About a month ago, Charlie Rose interviewed PIMCO’s Mohamed El Erian. El Erian is one of the country’s most successful money managers. He’s the co-CEO of the Pacific Investment Management Company, better known as PIMCO which oversees more than 829 billion dollars. He previously led Harvard University’s endowment to substantial returns on investment. In the interview, which is available below, Charlie Rose speaks to him about his new book “When Markets Collide” and how he sees the global economy today.
As you know, GreenLightAdvisor.com is a huge fan of the outspoken Hugh Hendry, CIO, Eclectica Asset, who has been a unique, eloquent, and brash voice in this market. Its our sense that Hendry is also uniquely alone, and lucid, in the marketplace in terms of his outlook, and for this reason should be added to your must see/must listen to list.
click image to watch
The segment which aired August 19, 2008 on CNBC Europe, also contains midway, a terrific interview with GE CEO Jeff Immelt.
“There is no role for speculation or speculators today. This is kaput,” Hendry said. “If we were Second World War generals, we’ve exposed our flanks. We’ve been wiped out. This is about fundamentals … this is about losing money.”
As the crisis unfolds, the policymakers’ focus should shift from the threat of inflation to that of the world economic downturn, which could be more severe than economists anticipate, he said. (Watch Hendry’s interview below for more on the economy, inflation and commodities).
China, which many believe will balance out slowdowns elsewhere, will struggle if difficulties in the U.S. continue, while the current spike in producer prices is just a hangover from rising oil prices earlier this year, Hendry said.
“I fear that the central bankers of the world are fighting yesterday’s battle,” he said.
As for the banking sector, it is “insolvent,” Hendry said, adding he can’t tell just how low those stocks will go.
Below we provide Bespoke’s trading range charts of ten major commodities. The green shading represents two standard deviations above and below the commodity’s 50-day moving average, and moves above and below indicate extreme overbought and oversold levels. It’s no news that commodities have suffered major pullbacks over the last two months, and the charts below provide a good view on how bad it has been.
After trading at the top of its range for what seemed like forever, oil finally traded to the bottom of its range late last week, and after touching extreme oversold territory, it finally bounced for a couple of days, only to see big declines again on Friday. Like most other commodities, natural gas unfortunately hasn’t gotten a bounce. Since touching 13.58 in early July, nat gas is down 42%.
While gold declines from $1000 to under $800 make the headlines for precious metals, platinum and silver have actually gotten hit harder. From their peaks, silver has fallen 38% and platinum has fallen 40%.
Corn, wheat, orange juice and coffee have actually staged some pretty good rallies off of oversold levels over the last couple of weeks. Wheat almost touched overbought territory last week, but all four are still well off their highs earlier this year.
Once again, we continue to be impressed by the charting and tabling work that Bespoke Investment Group compiles on a daily basis. Here below is the latest survey which compiles the largest market capitalizations of companies from around the world.
One notable standout is the size difference between Exxon Mobil ($438-billion) and Gazprom ($237-billion). We point this out simply because while Exxon is worth close to twice as much in market cap, Gazprom happens to be 6 times larger according to their total hydrocarbon reserves, and a reserve life index of roughly 28 years or so, vs. Exxon’s 17-18 years. This is the post Georgia debacle, post-oil-price-downturn price. Russian energy companies are cheap, cheap, cheap.
And, even after the huge haircut that PetroChina and China’s largest banks and companies have gotten the last year, PetroChina still commands 2nd place at $341-billion, China Mobile at 5th place, ICBC at 7th place, and CCB in the 15th spot.
Finally, where is India? We give 3-5 years before several Indian outfits make it to the market cap pantheon. That spells opportunity.
Below we highlight the 30 largest companies in the World by market cap ($). As shown, Exxon Mobil is the top dog by about $70 billion. Exxon is trailed by another energy company, Petrochina, then General Electric and Microsoft. Eleven of the top 30 are based in the United States. The Energy sector has the largest representation at 8, followed by Technology at 5. Only 3 companies in the top 30 are up in 2008 — Wal-Mart, IBM and Johnson&Johnson. And Apple and Google followers will be happy to see them ranked 25th and 26th in the World.
There is little evidence to suggest that Chinese manufacturing competitiveness has deteriorated meaningfully.
