The comments below were provided by Kevin Lane of Fusion IQ.
We said several weeks back that it was hard to see the market top when bullish sentiment surveys were so neutral. Additionally we stated that tops were usually met with exuberant buyers not traders salivating to put on shorts. So here we are several weeks later and two indices - the Nasdaq Composite and the Russell 2000 - are both at new post-market low highs. When the Nasdaq and Russell 2000 are both making highs it again is hard not to maintain a bullish bias.
Given that the market has rallied nearly 10% in the last few weeks, expect a shallow to moderate pullback to occur; however, we believe this pullback will present a buying opportunity.
The economic calendar will remain volatile as investors overinterpret every release; however, by and large we believe the economic recovery will continue on its course and this will cause the last reluctant sideline monies to finally join the party. Only when all liquidity is exhausted and all the buyers are in will this move likely end. Our guess is this will occur somewhere in the range of S&P 500 1,200 to 1,300.
So for now weakness appears to be an opportunity to buy stocks, especially in the areas that are working, i.e. technology and small caps.
Regulators in Beijing have approved a variety of investment products and strategies that are commonplace in mature stock markets: margin accounts for trading, stock index futures and short selling.
A trial period will come first, so it’s not yet clear when the millions of investors in China will be able to execute a short sale or buy stocks on margin. But just the decision to move forward on this front indicates that the government recognizes that its highly liquid markets are ready for more sophisticated strategies.
Chinese investors now have only one direction to go – long-only. If they don’t like a particular company’s prospects, they can either avoid it or, if they own it already, they can sell.
The result is that the country’s stock market is subject to wild mood swings – the Shanghai Composite index, for instance, saw a 130 percent gain in 2006, followed by a 97 percent gain in 2007, a 65 percent tumble in 2008 and an 80 percent gain last year.
Until the measures are fully implemented, we won’t know for certain the benefits and the risks of giving investors more tools to work with.
China’s regulators are optimistic about the impact of the changes. “This improves the stability and the healthy development of the capital markets,” the China Securities Regulatory Commission said on its web site.
Some market observers, however, say that the typical Chinese investor is not ready to take their game to a higher level, perhaps not unlike elevating a decent high school basketball player into the NBA. Their worry is that small-time investors won’t be able to keep up with their better-equipped professional competitors, and that an already volatile market could become even more volatile.
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One risk is that, without the proper regulatory structure on shorting, the potential exists for selling pressure similar to what we saw in the U.S. market after the “uptick” rule was removed a couple of years ago. On the other hand, futures and margin-buying could allow speculation that would drive markets higher, which would be a positive.
Overall, we think approval of these new products and strategies are a clear sign that the Beijing leadership believes the worst of the 2008 financial crisis is behind them and that China is ready to refocus on its goal of becoming an important global financial center.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The Shanghai Stock Exchange Composite Index is a capitalization-weighted index that tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange.
Robert Prechter, Elliott Wave Theorist, tells Yahoo TechTicker:
“Everybody who’s saying ‘buy stocks’ today or ‘buy real estate’ is, I think, setting up people to get really hurt,” says Prechter, who believes the bear market rally is reaching a major top.
“We had a great opportunity at [S&P] 667 - that was the big opportunity,” says Prechter, who did make a bullish call last February. “The market is up 60% [from the March lows]. There’s no way the S&P is going up 60% from here.”
Marc Faber, editor of The Gloom, Boom & Doom Report, recently did a wide-ranging interview with Aaron Task and Henry Blodget of Yahoo Finance - Tech Ticker. The video clips are must-see footage for any serious investor.
Part 1:
Bullish today, Marc Faber is “highly confident” the future will be very bleak.
Part 2:
Buy stocks because US dollars will be “worthless,” says Faber.
Part 3:
Faber: Emerging market economies will challenge and surpass the west.
Part 4:
Faber: Ken Fisher is wrong! America already has way too much debt.
