No Country for Old Bulls

Sunday, July 8th, 2012

  
With global PMI rolling over again, dimming unemployment growth, and slowing EM Asia impacting global production, it is no wonder than BofAML’s economics team sees a dearth of ‘feelgood’ factors in the market. In fact, as they note, further rate cuts in the euro area and China along with around $500bn of NEW QE in this quarter are priced into the market with any hope for risk assets to rally more consistently, investors will need to see not just willing-and-able central bankers but an abatement of the sovereign crisis in Europe and improvement in global data – neither of which they expect anytime soon. Easier monetary policy can only cushion the blow from higher uncertainty in the US and Europe. Effective policy breakthroughs would thus have to come from compromises in the European Council or in US cross-party politics. Investors have yet to zero in on the real impacts of rising economic uncertainty in the US. As Ethan Harris and Michael Hanson have argued, it is unlikely that the cliff is fully priced into the markets and US political dysfunction will share the spotlight with the European crisis over the next few months. And as last time, the joint act will likely undercut investor confidence.

and the prize for best research title also goes to BAML…

BofAML: No Country For Old Bulls

Review: policy to the rescue

Global central banks continued to ease monetary policy in response to a deteriorating global backdrop. Both the ECB and China’s PBoC cut interest rates this week, while the Bank of England kicked off another round of its quantitative easing program. As we expected, the ECB lowered interest rates by 25bp and brought deposit rates down to zero. In the UK, the BoE announced it aims to add £50bn to its balance sheet over the next four months. Meanwhile in Asia, the Chinese central bank surprisingly cut interest rates less than one month after it last lowered borrowing costs.

Most importantly, policymakers’ continued focus on downside risks backs expectations of further policy support. The ECB sounded more concerned about area-wide demand conditions and, although ECB President Mario Draghi discouraged hopes of further non-standard measures such as new LTROs, we think the Governing Council will lower interest rates once again before the end of the quarter. Likewise in China, we look for follow-ups to this week’s rate cut. Reserve requirement ratios will probably be lowered within the next few days, and we expect the PBoC to cut interest rates twice more before the end of the year. This week’s policy action was accompanied by mostly downbeat economic data.

Global confidence stumbled again, with the global PMI dropping to 49.6 in June from 50.1 in the previous month (Chart 1). In the US, nonfarm payrolls expanded by a below-consensus 80k in June, while the unemployment rate remained at 8.2%. This brings the 2Q average to 75k, well below the 226k per month seen during the first quarter. The unemployment outflow rate – a statistic tracked by Federal Reserve staff – remained close to historically low levels (Chart 2).

Hot topic: a dearth of ‘feelgood’ factors

Besides further interest rate cuts in the euro area and China, we also expect the Federal Reserve to underwrite $500bn worth of QE this quarter. If we are right, systemic central banks will have largely fulfilled recent market expectations of significant policy rescue. But for risk assets to rally more consistently, investors need to see more than willing-and-able central banks, in our view. On top of expanding liquidity, a meaningful market rally needs: (i) an abating sovereign crisis in Europe; and (ii) improvement in the global data. Are these conditions likely to materialize?

We think the crisis in the euro area will remain an open sore. The outcome of last week’s summit indeed revealed steps in the right direction. But it was no game changer. As German officials have been keen to highlight, the principle of no mutualization of national liabilities without sovereignty transfers looks intact. Moreover, the painstaking debate on what both shared banking supervision and ESM direct help to banks entail is only beginning. As Laurence Boone explains, the effectiveness of a banking union lies in the details.

The Eurogroup will meet next week, when we hope to learn more about the conditions underpinning the Spanish banking bailout. By the end of the month the Troika should unveil the magnitude of funding gaps in Greece. With policymakers still balking at prospects of another debt relief round (that is, official sector involvement), pressure on the new Greek government is likely to mount. We have seen this before: if the Troika pushes for significant adjustment over a short period of time the weakest link of Greek political stability will likely break. The well-known Greek dilemmas should resurface soon.

Better EM data to be cold comfort

As recessions in euro area countries deepen and doubts about both the crisis fighting strategy and the future institutional contours of the monetary union linger, we see no meaningful respite from the sovereign crisis. But could market perceptions brighten up once global activity data start to improve? In other words, could rebounding EM economies lighten up the mood in the marketplace and help investors tolerate foot-dragging in Europe?

Our real-time global activity gauge does suggest business conditions became less negative in June. Although activity appears to have softened further in the US, conditions seem to have improved in GEMs. This pushed the global aggregate higher. That said, the GLOBALcycle still indicates that global GDP growth likely dropped to 2.1% qoq (saar) in 2Q from 3.1% in the previous quarter. Looking ahead, wobbling global business confidence argues against a meaningful follow-up from June’s improvement. But mounting policy support in countries such as China and Brazil plus substantial recent drops in EM industrial production (Chart 3) point to a 3Q rebound in local activity. Its global reach, however, will likely be limited. As the US economy weakens ahead of the oncoming fiscal cliff and the euro area remains in recession, we expect global GDP growth to remain close to the 3% level. That is down from the average 4% seen between 2010 and 2011.

The looming fiscal fog

All in all, therefore, market respite opportunities are likely to be few and far between. On the plus side, global monetary conditions should continue to ease. Next week, whereas we now expect the BoJ to stay put, we look for the Brazilian central bank to cut interest rates by 50bp. Likewise, India’s RBI will probably reduce rates by the end of the month. However, as we illustrated last week, easier monetary policy can only cushion the blow from higher uncertainty in the US and Europe. Effective policy breakthroughs would thus have to come from compromises in the European Council or in US cross-party politics.

Investors have yet to zero in on the real impacts of rising economic uncertainty in the US. As Ethan Harris and Michael Hanson have argued, it is unlikely that the cliff is fully priced into the markets. The issue may only start to visibly influence the consensus once lumpy economic decisions – such as business investment and durable goods consumption – start being postponed in the run-up to the cliff. In all likelihood – and much like last summer – US political dysfunction will share the spotlight with the European crisis over the next few months. And as last time, the joint act will likely undercut investor confidence.

