Monday, December 20th, 2010
I posted an article on Friday, stating that the stock market still had a bullish bias, but that breadth was deteriorating. Breadth indicators are also useful tools to assess the inner workings of the market’s rallies or corrections, and are used to identify strength or weakness behind market moves such as the nascent rally, i.e. to assess how the bulls and the bears are exerting themselves.
Let’s consider a specific measure of stock market “internals”: The number of S&P 500 stocks trading above their respective 50-day moving averages has declined to 80% from 93% in October (see bottom panel of the chart below). In order to be bullish about the secondary trend, one would expect the majority of stocks to be above the 50-day line.
However, the fact that fewer stocks are now above their 50-day moving averages than in October means that a smaller number of stocks are participating in the rally. In the meantime, the S&P 500 has been scaling new highs for the move. This is known as a so-called bearish divergence – a phenomenon investors should be mindful of, especially given the overbullish sentiment levels.
The bulk of the index constituents, 86.4%, are trading comfortably above their 200-day averages. As long as this number holds above 50%, a primary bull market remains intact. However, a short-term reaction to clear some of the froth is likely and should be factored into investors’ decision-making.
John Hussman (Hussman Funds) summarized the situation as follows: “In short, it’s not impossible that specific features of the current market could make investors more tolerant of rich valuations, or more careful to demand conservative ones. Regardless, my impression is that a decade from today, investors will view the present time as a relatively undesirable moment to put investment capital at risk.”
Tags: bottom panel, Current Market, Hussman Funds, index constituents, Inner Workings, Investment Capital, John Hussman, market divergence, Market Internals, Moving Averages, New Highs, Present Time, Stock Market, useful tools
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Wednesday, May 6th, 2009
David Rosenberg, Merrill’s respected chief North American economist, is leaving the firm this month to return to his native Toronto, where he will join a buy-side firm, Gluskin Sheff & Associates.
Tyler Durden has posted some of David’s parting comments on his Zero Hedge blog site and these are shared verbatim in the paragraphs below.
We are in year 9 of an 18-year secular bear market
The S&P 500 peaked in real terms back in August 2000. Adjusted for the CPI, it is down 58% since that time. So, we would say that we are in year 9 of what is likely to be an 18-year secular bear market, because if you look at long waves in the past, they tend to last about 18 years with near perfection.
What happened during the last secular bear market
As an example, go back to the last secular bear market, and you will see that the S&P 500 peaked, again in real terms, in January 1966 and bottomed in July 1982, 18 years later. But there were plenty of mini-cycles in between. In fact, there were four recessions and three expansions during that entire 18-year period and unless you were a completely passive investor, you definitely wanted to be in the game during the three expansions because the S&P 500 rallied an average of 50% during those phases. Again, it is important to note that these were rallies you could rent, not own, but they did last an average of 20 months. So, it’s not exactly as if they have an extremely short shelf life.
Playing a game of devil’s advocate
With all this in mind, we went through an exercise over the weekend and played a game of devil’s advocate. If Rosie had to face off against Rosie, what would we say if we were forced to take the other side of the debate, keeping in mind that in fact, we may be overly bearish at the present time. And believe it or not, we did manage to come up with some pretty compelling material.
Past the half-way point in the recession
First, our in-house model of predicting where we are in the cycle, for the first time, gave us a signal late last week that we are past the half-way point in the recession. Considering that the stock market bottoms 60% of the way through, this is an encouraging signpost.
We’ve worked through the effects of the Lehman collapse
Second, our propriety proxy for private sector interest rates has come down from 8.11% at the nearby peak to 7.18% now despite the backup in Treasury yields, to stand at their lowest since last September. The TED spread is back to where it was last September, as are most credit spreads. The VIX has finally broken to 35, back to where it was last September. 10-year TIPS breakeven levels, which were predicting deflation at the end of last year, are now forecasting 1.5% average inflation rates for the next decade. Again, we last saw this in September of last year. This is interesting because even though the economy and the markets were clearly in the doldrums back in September, the fact that so many market barometers are back to where they were then means that at the very least, we have worked through the ill-effects of the post-Lehman collapse.
