Chris Wood: The U.S. Will be the Endgame

Monday, March 8th, 2010

In this video interview, Chris Wood, CLSA’s Asia strategist and author of the top “Greed & Fear” newsletter, shares his views on global markets with CNBC.

Click here or the image of the report to read Wood’s full report that precedes his appearance on CNBC below.

Wood said: “My view is that there is an inevitable endgame as a result of all this massive spending of taxpayer money in the West and Japan to bail out bankrupt banking systems, so in my view unfortunately the end game will be systemic government debt crisis in the western world.

“It will probably happen in Europe and will climax in the US, and I am expecting on a five year view the collapse of the US Dollar paper standard … The key reason why that is the endgame is that this credit crisis we saw in the west in 2008 and 2009 has simply been deferred, because 95% of the so-called government policy solutions to deal with this crisis have simply been to extend government guarantees.

“So the problem has been transferred from the private sector to the public sector. It is just a matter of time before investors revolt against these sovereign guarantees … The crisis is going to happen first in Europe. The US will be the endgame.” (Hat tip for transcript: Zero Hedge.)

Source: CNBC, March 1, 2010.

Tags: Banking Systems, Clsa, Cnbc, Collapse, Credit Crisis, Debt Crisis, Emerging Markets, End Game, Endgame, Global Markets, Government Debt, Government Guarantees, Government Policy, Greed, Hat Tip, Matter Of Time, Policy Solutions, Revolt, Strategist, Taxpayer Money, Video Interview
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Financial Services: Prospects for Your Future

Tuesday, September 29th, 2009

In a lively discussion with Simon Johnson (MIT Prof, former Chief Economist, IMF), Lawrence Fish (former Chairman and CEO, Citizens Financial) deconstructs the near collapse of the banking system and points out the multiple factors that have contributed to the financial crisis.

Topics in the discussion include the banks that did not fail, how Canadian and other countries’ banking systems also did not fail, the political landscape of banking regulation, ethics, bonuses in the banking industry and the ethics oath signed by 50% of the students at the Harvard Business School.

This is a must-view video clip, but be warned that it runs for 53 minutes.

Source: MIT World, September 24, 2009 (hat tip: Infectious Greed).

Tags: Banking Industry, Banking Regulation, Banking System, Banking Systems, Canada, Ceo, Chief Economist, Citizens, Collapse, Ethics, Financial Crisis, Financial Services, Harvard Business School, Hat Tip, Imf, Infectious Greed, Lawrence Fish, Political Landscape, Prospects, Simon Johnson, Video Clip
Posted in Markets | 1 Comment »

Bespoke: BRIC countries continue to surge

Sunday, May 31st, 2009

Bespoke Investment Group, who do a brilliant job charting, have put together the year-to-date look at BRICs vs. S&P500 [below].

Are emerging markets equities decoupling once again from developed markets equities?

It may still be too soon to tell, however, a recognition of the underindebtedness of BRIC-based companies and consumers, healthy banking systems, sound fiscal and monetary policies, as well as a resurgence in government spending and domestic consumption could be behind the recovery which has taken place in Emerging Markets since last November’s lows, which began 4 months sooner than the equity market recovery in March in the G-7.

Oil’s surging recovery from the $30s to $66 [Friday], and the weakening Greenback [which has been good to commodities' prices] have provided a further boost to Russia and Brazil’s commodity complex.

A landslide general election victory for India’s incumbent Congress [Liberals] coalition government has cleared the way politically for India to move forward on much needed reforms for at least the next 5 years.

China’s economic rebalancing, via its $600-billion stimulus appears to be trickling very solidly into the corporate sector and the economy, much faster than anticipated.

Time will tell.

Russia’s RTS stock index was up another 3.2% today [Friday], while China was up 1.71% and India was up 2.3%. The BRIC (Brazil, Russia, India, China) countries continue to surge higher in 2009, as they’ve far outpaced stock markets of so-called ‘developed’ countries. Below we highlight their year to date performance compared to the S&P 500. As shown, Russia is up a whopping 72.1% this year, followed by India at 51.6%, China at 44.6%, and Brazil at 39.7%. The S&P 500 is up 0.22%.