The mainstream media has been filled with reports about Chinese companies closing production facilities due to rising costs. Some analysts have concluded that China is quickly losing its competitive edge, and international producers are moving to other countries. In reality, there has been no meaningful decline of China’s export market share, particularly when exports of oil-producing countries are excluded. Indeed, China’s slowing export growth in recent months is a reflection of changing global market conditions rather than a deterioration in Chinese producers’ competitiveness. Rising input costs due to higher commodities prices are not unique to China: manufacturers around the world are suffering similar cost pressures and margin squeezes. In addition, the RMB’s appreciation has not been excessive, rising at a 3.5% annual rate in trade-weighted terms since its 2005 de-peg from the U.S. dollar. The trade-weighted yuan is still below its 2002 levels, when the economy was struggling with a deflationary shock. Finally, recent weakness in the export sector can be partially attributed to the Chinese government’s voluntary export restraints, which have been part of the country’s broader growth-rebalancing strategy. These policies could be removed any time if excessive weakness develops. Already, the government has increased VAT rebates for textile and garment exporters since the beginning of the month.
Jason Zweig’s latest column at the WSJ (Psyching Yourself Up to Let Losers Go ) tackles a tough issue for most investors - when to sell. Selling can be difficult for a variety of reasons, but a big factor is psychology. We don’t like to let go and give up things we’ve bought. Zweig provides us with a telling statistic:
Individual and professional investors alike struggle with selling. Berkeley finance professor Terrance Odean has found that investors are at least 50% more likely to sell their winners than their losers. Among the money managers surveyed by Cabot Research, a Boston consulting firm, fewer than 30% base their sell decisions on “extensive research.” The rest concede they basically sell by the seat of their pants.
To defend our portfolios from our emotions, Zweig offers us six techniques.
1. Use stop-loss orders
I’ve never been a fan of using a stop-loss order on a company’s stock. I know that Investors Business Daily advocates the use of selling whenever a company falls 10% and I think it’s too trivial of a rule. Zweig says that he doesn’t advocate the use of stop losses but prefers “stop look” orders:
Whenever a stock drops, say, 25% below what you paid, automatically review your original top three reasons for buying to see whether they are still valid. That will prevent you from selling without thinking first.
This is a pretty good idea. I practice the same kind of exercise myself. I don’t have any alerts set to tell me when about a drop of 25%, but I do check my company’s prices regularly. An easy way to get notified of drops in your companies can be done with Yahoo Alerts, you can get an e-mail or text message based up requirements you set (price drop/rise or percent drop/rise). Two of my holdings, Air Transport Services Group (NASDAQ: ATSG) and Steak N Shake (NYSE: SNS) have fallen a bit from my initial buying points ($1.70 and $10.00).
In each of these cases, I re-analyzed my investment thesis, to see if anything changed. With ATSG, the fall from $1.70 to below $1.00 was triggered by almost no news. DHL severing business ties with ATSG was already part of my investment idea- so I didn’t see a reason to sell. With SNS, my thesis hinged on Sardar Biglari getting onto the board and gaining control so that he could make the right decisions for the company. I decided that I would not sell till that thesis was properly tested.
2. Don’t Go Far Afield
Here, Zweig recommends buying an industry index if the company you purchased ends up having poor results. I don’t quite agree with this advice. It all seems a little bit like decisions made by an investor who doesn’t know what they’re doing who is trying to catch a trend (and may be too late).
The only time I think that this is valid is when you’re investing in an industry with good economics but where the individual players might be too hard to pick. I’m thinking of Buffett’s investments in pharma with companies like Sanofi Aventis (NYSE: SNY), GlaxoSmithKline (NYSE: GSK), and Johnson & Johnson (NYSE: JNJ). The difference with Buffett’s investments in pharmaceutical companies is that he still was not buying an ETF, he bought just a few of the players in that industry. An ETF will usually have many more holdings and carry the risk of over diversification.
3. Shop Before You Drop
Zweig’s next technique is a bit better-
Ask yourself: Which stock or fund would I most like to own? Then view your losers as a source of funding to reduce the amount of cash you would otherwise need to raise
Sometimes I think that selling losers can be good, especially if you’re purchasing a better buy. Maybe a new opportunity has presented itself with a higher return or the margin of safety in your losing investment has narrowed.
