Trombone fund pops up next. Let us know if there are any other interesting funds out there that we might be missing out on. These types of funds are the definition of the term ‘alternative asset class’.
David Rosenberg (Gluskin Sheff & Associates) – In our last article on Rosenberg, we noted his fondness for corporate bonds and his thoughts that the stock market in general already had a bunch of good news priced in. Rosenberg has been re-iterating his call on corporate bonds, this time saying that “they are still pricing in a very bad economic and financial market scenario. Moreover, the yield spread is still wider than at any point during the 2001 or 1990 recessions of the 1998 LTCM/Russian debt default freeze-up. In fact, history suggests that the corporate default rate would have to rise well above 7% for corporate bonds to deliver negative returns with yields as high as they are at around 7.25%.” Additionally, in media appearances over the past month or so, we wanted to point out that Rosenberg indeed sees inflation as a threat. However, he says that threat is many years away. He also thinks we easily go through past unemployment levels of 10.8% and that from March to May, the stock market has essentially seen a 40% ‘dead cat bounce’.
Hugh Hendry (Eclectica Fund) – Hugh is focused on the deflation versus inflation debate lately and he notes that he has never seen such a ‘crowded trade’ with people so confident that inflation is in our future. He favors bonds over equities and he thinks that deflation is the bigger risk here. Hugh says that, “It’s almost as if we have this flood, but people are buying fire insurance.” He is actually in favor of government bonds and notes that this is due to his contrarian nature. He is not too focused on the equity markets currently but says he will ‘prod them’ around August or September to see what is really going on there. We’ve covered Hugh’s thoughts on the blog in the past and you can view his past investor letter here.
Michael Steinhardt (WisdomTree Investments, ex-Steinhardt Partners) – Hedge fund legend Michael Steinhardt sat down and talked with Bloomberg back in early June. While this is obviously not as recent as some of the other developments we’ve pointed out, we are highlighting it due to the excellent content in the interview. He talks about returns in equity markets going forward, the current stock market, the role of hedge funds, and what people should be investing in these days. We highly recommend watching the interview and you can view the video embedded below. (RSS & Email readers will need to come to the blog to view the video). In the past, we’ve also covered Michael Steinhardt’s view on treasuries, as he says they are foolish.
Thanks for checking out our updates and stay tuned for more daily coverage of hedge fund land. In the mean time, make sure to also check out our recommended reading lists and our hedge fund portfolio tracking series.
Initial Jobless Claims were 9k more than expected. But Continuing Claims were 103k less than expected. As we have regularly noted, Street spinmeisters ignore Continuing Claims when they are worse than expected but herald the rebound in the job market when they are better than expected.
We noted almost two months ago that Continuing Claims were set to decline appreciably but it would NOT be a sign of a jobs rebound. It would be Americans exhausting their unemployment benefits.
Over the past month numerous pundits and the media have reported on the increasing number of people that have exhausted benefits or were about to exhaust their unemployment benefits.
Bloomberg: The unemployment rate among people eligible for benefits, which tends to track the jobless rate, held at 4.7 percent in the week ended July 18. [This suggests the Continuing Claims decline is due to benefits exhaustion.]
The ‘Exhaustion Rate’ [of unemployment benefits] jumped to 49.77 in June, up .60 from May. This suggests that about 400k people (Continuing Claims) exhausted their unemployment benefits in June.
And we can reason that x-hundred thousand people exhausted their benefits as July progressed. This would account for virtually the entire decline from the Continuing Claims peak of 6.9m – regardless of seasonal adjusting chicanery.
Is this a reason to rally? Of course not!
So why the big rally on Thursday? We addressed this a few days ago when we opined that July performance gaming should commence late on Wednesday. And we regularly note that performance gaming is most intense on the penultimate day of the marking period, which was yesterday.
We also remarked that anxiety over Friday’s GDP report would induce traders to insure that markets received maximum gaming on Thursday.
It was amusing to watch the financial media, especially the TV networks, try to explain Thursday’s rally on fundamentals. Some tried to attribute the rally to Motorola’s smaller than expected loss!
Please make some notation on your calendars that highlights expiration week and the penultimate day of the month. These are the periods of maximum upward manipulations of stocks.
PS – Trading sources said Goldman bought 1000 SPUs after the open yesterday.