Stock market has lagged relative to other asset classes
All an equity bull really has to do is point to the fact that the S&P 500 last September was trading around 1200. The only difference is back then we were looking at it from the perspective of being 20% off the highs whereas a move back to September levels, which, after all, would only mimic what many other market indicators have accomplished, would be viewed as an 80% surge off the lows not to mention another 35% potential upside from where we are today. Even the CRB raw industrials are now back to where they last October when the S&P 500 was hovering around the 950 level. So again, if we were equity bulls, and maybe we should be, we would simply point out that of all the asset classes that have bounced back to life, the stock market has actually been a laggard.
Three indictors that suggest cyclical bear market is over
Third, we found three indicators that have stood the test of time and strongly suggest that the cyclical bear market in equities and the economy have drawn to a close: the ISM, the Conference Board’s coincident-to-lagging indicator and the University of Michigan consumer sentiment survey. The ISM bottomed in December 2008 at 32.9 and is now 40.1. Going back to 1950, we found that recessions end within three months of the ISM hitting bottom, and never by more than six months. The coincident-to-lagging ratio just turned in successive lows of 89.6. The data go back to 1960 and we found that recessions ended within two months of this indicator, 100% of the time. And, the U of M consumer sentiment index bottomed at 55.3 last November. As we saw on Friday it had rebounded to 65.1 as of the end of April. The data show recessions end typically within six months of the bottom in this key leading indicator, and not once was the lag longer than eight months.
We could be on the precipice of a cyclical upturn
This is not to say that our secular views have changed. However, we could well be on the precipice of a cyclical upturn, and whether it is sustainable or not may have to be a story for another day. We don’t see as many green shoots as others do, but then again, we endured more than a year of jobless recoveries following the market lows of 1990 and 2002.
The most glaring example
The most glaring example of all is the fact that the S&P 500 bottomed in the summer of 1932 and yet by the end of the 1930s, seven years after ‘New Deal’ stimulus, the unemployment rate was still 15%, consumer prices were deflating at a 2% annual rate, and let’s face it, the Great Depression did not actually end until 1941. But for investors, the worst was over in the summer of 1932 in the immediate aftermath of the acute government intervention at the time. While there were recurring setbacks along the way, including the severe bear market of 1937-48, the fundamental lows had already been turned in long before.
Investors have been able to price out financial tail risks
Fast forward to March 2009, and the same mantra was heard – ‘nationalization’, ‘depression’ and ‘deflation’. As was the case with FDR’s early days as President, what the last half of Obama’s first ‘100 days’ managed to accomplish was to eliminate these words from the investment lexicon. The degree of intervention from the Treasury and the Fed has been so intense that investors have been able to price out financial ‘tail risks’ that had dominated the market landscape through much of the first quarter.
The market is gravitating to a new mean
So, the way to look at the situation is that by removing the ‘tail risks’ of an outright systemic financial collapse, the market has gravitated to a new ‘mean’ (in the sense that at any given point in time, market prices reflect some expected distribution of possible outcomes – a very bad potential outcome has been taken out of the probability distribution, at least according to Mr. Market). This is why if the bulls have a solid argument, it is the prospect that the S&P 500 can indeed approach those pre-Lehman levels, which back in September, seemed rather bearish, but is only bullish today benchmarked against where we are.
Still not sold on the bull case for equities
Despite all these powerful arguments, we are still not totally sold on the bull case for equities. Valuation is not compelling, in our view. Sentiment has completely swung towards a bullish consensus (which is a contrary negative). Home prices and employment are still in freefall, the former undermining the balance sheet and the latter exerting a drag on the income statement and suggestions that a mild improvement in the negative growth rate is something to be excited about seems off base.
Difficult to ascertain who the marginal buyer will be
It seems hard to believe that after being burned by two bubbles seven years apart that the baby boomer is going to line up at the trough one more time. So, it’s difficult to ascertain who the marginal buyer is going to be. Disposal of durable goods assets to pay off a record household debt burden seems like a multi-year deflation story as far as we are concerned. Since the boomer household is income constrained and underweight fixed-income securities on its balance sheet, we believe that demand for high-quality bonds is going to strengthen in coming years. Government policy will remain highly pro-cyclical but there is no match for the contractionary effects from a shrinking US household balance sheet.
Deflation will win out over inflation
We are concerned that deflation will win out over inflation this time around. While the data cited above are indeed impressive in terms of their track record, since this is not a manufacturing inventory recession but rather a downturn deeply rooted in asset deflation and credit contraction, we may find out that the economic releases that were tried, tested and true in the other post-war cycles may not be appropriate today given the overpowering secular trends of consumer deleveraging and frugality.