Tags: Abatement, Bank Of England, Central Banks, Chinese Central Bank, Dearth, Downside Risks, ECB, Economic Uncertainty, Economics Team, Ethan Harris, Feelgood Factors, Global Backdrop, Global Data, Global Production, Investor Confidence, Michael Hanson, Monetary Policy, Party Politics, Policy Breakthroughs, Qe
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Potential Bear Flag Forming

Tuesday, April 17th, 2012

This morning futures are up for (insert reason here).  The story of the day is a German investor confidence report but if that’s the main cause, it was a market that wanted to find an excuse to go up.  Futures took a U-turn overnight from down about 5 to up about 5 and have added to that gain as the morning progressed.  That’s a fortunate development for the bulls as the situation looked quite dire with the break of 1370 in the overnight session.  Recall late last week I said the area between 1370ish to 1390ish is a “white noise” area and not much stock can be taken of what happens in that area.

Pulling back a bit, yesterday’s action was among the most tricky of the year.  The market gapped up – and then immediately gave back all those gains within the opening half an hour.  That usually leads to a very bad day.  Instead the market moped around, and only the NASDAQ was hit.  While the DJIA actually was up quite strongly.  And S&P 500 flattish.  A strange divergence indeed.   The NASDAQ has been the leader of the pack in 2012 and hence it sure needed to ‘catch up’ (in this case down) to the rest of the major indexes – yesterday was one step towards that goal.

The market “generals” began getting hit in earnest last Friday and that continued yesterday – headlined by Apple’s 4% drop.  The “teflon” stock is now down 5 sessions in a row, and might actually be short term oversold if you can believe it.  But let me call your attention to the bottom of the graph – see that heavy volume?  That is quite ominous to me.  It speaks of distribution.

Priceline looks very similar in that the drops are on substantial volume versus the pops up of late.  This smells of the big boys selling.

Notwithstanding the morning’s gap up, we might be building what is called a “bear flag” on the indexes.

Technically speaking, a bear flag is a sharp, strong volume decline, several days of sideways to higher price action on weaker volume followed by a second, sharp decline to new lows on strong volume.

We saw that initial drop, on volume, over the past 2 weeks.  We now could be in the “several days of sideways to higher price action on weaker volume” stage.  Note again the volume bars at the bottom of the chart.  On those 2 up days last week volume lagged versus the down days.  If the bear flag is to play out it could pose an interesting situation towards the end of this week to early next.

The larger issue from this viewpoint is a lot of “go to” stocks are breaking down.  Yesterday’s gains were in consumer staples (hide out stocks) and a lot of areas that have shown weakness the past few weeks.  A lot of broken charts were the ones that led the charge yesterday.  So the benign index action hid a lot of weakening charts.  Hence, for those looking to enter or add to new positions the choices are thinning or differing.  And the high growth names are the ones withering away.  In the end we can stare at the indexes all we want but the market is made up of individual stocks, and many of those charts that were holding up even as the market went sideways in latter March are now signaling sell or at best caution.

Of course we should always look at the opposite view and a bullish take on this would be “we are getting a long needed rotation into new groups”.  My issue with that is those groups are mostly defensive.

The next few days will be tricky because some of the high octane stocks are now short term oversold after being taken to the shed the past week and are due for at least a short term bounce – and we have some key earning reports.  Tomorrow we have IBM’s earnings report which is to the DJIA what Apple is to NASDAQ, since the DJIA is price weighted and IBM is a $200 stock.  So the DJIA is going to effectively be “IBM” on Wednesday.

Anyhow if we are in a bear flag this week is going to be the most dangerous stage of the larger correction since this is where people will let the guard down and say “well I guess that was it”.   If however that *WAS* it, and a new leg up is starting (i.e. correction over) then ignore this post.

Copyright © Market Montage

Tags: Bad Day, Bear Flag, Big Boys, Confidence Report, Divergence, DJIA, Futures, Gap, Generals, Half An Hour, Investor Confidence, Last Friday, Leader Of The Pack, Nasdaq, Overnight Session, Priceline, Substantial Volume, Teflon, U Turn, White Noise
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Shifting Winds-Turbulence Ahead? (Sonders)

Monday, April 2nd, 2012

Shifting Winds-Turbulence Ahead?

March 30, 2012

by Liz Ann Sonders,Senior Vice President, Chief Investment Strategist, Charles Schwab & Co., Inc., and,
Brad Sorensen, CFA, Director of Market and Sector Analysis, Schwab Center for Financial Research, and
Michelle Gibley, CFA, Director of International Research, Schwab Center for Financial Research

Key Points

• Treasury yields have moved somewhat higher, while stocks have largely continued to rise. Some recent correlations appear to be breaking down, which could lead to some increased volatility but we remain relatively confident in the equity market. Perception as to the next potential moves by the Federal Reserve appeared to be shifting, but Chairman Bernanke reiterated their easy monetary stance. Uncertainty is rising and the Fed’s goal of increased clarity through more transparent communication is under increased scrutiny.
• Liquidity concerns in Europe have eased but economic risks remain elevated, while Spain and Italy face deal with their ongoing debt crises. Meanwhile, fears remain about a hard landing in China, although we have a more sanguine view.

Are we starting the return to a more “normal” market environment? It’s too early to tell but we are beginning to see lower volatility and asset class correlations. Contributing to this more stable environment is a shifting of Fed expectations and increased investor confidence about US economic expansion. However, we acknowledge that such a shift will likely cause some near-term turbulence in the market, especially given elevated bullish investor sentiment (a contrarian indicator). The market has also become technically extended after its roughly 30% rally since early October 2011, and could be due for a breather. Additionally, an uncertain earnings season is approaching, oil prices continue to be concerning, and the siren song of “sell in May” is likely to be heard again. We believe any consolidation is likely to be shallow and could bring back some of the “wall of worry” that the market loves to climb.

One of this year’s earlier trends had been stocks moving higher, but Treasury bond yields remaining near record lows, indicating both continued concern about the sustainability of the economic expansion, and the confidence that the Federal Reserve would continue its extremely accommodative monetary stance for the foreseeable future. Recently, we’ve seen Treasury yields move up from those record lows, while stocks continued to move higher. This could be the beginning of a shift in investor attitudes as confidence in the economic expansion may be growing leading to skepticism that the Fed can maintain its current policy stance through 2014.

Yields Move Higher—For Positive Reasons

Source: FactSet, Federal Reserve. As of Mar. 27, 2012.

While it’s too early to say this is the start of a trend of yields moving inexorably higher, it does appear that the retail investor could begin to shift some assets from bond funds and cash into equities. This could feed the next leg up in the equity rally.