This article courtesy of Validea’s GuruInvestor Blog:
The Financial Times recently interviewed several top strategists about the viability of “buy-and-hold” investing, and found that some are espousing more of a “buy-cheap-and-hold” approach.
Robert Arnott, founder of Research Affiliates: “Basically, we have an industry which has developed a cult of equities — a notion that if you buy stocks you will win, if you’re patient,” he says. “The reality is something very different, and that is that stocks do win over the very long run… but they win over spans measured in generations, not measured in years. And they win in fits and starts.”
Arnott says the only reliable route to long-term success is to buy shares that are cheap — not simply buy and index fund, the Times says.
That makes for something of a contrarian outlook: “It matters tremendously what you pay for an asset,” he said. “If you buy an asset when it’s cheap, you’ll likely to be pleased very soon. If you buy it when it’s expensive and popular and trendy and everyone loves it, you’re likely to have to wait a long time. The best way to invest is to do a contra trade against what has done best and is most popular, and into what is done worst and is most loathed. And it’s very hard to do.”
Paul Marsh, London Business School: Marsh thinks the equity risk premium is alive and well. “[Equities] are more rewarding in an expectational sense,” he said. “In other words, you are going to expect to get a higher return from equities. Probably, in our view, something like 3-3.5 per cent per annum more, but the reason you’re going to get that is because of risk.”
James Montier, GMO: He agrees with Arnott’s point about value, but says that investors need to be careful when assessing what “cheap” means. “One of the hallmarks of what we have seen in the last few years has been rather simplistic approaches to value — price/earnings ratios, price to book value,” he said. “We need to reconsider the role of balance sheets. Trying to think about value without the context of the balance sheet side of the equation, to my mind, is pretty meaningless.”
Right now, Montier said the market is attractive from a valuation perspective. “If you could buy a set of stocks today and bury them for five years, you would be laughing!” he said. “From my perspective, it is very simple — you buy when the market is cheap and the UK and European markets fall into that definition right now.”
According to the Economist.com, world trade, which collapsed last year, is not yet showing signs of recovery. Global stimulus efforts have only succeeded at steadying the value of trade. It is too early to tell where trade growth will come from:
Consumption has yet to recover:
But for a sustainable recovery in trade, global demand has to recover on its own steam. It is not clear where demand might come from. American consumers have lost much of their astonishing appetite for goods ranging from clothes to iPods to computers. American households are now saving 5% of their incomes, up from essentially nothing a year ago. Unemployment in America and elsewhere will continue to rise. The International Labour Organisation estimates that the global jobless tally will increase by between 21m and 50m this year.
More people out of work will mean a further fall in global demand. China’s boom (GDP grew by 7.9% in the second quarter) is fuelled by government investment and by the stimulus, not a rise in private consumption. Nor are other consumers stepping in. Without a move towards more private consumption in countries such as Germany and China, the world is in for a prolonged period of slow growth and correspondingly sluggish trade.
July 28, 2009 — This is perhaps the most important thing I learned over my years working on Wall Street, including as a managing director at Goldman Sachs: Numbers lie. In a normal time, the fact that the numbers generated by the nation’s biggest banks can’t be trusted might not matter very much to the rest of us. But since the record bank profits we’re now hearing about are essentially created by massive federal funding, perhaps it behooves us to dig beneath their data. On July 27, 10 congressmen, led by Rep. Alan Grayson (D-Fla.), did just that, writing a letter to Federal Reserve Chairman Ben Bernanke questioning the Fed’s role in Goldman’s rapid return to the top of Wall Street.
To understand this particular giveaway, look back to September 21, 2008. It was a frenzied night for Goldman Sachs and the only other remaining major investment bank, Morgan Stanley. Their three main competitors were gone. Bear Stearns had been taken over by JPMorgan Chase in March, 2008, Lehman Brothers had just declared bankruptcy due to lack of capital, and Bank of America had been pushed to acquire Merrill Lynch because the firm didn’t have enough cash to survive on its own. Anxious to avoid a similar fate, hat in hand, they came to the Fed for access to desperately needed capital. All they had to do was become bank holding companies to get it. So, without so much as clearing the standard five-day antitrust waiting period for such a change, the Fed granted their wish.