4. Re-price it.
Here, the idea is to take your original purchase price and divide it by 10 and compare that price with its current price. A simpler method might be to look at the price you’re seeing right now and compare it to your conservative estimate for the company’s margin of safety(the spread between the current price and the company’s intrinsic value you in your eyes). If you’re buying companies at what you think are 50% discounts, you’ll see a wider margin of safety. It will then be up to you to decide if anything has changed.
If the margin of safety has narrowed to a point where maybe the capital could be better used elsewhere, then you should.
5. Follow your sales.
This is some of the best advice in the column.
Using an online portfolio tracker, monitor the returns of all the stocks you sell after you sell them. Studying the aftermath of your mistakes will enable you to learn which you sold too soon and which too late. You cannot improve what you do not measure.
I try to do the same. On my Google Finance page I keep all of my stocks, even after selling them. I like to see what they’re currently doing and learn from my mistakes and the company’s mistakes. By doing this, you expand your circle of competence. It makes me think of a quote from Edward Lampert in Fortune Magazine.
[The] idea of anticipation is key to investing and to business generally. You can’t wait for an opportunity to become obvious. You have to think, “Here’s what other people and companies have done under certain circumstances. Now, under these new circumstances, how is this management likely to behave?” The plays my father designed for me helped me learn to think ahead. Lots of days I asked him, “Why can’t we just invite kids over and play a game?” In order to do something well, he explained, you have to keep practicing and preparing.
And I think that’s one of the more important concepts to keep in mind when investing. You can often draw upon past experiences when making future decisions. The situation might not be entirely the same, but it’s incredibly useful to have that kind of knowledge filed away for future reference.
August 25, 2008 - Courtesy: Bespoke Investment Group - The MSCI World index, which measures global equity market performance, is now up just 68% (not total return) since its bottom on March 12, 2003. After analyzing the performance of various country indices since then, we found some interesting results.
Since the 3/12/03 global market bottom, Brazil, India and Mexico all have total returns of more than 400%, with Brazil leading the way at 427%. Germany has been the best performing Western European country with a total return of 187%. At the bottom of the barrel is Japan, with a gain of 68%, but unfortunately the US ranks second to last at 77%. So while much has been made of how well the US has held up during this downturn, it still lags behind pretty much everyone else when looking at the last bull and the current bear. The most surprising performance number comes from China. After its bubble and bust from 2005 to present, China’s performance is pretty much right inline with the US at 79%. With so much focus on China’s growth this decade, one would think its equity markets would be at the top of the performance ladder with other BRIC countries.
Below we highlight the recent survey of strategist price targets for oil in the fourth quarter of 2008. Goldman Sachs has been making news with the reiteration of their $150 oil call, and as shown below, they’re currently the most bullish strategist amongst participants in Bloomberg’s strategist survey. Overall, 24 out of 31 have a price target greater than the current price of oil, but it’s important to note that these targets were all upped right as oil was peaking. The average price target for Q4 is $121, while the median is $125.
Its hard not to notice that only 3 strategists see the price falling below $100 by Q4. Is this contrarian?
August 20, 2008 - Here’s what BCA Research says about China - Growth moderation in the Chinese economy will continue. However, unlike many previous Olympic-hosting countries, the end of the game-related construction will have little tangible impact.
While the growth moderation in China will persist, it will be gradual with limited downside. Olympics-related capital spending (although estimated at a record US$43 billion) is only a fraction of China’s total capital spending and a relatively small portion of its US$3.6 trillion economy. In addition, the Chinese authorities are being proactive and have already shifted their focus to protecting growth, even though signs of the slowdown are still very preliminary and headline inflation remains above their target. So far, domestic demand is holding up well: retail sales volumes continue to accelerate and the softening in food inflation over the past several months is helping to alleviate a meaningful drag for lower-income households. Although it is still too early to expect a rebound in China’s export sector (the weakest link in the economy), the slowdown may already be well advanced. Moreover, the Chinese government has started to increase its tax rebates to exporters of some low-value-added industries, which should help stabilize their overseas sales. Additional fiscal support is expected if excessive weakness in these sectors persists. Bottom line: We expect a further moderation in China’s economic growth but maintain a positive outlook. The two primary risks that we are monitoring are the ongoing shortage of electricity and the rebound in the U.S. dollar.