Economic Transition

Part of the impetus behind the retail investor warming up to equities may be the improvement in economic data—especially as it relates to jobs and housing. But here too we may be entering a transition phase as year-over-year comparisons become more difficult and substantial gains become harder to come by. Housing data continues to be mixed and although initial jobless claims recently hit their lowest level in three years, the pace of the recovery in jobs could slow. This could contribute to near-term volatility, but we do believe in the sustainability of the economic expansion, which should help to support equity prices through the balance of 2012.

Jobs picture continues to improve

Source: FactSet, U.S. Dept. of Labor. As of Mar. 27, 2012.

Housing is not off to the races and likely won’t see a sharp bounce off of the bottom, but we are seeing encouraging signs. Although existing home sales fell 0.9% month-over-month in February, it was still the best February reading in five years and sales were up 8.8% over a year ago. Meanwhile, housing starts fell 1.1% but forward-looking building permits rose 5.1%, to the highest level since October 2008. And while housing remains extremely affordable based on historical levels, mortgage rates have moved modestly higher. Somewhat counter-intuitively this could contribute to further improvement of the housing market as the prospect of rates actually moving higher may push potential purchasers who had been sitting on the fence toward action.

Other economic data continues to show growth in the economy, although there are some potential chinks that we are watching closely. The Empire Manufacturing Index moved to its highest level since June 2010 while the Philly Fed Index rose to its best reading since April 2011. However, the forward looking new orders component of both reports moved lower. While not overly concerning yet, it’s something we’re keeping an eye on.

Additionally, the Index of Leading Economic Indicators rose 0.7% in February, marking the fifth-straight month of improvement. The National Federation of Independent Businesses Index moved higher, indicating improving small business confidence. Finally, retail sales moved 1.1% higher; while ex-autos and gas they moved 0.6% higher and the previous month was also revised upward, indicating the American consumer continues to spur activity.

Fed Stance Shifting?

This continued improving data may be contributing to a shift in the perception of the future of Fed policy. While the recent Fed meeting kept policy the same and continued to predict near zero interest rates through at least late 2014, they did upgrade their outlook of the economy slightly. Also, several Fed members have said they believe higher interest rates may be needed sooner than currently officially predicted. The fed funds futures market has the first rate hike coming at least six months before the end of 2014. And finally, during Chairman Bernanke’s recent testimony on Capitol Hill, he did nothing to indicate another round of quantitative easing was in the cards, leading investors to believe the Fed’s confidence in the economic expansion may be growing. However, in a subsequent speech, he reiterated his belief that the economy and job market would continue to need Fed assistance, throwing a little more uncertainty into the equation. We are encouraged at these glimmers of hope and believe that a return to more normal policy sooner rather than later would be appropriate.

Europe’s debt crisis merely on pause

The second Greek bailout was completed on March 20 with markets hardly batting an eye. But the eurozone sovereign debt crisis is far from over—it is merely on pause and there is still risk of future outbreaks.

Where could sovereign debt concerns arise?

• Greece and Portugal could need additional bailouts;
• Ireland could ask for debt forgiveness to bolster a public vote for the fiscal pact;
• France’s general election could result in a change of leadership from Sarkozy to Hollande.

However, we feel these potential events are unlikely to result in a broad contagion outbreak. On the other hand, Spain and Italy have the ability to heat up concerns and risk aversion due to their large debts and economies. Italy’s economy has grown less than the eurozone average over the past decade and reforms are needed to improve competitiveness and enhance growth prospects. Italian Prime Minister Monti needs to keep making progress to maintain investor confidence, and watered down labor reforms may not have a lasting effect.

However, Italy has some positive attributes, including a wealthy private sector with a per capita net worth more than three times higher than the other European peripheral countries, according to BCA Research, giving them the ability to fund debt locally. As such, Italy’s debt tends to be in stronger, longer-term, hands. Additionally, Italy has a primary budget surplus – a surplus before debt payments – as well as long debt maturities.

Spain’s housing bubble still deflating

Source: FactSet, S&P/Case-Shiller, Bank of Spain. As Mar. 27, 2012. Indexed to 100 = 1/1/1996.

Spain on the other hand has a more uncertain and risky outlook. While Spain’s current government debt load is smaller than Italy’s as a percentage of gross domestic product (GDP), it has an elevated deficit, high and rising unemployment and a housing bubble that is still deflating. A risk is that the large amount of private sector debt could incur more losses for banks, potentially requiring cash infusions from the government. Additionally, instead of making deficit-reduction progress, Spain has backpedaled; now targeting a higher deficit to end 2012 than envisioned a few months ago.

Positively, European policymakers are doing their part to contain risks, from the European Central Bank’s three-year loans and Germany’s recent willingness to combine the temporary European Financial Stability Facility (EFSF) with the longer-term European Stability Mechanism (ESM) that comes into effect in July. However, an even bigger firewall may eventually be needed.

Europe dragging down global growth

The lingering effects of the sovereign debt crisis on the European economy continue. The renewed downturn of eurozone purchasing manager indexes in March indicate the economy is still fragile and it could take some time before growth reaccelerates. A hobbled European banking system remains at the heart of the slowdown. Bank balance sheets likely don’t have enough excess capital to expand lending and banks have responded by tightening lending standards. Lending is the lifeblood of economic growth and a severe reduction in lending is likely to restrain activity.

In terms of investment implications, the outlook for European stocks is mixed. Valuations appear attractive and we believe correlations will decline and investors will differentiate across markets. Markets with stronger economies such as Germany could do better, while those with weaker economic outlooks, like Spain, could lag. The Italian stock market falls in the middle, as a negative economic outlook is offset by high private sector wealth.

Should we worry about China?

There are plenty of bearish stories about China these days and China remains a puzzle to many. The lack of transparency and the view that news is filtered and managed helps fuel the fears.

We believe the truth lies somewhere between the bearish and bullish case. We still believe that a hard landing is unlikely and that markets are at times over-reacting to data that is really not new news. Examples include the 7.5% growth target for 2012 when the Five-Year Plan issued a year ago envisioned a 7% rate over the full period; and comments from BHP Billiton that demand for iron ore would drop to single-digits, which was not significantly different than what they had said in the past.

Even reports that China’s manufacturing purchasing manager index (PMI) is in contraction territory are a misnomer. The PMI survey is a diffusion index—a reading below 50 indicates more people say things are slower versus last month than faster—in other words, below average activity. In a fast growing economy such as China, this does not necessarily equate to a contraction.