Bank holding companies (which all the biggest financial firms now are) come under the regulatory purview of the Fed, the Office of the Comptroller of the Currency, and the FDIC. The capital they keep in reserve in case of emergency (like, say, toxic assets hemorrhaging on their books, or credit derivatives trades not being paid) is supposed to be greater than investment banks’. That’s the trade-off. You get access to federal assistance, you pony up more capital, and you take less risk.
Goldman didn’t like the last part. It makes most of its money speculating, or trading. So it asked the Fed to be exempt from what’s called the Market Risk Rules that bank holding companies adhere to when computing their risk.
Keep in mind that by virtue of becoming a bank holding company, Goldman received a total of $63.6 billion in federal subsidies (that we know about—probably more if the Fed were ever forced to disclose its $7.6 trillion of borrower details). There was the $10 billion it got from TARP (which it repaid), the $12.9 billion it grabbed from AIG’s spoils—even though Goldman had stated beforehand that it was protected from losses incurred by AIG’s free fall, and if that were the case, would not have needed that money, let alone deserved it. Then, there’s the $29.7 billion it’s used so far out of the $35 billion it has available, backed by the FDIC’s Temporary Liquidity Guarantee Program, and finally, there’s the $11 billion available under the Fed’s Commercial Paper Funding Facility.
Tactically, after bagging this bounty, Goldman asked the Fed, its new regulator, if it could use its old risk model to determine capital reserves. It wanted to use the model that its old investment bank regulator, the SEC, was fine with, called VaR, or value at risk. VaR pretty much allows banks to plug in their own parameters, and based on these, calculate how much risk they have, and thus how much capital they need to hold against it. VaR was the same lax SEC-approved risk model that investment banks such as Bear Stearns and Lehman Brothers used, with the aforementioned results.
On February 5, 2009, the Fed granted Goldman’s request. This meant that not only was Goldman getting big federal subsidies, but also that it could keep betting big without saving aside as much capital as the other banks. Using VaR gave Goldman more leeway to, well, accentuate the positive. Yes, Goldman is a more risk-prone firm now than it was before it got to play with our money.
Which brings us back to these recent quarterly earnings. Goldman posted record profits of $3.4 billion on revenues of $13.76 billion. More than 78 precent of those revenues came from its most risky division, the one that requires the most capital to operate, Trading and Principal Investments. Of those, the Fixed Income, Currency and Commodities (FICC) area within that division brought in a record $6.8 billion in revenues. That’s the division, by the way, that I worked in and that Lloyd Blankfein managed on his way up the Goldman totem pole. (It’s also the division that would stand to gain the most if Waxman’s cap-and-trade bill passes.)
Since Goldman is trading big with our money, why not also use it to pay big bonuses? It’s not like there are any strings attached. For the first half of 2009, Goldman set aside $11.4 billion for compensation—34 percent more than for the first half of 2008, keeping them on target for a record bonus year—even though they still owe the federal government $53.6 billion, a sum more than four times that bonus amount.
But capital is still key. Capital is the lifeblood that pumps through a financial organization. You can’t trade without it. As of June 26, 2009, Goldman’s total capital was $254 billion, but that included $191 billion in unsecured long-term borrowing (meaning money it had borrowed without putting up any collateral for it). On November 28, 2008 (4Q 2008), it had only $168 billion in unsecured long-term borrowing. Thus, its long-term unsecured debt jumped 14 percent. Though Goldman doesn’t disclose exactly where all this debt comes from, given the $23 billion jump, we can only wonder whether some of it has come from government subsidies or the Fed’s secret facilities.
Not only that, by virtue of how it’s set up, most of Goldman’s unsecured funding comes in through its parent company, Group Inc. (Think the top point of an umbrella with each spoke being a subsidiary.) This parent parcels that money out to Goldman’s subsidiaries, some of which are regulated, some of which aren’t. This means that even though Goldman is supposed to be regulated by the Fed and other agencies, it has unregulated elements receiving unsecured funding—just like before the crisis, but with more of our money involved.
As for JPMorgan Chase, its profit of $2.7 billion was up 36 percent for the second quarter of 2009 vs. the same quarter last year, but a lot of that also came from trading revenues, meaning its speculative endeavors are driving its profits. Over on the consumer side, the firm had to set aside nearly $30 billion in reserve for credit-related losses. Riding on its trading laurels, when its consumer business is still in deterioration mode, is not a recipe for stability, no matter how much cheering JPMorgan Chase’s results got from Wall Street. Betting is betting.