Source: Bespoke, May 29, 2009.

Tags: Banking Systems, BRIC, Bric Countries, BRICs, Brilliant Job, Coalition Government, Commodities Prices, Corporate Sector, Domestic Consumption, Election Victory, Emerging Markets, Fiscal And Monetary Policies, government spending, Greenback, India, India China, Investment Group, Last November, P500, Rebalancing, Stock Index, Stock Markets
Posted in Emerging Markets, Markets | No Comments »

Overbought Bear Market Rally or New Bull?

Tuesday, May 5th, 2009

Are we in a mother of a bear market rally, and is the market overbought? Or is this 1982, or better yet, 1974 all over again, and as some are suggesting, the beginning of a new bull? Several ideas below are worthy of debate at this time.

First, investor sentiment seems to have rebounded far too quickly, considering the absence of strong indications that the economy is recovering, and quantitative easing moves have failed to re-ignite lending so far. Second, winning streaks this long are rare. Third, it appears that according to breadth measures, the market is in an overbought state. Is it different this time, or is it the topping out of a large sucker rally? Has the market just chosen to forget that there are still widespread problems in the banking systems of the US, Japan, Europe and the UK?

Sentiment may have changed too quickly, a characteristic of past bear market rallies.

“I’ve lived through a lot of bear markets, and I must say I’ve never seen sentiment change so quickly after an horrendous drop in the market.” So wrote Richard Russell, editor of Dow Theory Letters, after the close on Monday, following yet another impressive day for stocks, in which the Dow Jones Industrial Average tacked on another 214 pts,” writes Mark Hulbert for Marketwatch.com.

Winning streaks this long are quite rare for markets.

With the Nasdaq Composite index working on its 9th consecutive positive week, many are curious about just how unusual this is.

I’m not a huge fan of “streaking” in and of itself to try to determine when a trend might exhaust, but it can be quite useful in helping to time shorter-term entries and exits.  For example, if the S&P is up 5 weeks in a row and then it gaps up +0.5% one morning, that can give us a better edge than not knowing where we are in the streak.

Anyway, the tables below give the number of weekly streaks for the S&P 500, Nasdaq Composite and Dow Jones Industrial Average since the dates given under each index.  There is an interesting wrinkle that becomes evident very quickly.

The current stretch of 9 weeks (maybe) for the Nas would be pretty unusual, but not unheard-of.  12 other periods went for this long or longer since ‘71.

We can see from that tables that the “down” weeks one is quite a bit shorter, and is much more heavily weighted at 1 and 2 weeks.  This shouldn’t be too much of a surprise, but it means that the market is less likely (or has been less likely, anyway) to stage long stretches of down weeks without an interruption.  Those bulls just get way too antsy and need to jump in.

Also interesting is the streakiness of the Nasdaq compared to the others.  It’s more heavily weighted towards the longer streaks, and has the record for both up and down stretches.  The suggestion from that would be that some higher-beta indices like the Nasdaq are more prone to trends than are the more-staid indexes that are used far more for benchmarking purposes.

Breadth measures suggest the market is overbought.

Quantifiable Edges says “I’m seeing some breadth measures again hitting all-time extremes. Worden Bros. measures the % of stocks trading at least 1 and 2 standard deviations above their 40-day moving average. I mentioned the 1-standard deviation indicator (T2110) in the blog a couple of weeks ago. At the time it was hitting an all-time high of nearly 81%. Tonight it broke that record registering over 83%. The number of stocks closing 2-standard deviations above their 40-day ma (T2112) also hit a new extreme Monday - and in a big way. Before Monday this indicator had never reached 40%. Monday it spiked up to 52.14%. A chart with the complete history is below.”