Manufacturing in China slowing

Source: FactSet, Markit. As Mar. 27, 2012.

We have believed for some time that China’s economy would continue to slow, but that a sharp drop in inflation and money supply would allow stimulus to be enacted that could reaccelerate growth later in 2012. However, we are discouraged by so far modest policy easing amid signs of accelerated slowing.

In particular, the report that profits for Chinese industrial companies fell 5.2% during the first two months of 2012 was worse than we expected. Granted, this figure was after profits gained 34.3% a year earlier and is during a seasonally weak period, so it may not be a lasting trend, but is concerning.

The Chinese government typically takes gradual moves, but the slow pace of response while economic data is moving faster indicates the government could slip behind the economic momentum, then struggle to gain ground. China’s economy is now the second-largest globally and is becoming tougher to micro-manage – the risk of a policy mistake is growing. We’re not ready to change our view as we believe we’re still in the early innings of the slowdown, but have a wary eye on policy response.

An event that could have longer-term implications is the coming political changeover at year’s end. Concerns have arisen after the party chief in Chongqing, one of China’s biggest cities, was sacked in March. This is the highest level official removed in over two decades. There appears to be increasing strains within the Communist party about whether to move toward reforms or tighten control. We’ll be monitoring this over the coming year.

Read more international research at www.schwab.com/oninternational.

Important Disclosures

The MSCI EAFE® Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States and Canada. As of May 27, 2010, the MSCI EAFE Index consisted of the following 22 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.The MSCI Emerging Markets IndexSM is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. As of May 27, 2010, the MSCI Emerging Markets Index consisted of the following 21 emerging-market country indexes: Brazil, Chile, China, Colombia, the Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand and Turkey.The S&P 500® index is an index of widely traded stocks.Indexes are unmanaged, do not incur fees or expenses and cannot be invested in directly.Past performance is no guarantee of future results.Investing in sectors may involve a greater degree of risk than investments with broader diversification.International investments are subject to additional risks such as currency fluctuations, political instability and the potential for illiquid markets. Investing in emerging markets can accentuate these risks.The information contained herein is obtained from sources believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation or a recommendation that any particular investor should purchase or sell any particular security. Schwab does not assess the suitability or the potential value of any particular investment. All expressions of opinions are subject to change without notice. The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

Tags: asset class, Bernanke, Brazil, Canadian Market, Charles Schwab, Chief Investment Strategist, China, Contrarian Indicator, Earnings Season, Economic Expansion, Economic Risks, India, Investor Confidence, Investor Sentiment, Liz Ann, Market Environment, Market Perception, Monetary Stance, Russia, Sanguine View, Senior Vice President, Siren Song, Stable Environment, Transparent Communication, Treasury Yields
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Barron’s Confidence Index Takes a Worrying Turn

Thursday, January 19th, 2012

When reporting on the unfolding of the credit crisis I often referred to the Barron’s Confidence Index. This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds.

The difference between the yields is indicative of investor confidence. A rising ratio indicates bond investors are growing more confident, in other words preferring more speculative bonds over high-grade bonds. On the other hand, a declining ratio indicates investors are demanding a lower premium in yield for increased risk. That shows a waning confidence in the economy.

Since hitting an all-time low in December 2008, the Index was almost back to pre-crisis levels in January this year as investors grew increasingly confident. But that was when investors started focusing on sovereigns that were starting to get into trouble.

Since the start of 2011 the Index has given up more than 40% of its gains. This puts us back at levels experienced during mid-2008 – just prior to confidence falling off a cliff. Based purely on this chart, one has to conclude that confidence remains fragile.

Source: Barron’s

Tags: Barron, Bond Investors, Bonds, Confidence Index, Credit Crisis, Crisis Levels, Economy, Investor Confidence, risk, Sovereigns
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Intense Volatility Rattles Investor Confidence (Doll)

Wednesday, August 17th, 2011

August 15, 2011

Stocks endured intense volatility last week. The Dow Jones Industrial Average experienced four consecutive daily 400-point swings for the first time in history and markets moved over 4% on each of those days, marking only the fifth time in the last century that occurred in a single week. After all was said and done for the week, the Dow dropped 1.5% to 11,269, the S&P 500 Index fell 1.7% to 1,179 and the Nasdaq Composite declined 1.0% to 2,508.

The primary catalysts for the high levels of volatility have been, of course, S&P’s downgrade of US Treasuries and the ongoing sovereign debt crisis in Europe. Over the past couple of weeks, investors have been aggressively “de-risking” as they have been downgrading their outlooks for the future of global economic growth. The broad concerns about the health of the global economy are clearly understandable given that in many parts of the world fiscal stimulus has been largely exhausted and monetary policy rates are already at or near zero. Given this backdrop, many investors are deeply fearful of the possibility that declining markets could exacerbate an already-weak economy via a further weakening in confidence.

The Federal Reserve held their regularly scheduled policy meeting last week and acknowledged that the US economic recovery was “significantly slower” in the first half of 2011 than they had previously expected. Additionally, the central bank lowered its forecast for growth and indicated that it believed downside risks have grown. Given this backdrop, the Fed indicated that it planned to keep the Fed Funds target rate at its current level of between 0% and 0.25% through at least mid-2013. This statement represents a dramatic change in the Fed’s stance and is the first time that it announced a specific future time frame for interest rate decisions.

There was also some positive economic news that was released last week. Initial jobless claims for the week ended August 6 fell to below 400,000 for the first time since April, a trend that reinforces our view that the softness in the labor market continues to slowly fade. Additionally, retail sales for June were revised higher and July’s retail sales figures also increased.

Looking ahead, we continue to believe that the fundamental foundations for the global economy should be sufficient to keep the recovery on track, but economic growth will likely continue to be anemic. Confidence levels are extremely low and an additional influx of liquidity may be needed. The deteriorating economic conditions are making it clear that additional action by the world’s major central banks may be necessary to bolster confidence and stabilize the global economy. The US Federal Reserve and the Bank of England have been discussing the possibility of additional asset purchases and the European Central Bank may also be preparing to widen its purchase list of sovereign bonds. Monetary policy will need to remain accommodative until well after economic growth has turned around (a fact that the US Fed clearly acknowledged with their comments last week).