Let’s pause for some reflection: The bank “stars” made most of their money on speculation, got nearly $124 billion in government guarantees and subsidies between them over the past year and a half, yet saw continued losses in the credit products most affected by consumer credit problems. Both are setting aside top-dollar bonuses. JPMorgan Chase CEO Jamie Dimon mentioned that he’s concerned about attracting talent, a translation for wanting to pay investment bankers big bucks—because, after all, they suffered so terribly last year, and he needs to stay competitive with his friends at Goldman. This doesn’t add up to a really healthy scenario. It’s more like bad déjà vu.
As a recent New York Times article (and many other publications in different words) said, “For the most part, the worst of the financial crisis seems to be over.” Sure, the crisis may appear to be over because the major banks of Wall Street are speculating well with government subsidies. But that’s a dangerous conclusion. It doesn’t mean that finance firms could thrive without the artificial, public-funded assistance. And it certainly doesn’t mean that consumers are any better off than they were before the crisis emerged. It’s just that they didn’t get the same generous subsidies.
In an FT.com editorial, “I’ve been an optimist on China. But I’m starting to worry,” Stephen Roach, Chairman, Morgan Stanley Asia, opines that he is starting to worry about China, and its bank-led financing stimulus, and wonders if China has not learned from this era’s mistakes:
On the surface, China appears to be leading the world from recession to recovery. After coming to a virtual standstill in late 2008, at least as measured quarter-to-quarter, economic growth accelerated sharply in spring 2009.
A back-of-the envelope calculation suggests China may have accounted for as much as 2 percentage points of annualised growth in inflation-adjusted world output in the second quarter of 2009. With contractions moderating elsewhere, China’s rebound may have been enough in and of itself to allow global gross domestic product to eke out a small positive gain for the first time since last summer.
That’s the good news. The bad news is that China’s recent growth spurt comes at a steep price. Fearful that its recent economic short- fall would deepen, Chinese policymakers have opted for quantity over quality in setting macro-strategy, the centrepiece of which is an enormous surge in infrastructure spending funded by a burst of bank lending.
Are we done with this recession? I missed this discussion of a few days ago, featuring an economist, Nouriel Roubini of New York University, an historian, Niall Fergusson of Harvard, and a billionaire, real estate investor Mort Zuckerman, debating what is to come. Rather late than never, as the clip makes for good viewing material.
Ever since Richard Russell (Dow Theory Letters) called a “Dow Theory bull signal” last Thursday, the debate has been rekindled as to whether the US stock markets are experiencing a primary (secular) bull market or a rally within a primary bear market, i.e. a secondary or so-called cyclical bull phase.
As mentioned previously, Russell views the March 9 low as a secondary low, saying: “We are now in a cyclical bull market as opposed to a secular or primary bull market. In effect, we’re in an extended bear market rally. The true bear market bottom lies somewhere ahead.”
Irrespective of terminology, 64% of the readers of the Investment Postcards blog see the current phase as one characterized by “irrational exuberance”, as cleaned from a quick poll a few days ago.
As always, there are various signals pointing in different directions. The 200-day moving average of the S&P 500 Index just three days ago turned up for the first time since January 2008, after having been breached upwards by the Index in early June. The 200-day line is generally seen as a key indicator distinguishing between a primary bull and market.
Also, when considering monthly data, three momentum-type oscillators (RSI, MACD and ROC) are reversing course for the first time since the sell signals of 2007 and now either indicate buy signals (or are getting close to a signal in the case of MACD).
Amid the uncertainty, the highly rated Ned Davis (Ned Davis Research) has just completed a research project in which he identified seven dimensions one could use to compare the March 9 low with secular lows of the past. His findings, as reported by Mark Hulbert on MarketWatch (hat tip: The Big Picture), were as follows.
(1) “Monetarily, money should be cheap and amply available”: Neutral. You might think that this factor should be rated as “bullish”, given how accommodative the Federal Reserve is currently. But Davis notes that banks are also significantly tightening their lending standards. Given the heavy debt load of both consumers and corporations suffer (see next criterion), banks are finding it “increasingly hard to find ‘credit-worthy’ borrowers”.