Source: Aaron Task and Henry Blodget, Yahoo Finance - Tech Ticker (here, here, here and here), September 22, 2009.
This article courtesy of Validea’s GuruInvestor Blog:
The Financial Times recently interviewed several top strategists about the viability of “buy-and-hold” investing, and found that some are espousing more of a “buy-cheap-and-hold” approach.
Robert Arnott, founder of Research Affiliates: “Basically, we have an industry which has developed a cult of equities — a notion that if you buy stocks you will win, if you’re patient,” he says. “The reality is something very different, and that is that stocks do win over the very long run… but they win over spans measured in generations, not measured in years. And they win in fits and starts.”
Arnott says the only reliable route to long-term success is to buy shares that are cheap — not simply buy and index fund, the Times says.
That makes for something of a contrarian outlook: “It matters tremendously what you pay for an asset,” he said. “If you buy an asset when it’s cheap, you’ll likely to be pleased very soon. If you buy it when it’s expensive and popular and trendy and everyone loves it, you’re likely to have to wait a long time. The best way to invest is to do a contra trade against what has done best and is most popular, and into what is done worst and is most loathed. And it’s very hard to do.”
Paul Marsh, London Business School: Marsh thinks the equity risk premium is alive and well. “[Equities] are more rewarding in an expectational sense,” he said. “In other words, you are going to expect to get a higher return from equities. Probably, in our view, something like 3-3.5 per cent per annum more, but the reason you’re going to get that is because of risk.”
James Montier, GMO: He agrees with Arnott’s point about value, but says that investors need to be careful when assessing what “cheap” means. “One of the hallmarks of what we have seen in the last few years has been rather simplistic approaches to value — price/earnings ratios, price to book value,” he said. “We need to reconsider the role of balance sheets. Trying to think about value without the context of the balance sheet side of the equation, to my mind, is pretty meaningless.”
Right now, Montier said the market is attractive from a valuation perspective. “If you could buy a set of stocks today and bury them for five years, you would be laughing!” he said. “From my perspective, it is very simple — you buy when the market is cheap and the UK and European markets fall into that definition right now.”
The comments below were provided by Kevin Lane of Fusion IQ.
More than ever before, the dollar will be linked to the direction of the S&P futures market in how it is able to trade. We can forget green shoots, analyst opinions and political satire and instead look to the global investment arena taking its cue from wherever the S&P futures market goes. The equity sentiment is going to reflect the ability of the dollar to rise or fall.
This is not a fair value market that is looking at forward debt-to-growth ratios, nor regional economic sustainability; this market will now go into bursts of regional equity trade, and the dollar will follow around, beholden to the overseas purchasers of US debt. There seems to be little chance of sustainable USD appreciation. We will more likely see the reversal of dollar selling, in limited form, on the days equity markets drop.
It is very clear that no other global currency is in much better condition right now, but this will not be a regional currency story; it will be a buy stocks, or buy bonds story, at least until the end of the year. At that point we will look back and wonder how the dollar got down so low without many really noticing - if, that is, equities find buyers. However, if bonds are bought instead, we will see more of the same one-day-up, one-day-down periods that have been in place through June and July.
A week and a half ago we outlined technically and fundamentally that the USD would probably break down out of a small consolidation pattern near 80.00, and it did just that in a move to 78.90. As stated above, we will see more back-and-forth trade hinged on economic speak and global influences. [PduP: Just in is also an update by Adam Hewison (INO.com) of his technical analysis of the outlook for the US dollar versus the yen, spelling further downside. Click here to access the presentation.]
It is important that confidence be restored for the recent stock market gains to be more enduring. A few comments regarding this issue are highlighted in this post.
As shown in Sunday’s “Words from the Wise” review, there is a strong historical relationship between the US Consumer Confidence Index and the 12-month change in the S&P 500 Index. One needs to take a view on the direction of consumer confidence, but should it for argument’s sake pick up from 30 to 40 by the end of June, the relationship indicates a S&P 500 decline of 30-35% in year-ago terms. Using end-of-quarter prices, this means an Index at between 832 and 896 by mid-year.