For the United States, there is serious work to be done to repair the country’s balance sheet. The United States has experienced a significant deterioration in finances since the late 1990s when the budget was last in surplus. There is a great deal of ongoing debate in Washington over these issues, but it looks like any real progress will have to wait until after the 2012 elections. In terms of Europe’s debt issues, a comprehensive pan-European solution is needed rather than just the temporary Band-Aid approaches taken so far. Some initial progress has been made on this front, but more is needed. All of this suggests that debt issues will remain a concern for some time.

Our summary view is that we believe investors are overly pessimistic about the possibility of a renewed recession in the United States. It is important to remember that equity markets have a poor track record as acting as predictors of recessions and corporate fundamentals remain strong. Since 1950, the United States has never entered a recession with corporate balance sheets as flush with cash as they currently are—at present, nonfinancial companies are holding cash in the amount of around 11% of their balance sheets, the highest level in over 60 years. From an earnings perspective, results have also been very strong. Second-quarter results show that earnings have grown over 18% on a year-over-year basis driven by a nearly 10% rise in revenues. Corporate earnings are all but certain to surpass their mid-2007 highs before the end of this year, and yet stocks remain about 35% below where they were at that time. This backdrop underscores how inexpensive stocks are at present. This is not to say that we expect a rapid price rebound since markets are likely to continue to be driven by near-term economic and debt issues, but it does suggest that the long-term outlook for equities remains positive.

About Bob Doll

Bob Doll is Chief Equity Strategist for Fundamental Equities at BlackRock^® a premier provider of global investment management, risk management and advisory services. Mr. Doll is also Lead Portfolio Manager of BlackRock’s Large Cap Series Funds. Prior to joining the firm, Mr. Doll was President and Chief Investment Officer at Merrill Lynch Investment Managers.

Investors should consider the investment objectives, risk, charges and expenses carefully before investing. For this and more information on BlackRock funds, please view a prospectus. The prospectus should be read carefully before investing.

The information on this web site is intended for U.S. residents only. The information provided does not constitute a solicitation of an offer to buy, or an offer to sell securities in any jurisdiction to any person to whom it is not lawful to make such an offer.

Tags: Debt Crisis, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Downside Risks, Dramatic Change, Economic Recovery, Fed Funds Target Rate, Fifth Time, Fiscal Stimulus, Future Time, Global Economic Growth, Global Economy, Initial Jobless Claims, Interest Rate Decisions, Investor Confidence, Nasdaq Composite, Outlook, Outlooks, Sovereign Debt, Time In History
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Liz Ann Sonders: Investment Outlook (July 1, 2011)

Monday, July 4th, 2011

Dealing with Debt

Liz Ann Sonders, Senior Vice President, Chief Investment Strategist, Charles Schwab & Co., Inc.,
Brad Sorensen, CFA, Director of Market and Sector Analysis, Schwab Center for Financial Research, and
Michelle Gibley, CFA, Senior Market Analyst, Schwab Center for Financial Research

July 1, 2011

Key points

• Global governments are dealing with rolling debt crises, which are translating to shaky investor confidence. We are concerned that many of the solutions being proposed will weigh on growth prospects, but are hopeful about short-term resolutions that restore business confidence and lead to more investment and hiring.
• The economic sluggishness globally continues, largely affected by short-term factors. We believe a rebound is likely in the second half of 2011, but are wary of policy mistakes and weak confidence. The Fed continues to hold steady, keeping short rates near zero and likely reinvesting maturing Treasury securities after QE2 ends.
• Greece passed the austerity package required to get short-term funding but much more is needed. And while the focus has been on Europe, it may be time to start paying more attention to the Asian region.

Debt concerns have combined with soft economic data to weigh on markets and we’ve seen a bit of return to the “risk on, risk off” trade that dominated 2010. We believe this is a relative temporary phenomenon that should start to reverse toward the end of summer, but there are growing risks. Tenuous confidence among businesses and investors could again be shaken depending on how the debt crises are dealt with or if the economic soft patch lasts longer than we currently believe.

Small business confidence is tenuous

Source: FactSet, Natl. Federation of Independent Business. As of June 27, 2011.

For now, we continue to have a relatively optimistic view of the latter half of 2011, with stocks setting up for a potential rally. Corporate balance sheets remain flush with cash and earnings continue to hold up remarkably well, although we’ll get another update on that during the upcoming second quarter earnings season. Additionally, much of the bad news seems to be “known” and may already be reflected in stock prices, setting up the possibility for upside surprises as some of the temporary burdens begin to ease. Finally, investor optimism has taken a blow from the recent action, which is typically a contrary indicator—a potential good sign for the market in the coming months.

Debt decisions key
The focus has been largely on the European debt crisis, which is detailed below, but the US debt situation continues to add to uncertainty. We certainly don’t believe that there is any real risk of default by the United States due to not raising the debt ceiling, a view confirmed by the continued extremely low yields of Treasury securities; but we are concerned about the deal that may be made in Washington. It appears highly likely that the agreement will involve at least an agreement to cut spending by approximately the amount of the boost to the debt ceiling—likely somewhere around $2 trillion. Spending needs to be cut, but details are important including the timing of the cuts and whether there’s a bias toward budget gimmickry. If too much cutting is pushed out into future years, any short-term benefits to the recovery would be offset by longer-term continued uncertainty.

However, that risk can be softened by the US economy growing at a more rapid rate, much as we saw during the early 1980′s recovery. Government policies that add uncertainty into the market and stymie risk-taking and innovation only make the future bill more difficult to pay. At Schwab, we have long been advocates of free markets and capitalism as the solution to many of the perceived problems in the world. Increased regulation and government interference has already started to weigh on business and we believe is a large contributor to the reluctance of companies to put their massive cash balances to work. Uncertainty and concern over the health care bill and resultant costs, regulation on interchange fees in the financial sector, environmental decrees that raise the cost of doing business, and an uncertain tax policy as we continue to deal with our debt all contribute to business uncertainty. A more globally competitive tax policy, a rollback of some of the more egregious regulations instituted recently, more certainty with regard to the health care law and the new financial derivative regulations, and cuts to spending on entitlement programs would help. It’s important to convince businesses and ratings agencies that our country is on the right track in order to accelerate economic growth over the next several years and bring down the unemployment rate; while repairing housing, and increasing growth and tax receipts. This would result in a more tenable debt situation at both the Federal and state levels.