(2) “Economically, the debt structure should be deflated”. Bearish. This is the most negative of any of Davis’ seven dimensions, since the debt structure is by no means deflated. On the contrary, Davis calculates that the total credit-market debt load right now is nearly four times the size of gross domestic product, and that it takes more than $6 of new debt for our country to produce just $1 of GDP growth. That’s almost double the amount of debt required in the 1990s.
(3) “There should be a large pent-up demand for goods and services”. Bearish. Davis acknowledges that there has been improvement in this dimension from where things stood at the beginning of the bear market. But he is particularly worried by the ratio of total Personal Consumption Expenditure to Non-Residential Fixed Investment, which currently stands at a record high. At the secular bear market low in 1982, in contrast, this ratio was at a record low.
(4) “Fundamentally, stocks should be clearly cheap based upon time-tested, absolute valuation measures”. Neutral. Though the stock market “got undervalued at the March lows”, it never became “dirt cheap”.
(5) “Psychologically, investors should be deeply pessimistic, both in terms of the stock market and the economy.” Bullish. Davis says that past secular market lows were accompanied by extreme pessimism, and his indicators show a similar extreme existed earlier this year.
(6) “Technically, major investor groups should have below-average stock holdings and large cash reserves”. Neutral. While foreign investors have record-low stock holdings, according to Davis, household holdings – while low – are not nearly as low as they were at prior secular bear market lows. And institutional investors’ stock holdings “are only down to an average weighting historically”.
(7) “A fully oversold longer-term market condition in terms of normal trend growth and in terms of time”. Neutral. Davis believes that, though many of the excesses of the real-estate bubble have been worked off, some still exist. That’s particularly a problem, he says, given that the stock market bubble of the late 1990s never completely deflated either. “As we saw in Japan after 1990, a double bubble in stocks and real estate leaves it difficult to put ‘humpty dumpty’ together again.”
The research shows that only one of the seven criteria indicates that a secular bull is in place, whereas three are neutral and three are bearish. Although Davis believes the nascent rally has more upside potential, he concludes, like Richard Russell, that we are dealing with an extended rally (cyclical bull phase) within a secular bear market.
Looking at the next few weeks, I take a somewhat different perspective and am of the opinion that stock markets have run away from fundamental reality and that a pullback/consolidation looks likely. Taking a slightly longer-term view, I think we are in a (possibly lengthy) bottoming-out phase as far as slow-growth (OECD) countries are concerned, but already in new (potentially volatile) uptrends regarding high-growth emerging and commodities-related markets. Above all, I believe one should be careful of over-analyzing broad indices and at this stage of the cycle focus more strongly on selecting individual stocks with strong balance sheets and dividend-paying potential.
Bill Gross shares his latest take on markets, the economy and investing in his August 2009 investment outlook, “Investment Potions.”
Here are a few excerpts:
On price vs. performance – getting the potion you paid for…
But my point is that those who sell investment “potions” must wrap their product with an extra large ribbon because history is not on their side. Common sense would dictate that the industry as a whole cannot outperform the market because they are the market, and long-term statistics revealing negative alpha for the class of active managers confirms it. Yet, what a price investors are willing to pay! A recent Barron’s article pointed out that stock funds extract an average 99 basis points or virtually 1% a year in fees from an investor’s portfolio. Bond managers are more benevolent (or less pretentious) at 75 basis points, and many money market funds manage to subsist at a miserly 38. Still, those 38 basis points are as deceptive as the pea that disappears beneath the shell of a street-side con game.
What investors need to do in this new normal market…
Investors looking for love potions or successful investment strategies in this new normal economy dominated by deleveraging and reregulation must focus on some very macro-oriented ingredients as opposed to typical news-dominated minutiae. The latest quarterly earnings report from Goldman Sachs may be an indicator that the financial sector is getting some color in its cheeks, but it doesn’t really let you know what needs to happen in order for the real economy to stabilize as well.
Read the whole newsletter here, or click on the image below.
There is nothing new on Wall Street or in stock speculation.
What has happened in the past will happen again, and again, and again.
This is because human nature does not change, and it is human emotion, solidly built into human nature, that always gets in the way of human intelligence.
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WSJ What's News Late Edition, June 18, 2013by The Wall Street Journal 18 Jun 2013 at 10:54pm
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Jeffrey Saut Daily Audio Comment Raymond James
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