Source: Plexus Asset Management (based on data from I-Net Bridge)
Interestingly, a report from Franklin Templeton Investments has just arrived, also showing that when confidence was low in the past, it had been time to buy. For example, on average, stocks returned 12.5% a year following consumer confidence of 66 or lower. The consumer confidence reading at the end of February was 25.
Another confidence indicator worth monitoring, is 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 discrepancy between the yields is indicative of investor confidence. There has been an improvement in the ratio since its all-time low in December, showing that bond investors are growing somewhat more confident and have started opting for more speculative bonds over high-grade bonds.
Source: I-Net Bridge
Not surprisingly, a strong historical relationship also exists between the Barron’s Confidence Index and the S&P 500’s 12-month rate of change. But unlike consumer confidence that has not yet bottomed, the Barron’s indicator has already been working its way higher over the three months.
Source: Plexus Asset Management (based on data from I-Net Bridge)
As mentioned before, taking one step at a time, the next hurdle is the release of potentially ugly earnings and guidance announcements in April. By then a clearer picture should also start emerging on the results of the Fed’s medicine and whether credit markets are thawing and confidence is beginning to improve.
Long time students of the market will tell you that “the crowd is usually wrong at the extremes”. Judging by what I see, hear and read in the media, the current consensus is that stocks bottomed on November 20th-21st, an economic recovery will begin in the second half of 2009, corporate bonds are a buy, stocks are cheap and the stock market is now discounting all the bad news. This is surely a sign that the worst is likely behind us.
Even though I was looking for a low in the S&P 500 around 750 (it bottomed around 740 on November 21st only to close at 800 the same day), I continue to believe that was a low point, but not THE low point for this bear market. We were large buyers of Mortgage Backed Securities during the Wall Street de-leveraging and have been rewarded with handsome gains, although we began to take some profits on Friday where appropriate.
Corporate bond spreads have tightened during a slow holiday season as well as spreads in CMBS (Commercial Mortgage Backed Securities). Corporate spreads may or may not tighten further as I believe there will be a wave of issuance at every level - Government, Emerging Markets, Corporations, Municipalities, etc. Treasury yields have crashed as the Fed has taken the Federal Funds Target Rate to a range of 0-0.25%.
Stocks have rallied even more to S&P 931 and could possibly make a run at 1,000-1,100 if “performance anxiety” sets in among those portfolio managers that are afraid to miss the rally. We are not afraid of missing the rally because we are absolute return investors and have the luxury of having missed the big down move from nearly 1,600. The managers that are subject to performance anxiety are the same group that managed to a market benchmark only to get tattooed during the downturn.
The Fed is punishing savers and the Prudent Man by manipulating interest rates to zero. You can sit in cash and earn zero or you can be forced out on the risk spectrum just so you can keep up with inflation or your benchmark. Forcing money into risky assets is perhaps the most dangerous experiment ever done, and is so large in scale and so unprecedented that we have no idea how it will end. I expect it to end poorly and with hyper-inflation. The funneling of assets into risk is masking the deteriorating fundamentals and giving the appearance of a market that has bottomed. But this is sleight of hand, an illusion.
The Fed has declared a war on savers, a war on prudence and provided the ultimate Moral Hazard Card - and with our money no less. They are also setting up the ULTIMATE BULL TRAP - a trap so large that when it is sprung, perhaps as early as the end of the first quarter/beginning of second quarter, there will only be sellers left.
* President of Atlantic Advisors Asset Management, Bennet Sedacca brings with him more than 26 years of securities industry experience. From 1981 to 1997 he worked for several major investment banks, specializing in high-grade fixed-income securities marketing, trading and portfolio management. In 1997 he formed Sedacca Capital Management focusing on portfolio management for high-net worth individuals and small to mid-sized institutions.
Bennet graduated from Rutgers University in 1982 with a degree in Economics.
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