The current losses from the “credit crisis” have reached a staggering landmark of $500 billion. That’s enough cash to buy Exxon Mobil outright and still have $100 billion left over. Or you could pick up Wal-Mart and Microsoft. As nasty as $500 billion sounds consensus says we are still only halfway through.
Bob Farrell, a legend at Merrill Lynch for several decades, had a front-row seat to the go-go markets of the late 1960s, mid-1980s and late 1990s, and the brutal bear market of 1973-74, and October 1987’s crash.
He retired as chief stock market analyst at the end of 1992, but continued to occasionally publish. Rumor has it for a humongous donation to Farrell’s favorite charity, you can get on his very exclusive email list.
Marketwatch gathered some of Farrell’s more famous observations, and republished them as “10 Market Rules to Remember.”
1. Markets tend to return to the mean over time
When stocks go too far in one direction, they come back. Euphoria and pessimism can cloud people’s heads. It’s easy to get caught up in the heat of the moment and lose perspective.
2. Excesses in one direction will lead to an opposite excess in the other direction
Think of the market baseline as attached to a rubber string. Any action to far in one direction not only brings you back to the baseline, but leads to an overshoot in the opposite direction.
3. There are no new eras — excesses are never permanent
Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots. Look at how far the emerging markets and BRIC nations ran over the past 6 years, only to get a sizable haircut.
As the fever builds, a chorus of “this time it’s different” will be heard, even if those exact words are never used. And of course, it — Human Nature — never is different.
4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
Regardless of how hot a sector is, don’t expect a plateau to work off the excesses. Profits are locked in by selling, and that invariably leads to a significant correction — eventually.
5. The public buys the most at the top and the least at the bottom
That’s why contrarian-minded investors can make good money if they follow the sentiment indicators and have good timing.
Watch Investors Intelligence (measuring the mood of more than 100 investment newsletter writers) and the American Association of Individual Investors survey.
6. Fear and greed are stronger than long-term resolve
Investors can be their own worst enemy, particularly when emotions take hold. Gains “make us exuberant; they enhance well-being and promote optimism,” says Santa Clara University finance professor Meir Statman. His studies of investor behavior show that “Losses bring sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning stocks.”
7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
Hence, why breadth and volume are so important. Think of it as strength in numbers. Broad momentum is hard to stop, Farrell observes. Watch for when momentum channels into a small number of stocks (”Nifty 50″ stocks).
8. Bear markets have three stages — sharp down, reflexive rebound and a drawn-out fundamental downtrend
I would suggest that as of August 2008, we are on our third reflexive rebound — the Januuary rate cuts, the Bear Stearns low in March, and now the Fannie/Freddie rescue lows of July.
Even when these sporadic rallies end, we have yet to see the long drawn out fundamental portion of the Bear Market.
9. When all the experts and forecasts agree — something else is going to happen
As Stovall, the S&P investment strategist, puts it: “If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?”
Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.
10. Bull markets are more fun than bear markets
Especially if you are long only or mandated to be full invested. Those with more flexible charters might squeek out a smile or two here and there.
Below we highlight the estimated current year P/E ratios and dividend yields for the major equity indices of 13 countries. As shown, Europe has the lowest estimated P/E ratios, with Italy, the UK and France all below 10. The US ranks 3rd to last behind China and Japan. European equity markets also offer some attractive dividend yields well above 4%.
To be satisfied with a little, is the greatest wisdom; and he that increaseth his riches, increaseth his cares; but a contented mind is a hidden treasure, and trouble findeth it not. — Akhenaton
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WSJ What's News Late Edition, March 17, 2010by The Wall Street Journal 17 Mar 2010 at 5:56pm
Stocks rise again as the Dow closes at a 2010 high; wholesale prices fall in February, showing inflation remains in check; and MillerCoors shakes things up with a new brew.
Jeffrey Saut Daily Audio Comment Raymond James
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Jeff Saut’s Daily Audio Comment is recorded every weekday, except Wednesday, at 9 a.m. ET. It is made available to the public on this Web page at approximately 1 p.m. ET.
There is little evidence to suggest that Chinese manufacturing competitiveness has deteriorated meaningfully.