“This suggests the market is incredibly overbought. As I went over a couple of weeks ago, this doesn’t necessarily mean we’ll see a sharp selloff. At such incredible levels, though I’d certainly be careful taking long positions. These overbought levels will be worked off at some point. A selloff is one way to accomplish that.”

Barry Ritholtz offers this view:

Over the past month, I have heard quite a few people declare this to be the start of a new bull market. The kindest thing I can say in response to that is the jury is still out, but the weight of the evidence is inconclusive.

In terms of historical analogies, investors should be asking themselves: Is this move more like 1982 or 1974?

Consider: 1982 marked the end of a 16 year, secular bear market, which saw the Dow finally get over 1,000 on a permanent basis. It kissed that level in 1966, and again a few more times prior to breaching that level for good in 1982. After 16 years, nominal returns were zero, but on a real (inflation adjusted) basis, buy & hold investors lost nearly 90% of the purchasing power.

At the beginning of that 18 year long Bull market, equities were despised, bond yields were high and P/E ratios were single digits. History does not repeat precisely, but there is usually a rhyme involved.

I have noted in the past that following major bull runs, markets often have a major refractory period, wherein it takes years to work off the excesses of the prior period. Even in that period, markets will get deeply oversold and rally, and deeply overbought and sell off.The current secular bear is no different.

This could be 1982, but I doubt it. Instead, consider the 1973-76 period as a analog: The 23 month, 45% sell off was followed by 22 month, 76% rally. I could live through that again, as long as disco doesn’t come back also . . .

I’ll see if I can dig up a few relevant charts later.

And, Corey Rosenbloom at GreenFaucet.com puts forward his argument, Are we Reliving the1982 Scenario?

Could history be repeating itself directly?  Might there be an exact roadmap to follow as it relates to the current stock market trajectory?  If only it were so easy, but I did want to highlight some eerie similarities in the charts you might want to as it relates to the end of the 1982 Bear Market in what was called the “Melt-Up” action.  Let’s take a look and see if we might be reliving the “1982 Melt-Up Scenario”.

First, let’s take a look at our current market structure as of May 4th, 2009:

Taking a quick look, we see a negative volume divergence accompanying a negative momentum divergence (shown in the 3/10 Oscillator and in other momentum oscillators).  Divergences are non-confirmations of higher prices and hint that odds favor a reversal (or at least a retracement) rather than immediate continuation of the rising price action.

A geometric ‘arc’ has also formed, which hints at a gentle transfer between buyers and sellers (supply and demand) - also a reversal/retracement signal.

Next, let’s look at an eerily similar pattern that formed as we hit the absolute lows of the 1982 Bear Market:

We can apply the same analysis - rounded arc, negative volume and momentum divergences.  In the case of September 1982, we did see a much larger volume and momentum spike than we’re seeing now.  Price had broken down out of a rising trendline and beneath the 20 day exponential moving average (all charts are showing the 20 and 50 exponential average as well as the 200 day simple moving average).

Speaking in terms of visual charting or technical analysis, virtually any market forecast would have returned a bearish implication from the negative divergences combined with the trendline and moving average break, and the persistent downward trend in prices.

But what happened just after I captured this chart?

Finally, here is the resolution of the pattern and what happened afterwards.

Much to the surprise to both technical and fundamental analysts, investors, and traders, price completely  shrugged-off the negative technical and fundamental analyses and rallied quite sharply - most likely in response to the persistent negativity, as funds who were short were forced to cover and equity funds who were in cash rushed to chase alpha buy putting cash to work, not wanting to ‘miss the boat.’

Price continued higher with nary a meaningful retracement at all (finding support each time at the rising 20 day EMA) despite further weakness in the momentum oscillator and in volume.

If I extended the chart further to the right, you would see price continue its steady trek higher, rising persistently into August 1983 before any meaningful pullback occurred.  We often refer to this period as the “Market Melt-Up” (as opposed to a melt-down) or as the “Creeping/Oozing Trend Up” that continued to defy the bears (sellers).