Soft data continues- transitory?
Uncertainty over the US government’s actions in advance of the August 2 debt ceiling expiration, combined with soft economic data contributed to the recent market correction. Regional manufacturing surveys have dipped into negative territory, jobless claims remain stubbornly above the key 400,000 level, and housing continues to scrape along the bottom. However, all has not been negative as the Index of Leading Economic Indicators rebounded strongly, gaining 0.8%, inflation remains relatively low, and the yield curve remains historically steep, which has typically been a good indicator of future economic growth.

Tags: Asian Region, Austerity, Brazil, Business Confidence, Canadian Market, Charles Schwab, Chief Investment Strategist, Corporate Balance Sheets, Economic Data, Federation Of Independent Business, Global Governments, Growth Prospects, India, Investment Outlook, Investor Confidence, Liz Ann Sonders, Market Analyst, Optimistic View, Qe2, Sector Analysis, Senior Vice President, Sluggishness, Treasury Securities
Posted in Brazil, Canadian Market, India, Markets | Comments Off

Time for a Pause (Wien)

Thursday, June 16th, 2011

Time for a Pause
by Byron Wien, Blackstone Group

June 2011

Uncertainty has finally caught up to the equity markets around the world and we shouldn’t be surprised. At the beginning of the year, most investors were optimistic about the outlook, partly as a result of the quantitative easing begun by the Federal Reserve in the fourth quarter of 2010. Much of the liquidity that poured into the system found its way into financial assets rather than the real economy. Even though a number of events that would be considered negative for equities took place in the first four months of the year, the indexes moved higher. The market was able to withstand the 9.0 (Richter scale) earthquake in Japan and the resultant tsunami, the Fukushima-Dai-ichi nuclear accident and related manufacturing disruptions, floods in Australia, severe winter weather in the United States, regime change in Egypt and Tunisia, civil war in Libya, a sharp rise in oil and other commodity prices, major credit problems in Greece and Portugal again casting doubt on the viability of the European Union and the euro, the possibility of a government shutdown as a result of hitting the debt ceiling in the U.S. and an inability of Congress to reach a compromise on cuts in the Federal budget.

Finally, however, the optimism began to wane. We have learned that the best time to buy stocks is when most investors are pessimistic. Points of extreme pessimism in terms of investor sentiment most recently occurred in March 2009 and August 2010, both important buying opportunities for U.S. stocks. As investor confidence improves and cash is employed, equities can have a sustained move. If investors are already positive, as they were at the beginning of 2011, stocks can still rise but it is likely that the energy of the market will dissipate and a correction will begin before too many months go by. The decline will be blamed on the factors that the market successfully plowed through during the upswing. The question then becomes: How vulnerable is the market and how far down will stocks go? Sentiment seems to be turning. Some survey-based indicators which were very optimistic (and therefore negative for the outlook) have shifted to neutral and the transaction-based Chicago Board Options Exchange put/call ratio is approaching a bearish reading which is favorable.

It is my view that the current market pullback was inevitable and is not indicative of a reversal of the positive move in equities that began last September. I still believe the basic underlying fundamentals are constructive. The U.S. economy grew 1.8% in real terms in the first quarter and I think forces are in place for real growth of 3% or more for the remainder of the year. There are three principal factors driving the growth: exports, capital spending and the consumer, and they are still in place, although perhaps not as robust as they were a few months earlier. The first quarter real gross domestic product report showed equal 1.5% contributions from the consumer and private investment. For the consumer, durable goods (primarily automobiles) and services made equal contributions of .7%; for private investment, equipment and software provided the largest share, much of it for productivity-improving devices. Net exports were a disappointment. Although exports were reasonably strong, the increase in the price of oil resulted in a small net loss for the category.

A number of observers are worried that the end of quantitative easing (QE2) will result in a sharp slowdown in the economy and a resultant market decline. While I believe the withdrawal of liquidity might contribute to the correction running its course, converting the optimism of the beginning of the year to concern or pessimism, I do not believe we are at the start of a prolonged market decline or the beginning of a recession. The negatives are well known: the rise in the price of oil has drained some consumer spending capacity; the slow decline in the unemployment rate has also deprived the economy of the buying power of more people finally at work again; the tightening of credit in the emerging markets to dampen virulent inflation has diminished demand for imports by those countries from the developed world; and uncertainties related to the viability of the European Union as a result of the possible default of sovereign credit in Greece, Portugal and Ireland have unsettled investors everywhere.

The turbulence in the Middle East and North Africa confused investors as well. While many cheered the coming of the Arab Spring, it is not clear that democracy will thrive under the new regimes. One thing we do know is that oil production in Libya has stopped and the world no longer has access to the 1.5 million barrels a day that were being produced there. Events in Europe, North Africa and the Middle East have driven investors looking for a low-risk place to put their money into United States Treasury securities. The yield on the 10-year note is approaching 3% as fear capital from everywhere floods into America. Concern about slower growth in the U.S. economy has created a “risk off” attitude among domestic investors as well.

While the negative factors are far from illusory, there are some positives to consider as well. We are finally beginning to get some better news about housing. New home sales rose in April according to a Commerce Department report. Most of the other housing-related data are still seriously negative, however. The overhang of houses with mortgages that are 90 days or more delinquent is several million. Partly as a result of this, the Case-Shiller index of property values in 20 cities is still depressed, and sales of existing homes are still declining modestly month-to-month, but I believe the housing industry is approaching a bottoming process. This is important because construction workers comprise a key component of those unemployed. Some improvement in housing starts over the next year would be a major positive for the economy.

The liquidity provided by the quantitative easing program of the Federal Reserve must be replaced for the economy to continue to expand. There is some evidence that this is happening. Bank loans and commercial paper issuance have been increasing over the past four months and commercial and industrial loans have been rising for six months. Clearly some business people have enough confidence in the future to begin borrowing again and some banks are willing to grant the loans to facilitate their needs.

The credit situation in Europe is clearly worsening and the real risk is that the commercial banks may be vulnerable if the weaker countries default on their sovereign debt. Greece is the most troubled, and the mid- teens yield on its 10-year paper and the high cost of its credit default swaps are signs that confidence in that country’s ability to meet its obligations has all but disappeared. It now appears that a “soft restructuring” is likely, which means that debt maturities will be extended. There can be no doubt that the financial condition of Greece, Portugal and Ireland is extremely weak and the political climate makes a major austerity program in these countries difficult to implement. I still believe the stronger countries – Germany, France and The Netherlands – have more to lose than to gain if the European Union (EU) dissolves and they will provide substantial transitional aid to the weaker members. Even if one or more of the smaller countries does go through a debt restructuring, I think the EU and the euro will survive. Right now I think time is being bought. If progress isn’t made in the next three years, more substantial changes will take place in the EU.

