A Topping Pattern In The Market Is Underway

Friday, April 5th, 2013

by Comstock Partners, Inc.

A Topping Pattern In The Market Is Underway

April 04, 2013

The market appears to be running into some technical problems at the same time that the fundamentals are showing sign of deterioration. Recent U.S. economic releases have tended to be disappointing, while the global economy is either in recession or reporting slower growth. At the same time the situation in Cypress is still festering, Italy is without leadership, North Korea is making serious threats and the Mid-East is—-well, the Mid-East. Japan is embarking upon unprecedented massive easing that is most likely to set off a global currency war to see who can devalue faster.

The market is showing signs of divergences that usually show up at market peaks. The Russell 2000 has been underperforming the S&P 500, market breadth has begun to erode, new daily highs in stocks are diminishing and transports are lagging. In addition investor behavior is signifying a flight to safety as the strong performers have been defensive stocks such as consumer non-durables and health care, while cyclicals, commodities, banks and brokers have been lagging.

The economy also appears to be cooling off after a decent start to the year. Weekly unemployment claims jumped to 385,000 compared to estimates of 347,000. The ISM manufacturing index dropped to 51.3 from the previous month’s 54.2 and estimates of 54. The ISM non-manufacturing index declined to 54.4, its lowest number since August. The ADP employment report dropped to 158,000 compared to an estimate of 215,000.

Real consumer spending has been growing at a mediocre 2% rate over the past year, outrunning the weak 0.9% growth in real disposable income over the same period. To accomplish even this meager growth rate, consumers had to drop their savings rate to an extremely low 2.6% in February. It is highly likely that consumer spending will slow down even more. Employment growth is diminishing and the negative effects of the January tax increases and the sequester have barely begun to kick in.

According to William Dudley, the head of the Federal Reserve Bank of New York, “The increase in payroll tax, the rise in high income tax rates, the increases in taxes associated with the Affordable Care Act, and now the sequester—-if sustained—-will result in fiscal drag of about 1 ¾ percentage points of GDP in 2013….in an ideal world, fiscal policy would have broad-based bipartisan support. That would reduce uncertainty and reassure households and businesses that the U.S was on a sustainable long-term path. Instead, we have nearly the opposite: significant retrenchment in the near-term, but no credible action over the long-term, with partisan divisions and significant uncertainty about what will happen next.”

Adding to the global problems, the Japanese central bank has announced its intention to begin a massive and unprecedented easing program with the aim of doubling central bank assets within two years and increasing the inflation rate to 2% after more than 20 years of deflation. The plan is to buy the equivalent of $75 billion of various types of securities each month compared to the U.S program of $85 billion—and keep in mind that Japan’s economy is only one-third the size of the U.S. One important result will be a significant devaluation of the Yen in attempt to make Japanese goods attractively priced in world markets. The problem is that other nations will also have to attempt devaluation in order to protect their economies, resulting in a deflationary global currency war that we at Comstock have long anticipated.

All in all, we believe that the cyclical bull market that started four years ago has run its course and that it is now in the process of topping out. The consensus does expect a minor correction, but is eagerly looking forward to buying “bargains” on the dip. However, the first downturn in a new bear market is usually indistinguishable from any run-of-the-mill correction. It is only after the first rally attempt fails that the reality of a new bear market begins to sink in. While the topping process may take some time, we think a major downturn is in store.

Copyright © Comstock Partners, Inc.

Tags: Comstock, market, topping
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Developed World’s Standard of Living Must Plummet Sharply (Crispin Odey)

Saturday, May 14th, 2011

by Courtney Comstock, Business Insider

Crispin Odey, a London-based hedge fund manager, warned that the standard of living in the developed world will come down sharply in the future.

Not in the near term, he said (at the Morningstar investment conference in London yesterday), but eventually.

It has to do with the fact that emerging markets have not yet revalued their currencies, and developed countries will not raise interest rates until they do.

Eventually, he said, salary gaps in the emerging and developed worlds will close. This will go on to shape future thinking about the economy.

Context: Right now, emerging markets like China keep wages low, which supports their heavy export business, but hurts Western economies like the U.S., which currently outsources rather than produce goods in the U.S. Until emerging markets revalue their currencies, this will continue.

But once they do -

A wave of inflation will come when emerging markets post current account deficits and workers’ wages converge, according to Odey. His comments were reported by CityWire UK.

The fact that it hasn’t happened yet and won’t for awhile is one reason why the U.S. won’t raise interest rates yet, Odey says. [Raising interest rates would only make it harder for us to pay back obligations to China, for example.]

“We will not see any interest rate rise until wage inflation is well on the up. When it does come through, it will take us out like a flood.”

The west can try to speed up the process through quantitative easing, he says. Quantitative easing should speed up the process of wage rises in emerging markets, which then translates into a bullish factor for the West, which is becoming increasingly competitive despite emerging market resistance.

Being invested in the West is the best place to be when this happens, according to Odey.

Fun fact: Crispin Odey is the manager who taught Hugh Hendry.

Tags: Account Deficits, Business Insider, Citywire, Comstock, Crispin Odey, Current Account, Developed Countries, Emerging Market, Emerging Markets, Export Business, Hedge Fund Manager, Hugh Hendry, Interest Rate Rise, Morningstar Investment Conference, Quantitative Easing, Source Business, Standard Of Living, Wage Inflation, Wages, Western Economies
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Hugh Hendry: “I Don’t Sell Dreams, I Live in the Real World.”

Tuesday, April 27th, 2010

This article is a guest contribution from Courtney Comstock, at The Business Insider.

There’s a great interview with the eccentric hedge fund manager Hugh Hendry of Eclectica Capital in Investment Week.

Here’s the short version of what he said:

On the China “bubble”: “China has not demonstrated an ability to create wealth. It has demonstrated an ability to create GDP growth, which is a function of spending money…Infrastructure projects and steel plants that are publicly commissioned…If you build a high-speed rail link and anticipate it improving the productivity of the economy over the next 10 years, but actually it does not, it means you will have to raise Government borrowing or tax the population to sustain the negative cashflow.” More on China from Hendry.

On what’s wrong with the investment world: “We have created a hunger just to make money, speculative money and damn the consequences almost – we are either all investing in houses or stocks, soon to be Chinese stocks with Anthony Bolton. But, it has also created a Pavlovian response where every crisis was an opportunity to buy more. I think time is receding, it is passing, it is leaving us behind. My difficulty is that I do not sell dreams. I live in the real world.”

On his investment strategy: “We are concerned about the world being profoundly deflationary and therefore are reluctant to take a lot of economic risk. So the businesses we select to buy today are large-cap names, so I can sell them and not be trapped in them. They are businesses that have a lack of economic sensitivity. I have a tremendous amount invested in the tobacco industry. I think it could survive a consumer depression.”

On inflation: It could reside in the future [especially if you ban short-selling]. “If you want to create inflation, what you will see is that we will have a ban on short selling. We will have a ban on naked credit default swaps.” Watch Hendry vigorously defend short selling.

The full interview is on Investment Week.

And for more from Hendry, read an article he penned in the Telegraph.

Tags: Business Insider, Cashflow, China, Chinese Stocks, Comstock, Credit Default Swaps, Economic Risk, Ell, GDP, GDP Growth, Hedge Fund Manager, High Speed Rail, Hugh Hendry, Hunger, inflation, Infrastructure Projects, Investment Strategy, Investment World, Pavlovian Response, Spending Money, Steel Plants, Tobacco Industry
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