We’ll need to do more analysis to draw further parallels, so one might do well to turn back your charts to 1982 and see if the current S&P 500 continues to behave in the manner it did almost 30 years ago.  It might be an eerie coincidence, but there may also be something deeper of value to consider in the price structure parallels of then and now.

Finally, after reading Corey Rosenbloom’s discussion, one counterpoint arose to his argument, that being that the US prime lending rate in 1981 had topped at 20.5%, and in the period thereafter, interest rates began their return to normal levels over many years. Today, we are faced with an empty monetary tool box and trillions of dollars in Quantitative and Credit Easing - an altogether different set of circumstances, i.e. fully tightened in 1982 vs. fully eased in 2009. Today’s pretext is deflationary, not inflationary. And, worse, there appears to be a lot of hope, for hope’s sake, that the worst of the problems of the banking sector are behind us. Are they?

To wit, stocks are not yet quite among the despised of assets, they are not yet in the single digit P/Es yet, and government bond yields are at historic lows. Where is the rhyme with either of 1982 or 1973-74?

The charts sure are interesting, and perhaps in some cases they do rhyme, or show high correlation to past markets, however, they remain inconclusive.

To reiterate Barry Ritholtz, the jury is still out. You decide.

Tags: Amp, Banking Systems, Bear Market, Bear Markets, Breadth, Different This Time, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Dow Theory Letters, Gaps, Investor Sentiment, Mark Hulbert, Market Rallies, Market Rally, Nasdaq Composite Index, Periods, Quantitative Easing, Richard Russell, Stocks, Streaking, Sucker, Term Entries, Winning Streaks
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Mark Mobius: Riding the Chinese Ox

Tuesday, March 24th, 2009

Further to my recent articles on China (”China - better days ahead” and “China - rising to the occasion“), a few comments from Mark Mobius, executive chairman of Templeton Asset Management, have just arrived.

“On February 4, China and Chinese all over the world celebrated the entry into the Year of the Ox. We would prefer to call it the Year of the Bull because we believe that 2009 will be the year that the emerging stock markets should witness a substantial recovery and China should lead the way to that recovery.

“The investment prospects and long-term outlook for China are excellent for a number of reasons: (1) the Chinese leadership is intelligent, resourceful and enlightened, with an interest in maintaining growth with a better standard of living for all Chinese, (2) that leadership has the organizational skills and policies capable of ensuring that China continues to achieve the highest GDP growth of any major country in the world, (3) China has the financial resources to undertake this gargantuan task with the world’s largest store of foreign reserves and (4) China has one of the healthiest banking systems in the world and most individuals have little borrowings.

“Undoubtedly, China will not be able to achieve the double-digit growth of 2008 but it can certainly achieve high single-digit growth. In order to maintain growth, the government is undertaking a number of massive stimulation programs targeted at the domestic market, which is designed to replace export-led growth by the domestic market-led growth. The key driver therefore will be domestic consumption. The government is also taking measures to boost consumer spending by tax cuts and consumption coupons. Therefore, any sector related to domestic consumption will be favorable. China’s economic growth is expected to be driven predominantly by fiscal stimulus and monetary easing.

“Since September 15, 2008, the People’s Bank of China has cut lending interest rates by 216 basis points (2.16%) with additional cuts expected. In order to stimulate bank lending, the reserve requirement ratio for banks was lowered four times and loan quotas, which were designed in 2008 to restrain banks from lending, will probably be unofficially abandoned.

“Inflation eased to its lowest level in more than two years, with consumer prices increasing 1.0% y-o-y in January. With strong declines in inflation, policy makers in China have become more confident and have been cutting interest rates aggressively. One of the constraints to inflation has been the crunch in trade financing, which became a global problem, but as a result of new support from Beijing this problem seems to have eased.

“The Chinese currency, the renminbi, is currently undervalued on a price parity basis. There is thus pressure for it to strengthen against the US$. However, the Chinese are concerned about further erosion of export businesses and thus are proceeding cautiously regarding any further appreciation. Structurally, this would be a good opportunity for China to introduce further reforms on the opening of its capital account and currency convertibility. With the renminbi taking a bigger role in the international market, it could become another reserve currency after the US$ and euro.