It appears that the manufacturing situation in Japan is improving. I spent a day in Tokyo in May and it is clear that business activity has slowed down. Traffic moves freely and Narita airport is almost ghostly as fewer travelers are passing through Japan. Industrial production in March was down 15.5% from April and the impact of the nuclear accident on automobile production both in Japan and the United States has been significant. Evidence is beginning to emerge, however, that manufacturing is returning to normal, but concerns about inadequate supplies of electrical power this summer are troubling many companies. Toyota plans to work weekends during the summer and take two weekdays off. Both non-manufacturing indexes and department store sales are improving, and there are growing expectations that manufacturing will approach normal levels during the summer. Japan is no longer a major contributor to world growth, but it is an important component supplier and a return to normal manufacturing output is an important development.

During the past few months there has been considerable focus on the inflation issue. This has been particularly pronounced in the developing markets where food and energy are 30% or more of their respective consumer price indexes. China and India have tried to address this problem through monetary policy and there is evidence that they have achieved some success, but the major improvement in the inflation outlook has come from the commodities themselves. The possibility of Qaddafi stepping down in Libya has been a factor in reducing crude prices, but I believe oil and agricultural commodities got ahead of the price that was demand-induced because of an abundance of financial speculators buying futures. Once the prices showed signs of topping, traders got out and commodities pulled back to levels closer to those created by normal demand, thus reducing inflation pressure. I continue to believe inflation will remain relatively modest in Europe and the United States because wages and house prices will not be showing significant increases. In the developing world we have probably seen the worst because I believe commodities have peaked for 2011.

Certainly one cloud hovering over the equity market is the prospect of an impasse on the $14.3 trillion debt ceiling in the United States. In my view a government shutdown would be a negative for both political parties. If the government was unable to send out benefit checks and pay its bills, and could only maintain essential services, the American public would lose confidence in the political system as a whole and the Republicans would not get credit for their fiscal discipline and the Democrats would not get credit for trying to continue support for those in distress. In the eleventh hour (perhaps August), some compromise will be reached, but the trade-off may be costly. At the end of last year, the Republicans approved an extension of unemployment benefits (which the Democrats wanted) in exchange for the extension of the Bush tax preferences, resulting in a bigger budget deficit this year and next. Who knows what the deal will be this time?

Tags: Blackstone Group, Byron Wien, Commodities, Commodity Prices, Crude Oil, Debt Ceiling, Disruptions, Earthquake In Japan, Federal Budget, Financial Assets, Floods In Australia, Fukushima, Government Shutdown, India, Investor Confidence, Investor Sentiment, Months Of The Year, Nuclear Accident, Pessimism, Regime Change, Richter Scale Earthquake, Upswing, Winter Weather
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Despite Economic Soft Patch, Bull Market Should Persist (Doll)

Tuesday, May 10th, 2011

by Bob Doll, Chief Equity Strategist, Fundamental Equities, BlackRock

Stocks fell last week amid a great deal of economic crosscurrents. Overall, the Dow Jones Industrial Average dropped 1.3% to 12,639, the S&P 500 Index fell 1.7% to 1,340 and the Nasdaq Composite declined 1.6% to 2,828.

The major story in the headlines is, of course, the death of Osama bin Laden. While the news can be viewed as beneficial from an overall perspective of improving the mood of the general public (which could have a positive impact on investor confidence), it is unlikely to have any meaningful impact on the economic or financial outlook. In our view, issues such as corporate earnings trends and economic data releases are almost certain to overshadow the impact of bin Laden’s death.

Recent economic data does suggest that the United States is in the midst of a soft patch. The slowdown in gross domestic product (GDP) growth that we saw in the first quarter is the most high-profile data set that supports this view, and we have also seen a reduction in some individual and consumer confidence measures. To some extent, weaker economic data can be attributed to poor weather in much of the United States, but the real culprit is probably higher energy prices (notwithstanding last week’s commodities correction). Higher energy prices are likely to have a longer-lasting negative impact on future growth levels unless we see a continuation of last week’s moves.

Outside of the United States, investors are concerned about ongoing problems in European sovereign debt markets. Without decent levels of economic growth in European peripheral countries, we are likely to see higher levels of sovereign bond defaults. Unfortunately, the combination of fiscal austerity and policy tightening in Europe is unlikely to result in improved growth, meaning that the sovereign debt problem is not likely to go away any time soon.

Despite all of the risks and a somewhat weaker set of economic data, it is important to point out that there are also a number of tailwinds for the economy and the markets. Chief among them is the continued improvement in the labor markets. April’s employment report showed a significantly better-than-expected increase of 244,000 jobs for the month. The unemployment level also rose to 9.0%, but at least some of that was driven by a decline in agriculture-related jobs that were negatively impacted by bad weather. The recent trend of employment growth is quite impressive. Over the last three months, the average increase in jobs has been 253,000, which would translate into an annual increase of three million new jobs, the best rate in over five years. Looking ahead, we expect the labor market improvements will continue.

An additional positive factor we would highlight is the continued improvement in credit conditions in the United States. Loan standards have been easing in recent months for both businesses and individuals, which is a leading indicator of improvements in jobs growth, retail sales and corporate investments. Additionally, as we have been citing in recent weeks, corporate earnings have continued to be a source of strength.

Despite the economic crosscurrents, our baseline view has not changed. We still believe the macro environment will continue to be dominated by moderate levels of economic growth (helped in large part by an improving labor market), low levels of core inflation (driven by below-potential levels of GDP growth and employment) and near-0% short-term interest rates. There are, of course, a number of risks that could cause more significant disruptions (specifically, a worsening in economic data and/or continued climbs in energy prices). For now, however, we believe that, as has been the case for many months, the macro environment should be conducive for additional gains in equity prices.

Bob Doll is Chief Equity Strategist for Fundamental Equities at BlackRock^® a premier provider of global investment management, risk management and advisory services. Mr. Doll is also Lead Portfolio Manager of BlackRock’s Large Cap Series Funds. Prior to joining the firm, Mr. Doll was President and Chief Investment Officer at Merrill Lynch Investment Managers.

Sources: BlackRock; Bank Credit Analyst. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of May 9, 2011, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index.