“In November 2008, the government announced a stimulus package and should be able to spend up to RMB4 trillion (or US$586 billion) in new investment programs. The package is scheduled to be spent before the end of 2010 in ten key areas, including transport infrastructure, rural electricity and gas facilities, low-rent housing, agricultural subsidies and minimum income support.

“There are also other supplementary programs geared towards promoting incomes and consumption. Funding is certainly not a problem for the Chinese government as the government is in fiscal surplus and has the largest fiscal reserves, currently at US$1.95 trillion, in the world. Moreover, given the high savings rate and low loan-to-deposit ratio with the banking system, there is ample room for the government to raise debt.

[PduP: The Chinese FTSE Xinhua Bank Index has certainly been the best-performing banking sector of any country over the past few months as seen from its performance versus the S&P 500 Financial Index, although US financials have started making amends over the past two weeks.]

Source: Fullermoney

“There are now signs of recovery in the China economy with the government’s infrastructure projects beginning to have an impact and as the Purchasing Managers new orders index rebounds. The December PMI rebounded to 41.2, 2.4 percentage points higher than the previous month, which represents the first meaningful rebound since March 2008.

“The current 2009 GDP growth forecast for China is 7.4%. The fiscal stimulus and interest rate cuts are expected to have a continuous positive impact. Of particular interest is the rise in orders for infrastructure-related material and machinery orders. This reflects the effects of the government’s fiscal stimulus measures. There are indications that the slowdown in China’s industrial production growth is showing signs of recovery with new orders, input prices and even new export orders recovering from their lows. Moreover, stocks of major inputs and finished goods are stabilizing.

“There are, of course, risks in Chinese investing. Currently unemployment is on the rise and labor activism is increasing. Therefore there are risks of disruptions, which could impact stock prices. While the official unemployment rate was just 4%, it is believed the actual number could be as high as 10%, with most unemployed being migrant workers in the coastal areas and new college graduates. Compared to the last down-cycle, the government now has greater fiscal strength to handle the situation. Farm ownership reform and wider social security coverage will help ease the impact on social stability.

[PduP: The risks are plentiful as pointed out in this report by George Friedman of Stratfor. However, the authorities are mindful of the declining world trade and are using their enormous firepower to counter the reduced exports.]

“The benefits, however, far outweigh the risks of investing in China and as the fastest growing major country in the world with the largest population, clearly China must be an investment destination for any intelligent investor.”

[PduP: In conclusion, an updated chart of the Chinese Shanghai Composite Index that seems to be mapping out a rather bullish pattern notwithstanding concerns about the command economy’s ability to successfully compensate for reduced global trade with domestic demand. Some may argue that the stock market is being manipulated, but such action, if true, can at most be a temporary phenomenon. Charts seldom lie over the longer term and with the Index above the 40-week (200-day) moving average and the rate of change (ROC) indicator (black line in the bottom section) on the weekly chart above zero, depicting a positive trend, the Chinese Ox (or should I say bull) appears to be in control.]

Source: Stockcharts.com

Source: Mark Mobius, Templeton Asset Management, February 2009.

Tags: Articles On China, Bank Of China, Banking Systems, China China, Chinese Leadership, Domestic Consumption, Double Digit Growth, Emerging Stock Markets, Executive Chairman, Fiscal Stimulus, Gargantuan Task, GDP Growth, Investment Prospects, Mark Mobius, Rising To The Occasion, S Largest Store, Substantial Recovery, Templeton Asset Management, Year Of The Bull, Year Of The Ox
Posted in Economy, Emerging Markets, Markets, Outlook | No Comments »

How are the BRICs Doing?

Wednesday, March 18th, 2009

Highlighted below are two charts from Bespoke Investment Group detailing the relative performance of the BRIC Markets (Brazil, Russia, India, China) compared with the S&P500.

Over the last year, the US has performed better than Russia and China, inline with India, and worse than Brazil.  Russia’s stock market is down the most of the BRIC countries at -68%.  China’s Shanghai Composite is down 46% and has really seen a nice pickup lately.  India’s Sensex is down 43%, which is right inline with the S&P 500, and Brazil is down 36%.

The last ten years have been very tough for US equity markets, with the S&P 500 now down 42% on a simple price basis.  But even after the suffering that BRIC markets have had over the last year, their ten-year returns remain strong.  Russia is down 68% over the last year, but it is still up 689% over the last decade (we had to put its performance on a secondary axis in the chart below).  China is up 84%, India is up 136%, and Brazil is up 314%.

Its worth highlighting that during the last decade, markets in Brazil, India, and China, experienced their strong run-ups while adhering to the advice that was given to them by the IMF and World Bank following the Long Term Capital Management fiasco, of fiscal and monetary prudence, and are today in a very sound fiscal and monetary condition. All four have amassed sizable forex reserves, consumers and corporates have under-utilized credit, especially in Brazil and India, banking systems in Brazil, India and China are sound, well capitalized and negligibly exposed to toxic assets from the G6 credit spill. In addition, stocks are cheap with P/E ratios as follows: India 9X trailing earnings, Brazil, 9-10X trailing, China 12X trailing, and Russia at 2.5X (the cheapest by far).

Although they have performed in line with S&P500 during the last year (except for Russia) they are in a much better position to recover given their “cleaner” credit fundamentals and the fact emerging markets are expected to continue to drive almost all GDP growth over the next two years, according to the IMF’s January 2009 revision, which calls for a contraction in 2009 GDP growth and a recovery in 2010.

The break in commodity prices during the last year has provided the key consuming countries, India and China, and the rest of the world, for that matter with relief from inflation, and in the case of Brazil and Russia, highlighted the fact that low cost producers of hard and soft commodities will have an unusual advantage as consumption for commodities resumes, given their lower break-evens on production.

The by-product of lower commodity prices and the ensuing global recession is also providing emerging markets central banks the room to aggressively cut interest rates in order to stimulate and accelerate domestic consumption within their own economies. This is a favourable development during a time when foreign capital flows are beginning to rebuild post the credit market crosswind that caused investors to repatriate their investments en masse from emerging markets during the last year. In China’s case, its $586-billion stimulus program announced in November, which is set to be spent over the next two years, should not only contribute very significantly to China’s domestic growth, and shore up its weakened exports sector, it should indeed provide the world with a boost as well.

Its hard to know which of the emerging markets will have the best performance over the next 2-5 years, but there is a great likelihood, that given that they continue to be the key driver of economic growth over the same period, that they will do very well.

David Swensen, Yale Endowment’s Super-CIO, recently revised upward, (this can be found in the right hand column of his recent Yale Alumni Magazine interview) his recommended allocation to emerging markets funds for individual investors from 5% to 10%.

Today, Swensen says, economic conditions might call for a modest revision. He now recommends that investors have 15 percent of their assets in real estate investment trusts, and raise their investment in emerging-market stock funds to 10 percent.

Jeremy Grantham, CIO, and founder of GMO, manager of $81-billion in assets re-entered his emerging markets trades in October-November 2008, after getting out entirely in July 2008. He had been long emerging markets for 12 years prior to the July exit, and was of the opinion that a 40% haircut was a good reason to get back in. You can read or view the interview transcript here.

Tags: Banking Systems, BRIC, Bric Countries, BRICs, Corporates, Emerging Markets, Fiasco, Forex Reserves, India, India China, Investment Group, Last Decade, Last Ten Years, Long Term Capital, Long Term Capital Management, P500, Price Basis, Prudence, Relative Performance, Secondary Axis, Sensex, Shanghai Composite
Posted in Commodities, Credit Markets, Emerging Markets, Markets, Outlook | No Comments »