Copyright © BlackRock

Tags: Bob Doll, Confidence Measures, Consumer Confidence, Corporate Earnings, Crosscurrents, Debt Markets, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Economic Data Releases, Financial Outlook, Fiscal Austerity, GDP Growth, Higher Energy, Investor Confidence, Meaningful Impact, Nasdaq Composite, Poor Weather, Profile Data, Sovereign Debt
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Counterpoint – It’s Bad, But Not All Bad (Bradley)

Monday, September 20th, 2010

September 16, 2010

We continue to be barraged with negative news. Even the most positive economists are projecting slow growth for the next few years, and the bearish ones, whose names all seem to start with ‘R’, send chills down my spine. One sentence in Connor, Clark & Lunn’s September Outlook pretty much captures the concerns.

“Consumer, business and investor confidence are poor, retail sales are sluggish, credit formation is weak, unemployment rates continue to rise, house sales and prices are falling again, the system is choking on debt and the majority of leading indicators have rolled over and are heading down at an alarming rate.”

Yikes.

In this context, we continue to counsel caution, but we’re not recommending our clients stray too far from their long-term asset mix. I say that because there are some offsetting positive factors that don’t get much press. Rather than wallow in the gloom, we need to keep some perspective. Consider the following:

• Price/Earnings multiples are low. There are plenty of high-quality, well-financed companies trading at 12 times earnings, or less. This compares to U.S. treasuries that carry a multiple of 40 times. As CCL calculates it, the Equity Risk Premium, which factors in interest rates, credit spreads and economic growth, is at its highest reading ever (i.e. good for making money).
• Corporate balance sheets are strong. Indeed, they’re stronger than all but a few countries. This means corporations have money to spend on capital assets and acquisitions. If we do get a pickup in mergers and acquisitions activity, the stock market will love it.
• Negative sentiment usually presages a major investment opportunity. Today equity mutual funds are in redemption and investors are asking why they own stocks at all. Indeed, in recent weeks, there have been a number of articles on “The End of the Equity Cult”. In his July 19th letter, Howard Mark of Oaktree Capital Management phrased it well. He said, “Markets are safer when fear balances greed, and when worry about losing money balances worry about missing opportunity.” We needn’t worry about greed right now and all the worry is focused on losing money.

In my meetings with industry veterans over the last month, the themes have been consistent. Why would I buy bonds yielding less than 3%? Equity returns are going to be modest over the next 5-10 years (because of subdued economic growth). And there are some really good companies trading at low valuations, particularly in the U.S. and Europe.

It doesn’t necessarily add up – low rates and low stock valuations don’t usually go together, nor do cheap stocks and subdued market expectations – but not to worry. What it really means is that there’s opportunity out there and we need to start culling through the negatives to find the positives. I say that not to cheer myself up, but rather to make sure we bring some balance to the discourse.

Copyright (c) Tom Bradley, Steadyhand Investment Funds

Tags: Alarming Rate, Asset Mix, Capital Assets, Connor Clark, Consumer Business, Corporate Balance Sheets, Counterpoint, Credit Spreads, Equity Risk Premium, House Sales, Investment Opportunity, Investor Confidence, Leading Indicators, Mergers And Acquisitions, Negative News, Negative Sentiment, Oaktree Capital Management, Price Earnings, Treasuries, Unemployment Rates
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“You Call This Capitulation?” (Rosenberg)

Thursday, August 26th, 2010

GOLD GLITTERS

A contact of mine was kind enough to send me a copy of a speech that Ben Bernanke delivered on Japanese monetary policy back when he was still teaching economics at Princeton — A Case of Self-Induced Paralysis. Imagine that he gave this speech 11 years ago, and everything he laments in his speech is part and parcel of the U.S. macro and market backdrop today.

In any event, without getting too critical, this is the earliest piece we can find — three years ahead of his famous “What If” speech on November 22, 2002. What really caught our eye — on the same day that gold prices rose another $10 an ounce — was the section on “How to Get Out of a Liquidity Trap”, which we are clearly in considering that record-low mortgage rates have not stopped home sales from cratering to record-low levels. In particular, the subsection that contains one of the solutions to a deflationary debt deleveraging cycle, which is what he was advocating for Japan back then: “Depreciation of the Yen”. Indeed, instead of depreciating, the yen has strengthened 15% since Mr. Bernanke gave that speech, and look where Japan is today. So, it would go without saying that embarking on investment strategies that are inversely correlated with the greenback would seem to make good sense, and the gold price would certainly fit that bill (we should add silver into that mix as well).

YOU CALL THIS CAPITULATION?

Short interest on the Nasdaq down 1.6% in the first week of August?

The Rasmussen investor confidence index at 80.4? Call us when it hits 50, which in the past was a “classic” washout level.

Investors Intelligence did show the bull share declining further this past week, to 33.3% from 36.7%. But the bear share barely budged and is still lower than the bull share at 31.2%. Are we supposed to believe that at the market lows, there will still be more bulls than bears out there? Hardly. At true lows, the bulls are hiding under table screaming “uncle!”.

Yes, Market Vane equity sentiment is down to 46, but in truth, this metric is usually in a 20-30% range when the market correction ends. We are waiting patiently.

As for bonds, well, Market Vane sentiment is 73%. Now what is so bubbly about that. Call us on extreme positive sentiment when this measure of excessive bullishness is closer to 90%, and we’ll be in the correction camp hopefully by the time this happens.

In any event, the extent of the denial over U.S. double-dip risks is unbelievable. These are quotes from economists and strategists in yesterday’s print media — and just a select list at that for there was just so much surreal commentary:

“I’d be shocked if you don’t make a lot money in U.S. stocks over the next decade.”

“If yields rise, then 30-year bonds will suffer.”

“It won’t be a double-dip recession but it might feel like it.”

“There is a global perception that we are not necessarily going into a Japan-type scenario, there is a recognition of a slow recovery.”

“People shouldn’t panic.”

At market lows, the recession rhetoric becomes more intense and indeed it’s when people do panic that the best buying opportunities generally occur.

Copyright (c) 2010 Gluskin Sheff

Tags: Bear Share, Capitulation, Confidence Index, Gold, Gold Glitters, Gold Price, Gold Prices, Good Sense, Greenback, Investment Strategies, Investor Confidence, Investors Intelligence, Japanese Monetary Policy, Liquidity Trap, Low Mortgage, Lows, Mortgage Rates, Nasdaq, Ows, Short Interest, Silver, Teaching Economics
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