Source: Tyler Durden, Zero Hedge, May 4, 2009.
Tags: American Economist, Canadian Market, CPI, David Rosenberg, Devil S Advocate, Expansions, Face Off, Long Waves, Native Toronto, Parting Comments, Parting Thoughts, Passive Investor, Playing A Game, Present Time, Rallies, Recession, Recessions, Rosie, Secular Bear Market, Shelf Life, Tyler Durden
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Tuesday, March 17th, 2009
Hugh Hendry, CIO, Eclectica Asset Management, appeared on CNBC, Wednesday, March 11, 2009 and shared his contrarian views on investing in inflationary assets, asserting that it is not yet time to do so. To appreciate Hendry, you must see him in action.
Geoff Cutmore: Hugh has been a huge proponent of Potash Corporation, that was some months ago. Does he still have a view that the business will continue to do relatively well even as the share price falls. There does seem to have been faint signs of life in commodities. Do you still have a trading position in Potash. What is your take on these shares and the macro view for fertilizers and the agricultural space?
Hugh Hendry: A good question. I have in part of my business, we have an agricultural equity franchise (fund), clearly Potash is one of the very best agricultural businesses in the world, but we’re talking about a business, lets not forget, which has now fallen from $260 to, like, $60. The notion that I would have had ownership from that level all the way down is preposterous, and in our trading accounts at the present time, clearly I can’t own that. But what you do hear is that George Soros is the biggest shareholder now of Potash, and if you look at the performance of agricultural equities, they’re performing almost in line with gold shares, i.e. they’re outperforming at the present time.
But I have to throw some water on that, on those flames. I still believe this is still a profoundly deflationary environment, and therefore this whole notion of investing at this present moment in inflation or inflationary assets is ill-conceived and poorly timed, and so I think what we’ve seen is this waterfall decline, then we’ve seen an explosive rally, and I think it then comes down again. I think there’s still a lot of hope, and a lot of recognition how strong these businesses are, but further price swings, I think.
In this next must see segment, Hugh Hendry and Liam Halligan of Prosperity Capital Management, locked horns over how quantitative easing (QE) will affect the economy. Halligan and Hendry get into a heated argument over QE. Halligan claims to be in a minority of one that it will be inflationary, while Hendry tells Halligan that he is, in fact, consensual, and that his view is held by many. Finally, Hendry points out that they, in fact, both agree that quantitative easing is doomed but that Halligan’s claim that it is inflationary is what’s out in left field, that QE is a profoundly deflationary policy for the time being, hence, Hendry’s assertion that it is not the right time to invest in inflationary assets,… yet.
In this third segment, Hendry and Halligan discuss the effects of falling Sterling and QE. Hendry fires back initially by saying Halligan “has a very loud voice, and he’s kind of a scary guy.” Its is hilarious to hear Hendry take a bite out of Halligan in his usual way. Halligan’s response is that Hendry is insulting and that its demeaning to him. To Hendry, guys like Halligan should not be allowed to come on TV and spout. Hendry tells Halligan, “You’re not a rational person…”
The debate between Halligan and Hendry over QE is revealing and serves as an excellent source of enlightenment on the contentious issue of central banks printing money to get around the credit-burdened economic curve, especially if you’re wondering what to do next and when to do it.
Here is some additional quoted material from CNBC:
The stock market is still an unsafe place for investors as quantitative easing, by which central banks boost the supply of money attempting to kick-start economies, is unlikely to work, Hugh Hendry, Chief Investment Officer at Eclectica, told CNBC.
Hendry also disagreed with Warren Buffett’s view, recently expressed to CNBC, that inflation is likely to be as bad if not worse than in the 1970s.
“I’ve honestly never known a time of near-universal conviction that we have to worry about inflation today,” Hendry told “Squawk Box Europe.”
“For quantitative easing there’s no successful precedent. It has never, ever succeeded,” he added.
He is buying government bonds, shorting stocks and “can’t buy enough dollars.” Taking the contrarian view to the majority of speculators creates opportunities, Hendry added. “Gold, silver, I’m shorting them right now.”
Inflation will become a reason to worry for authorities again at some point, but they should think about combating deflation right now, Hendry said.
“It is coming back in the future. All I’m saying it is just an unprofitable proposition at the time,” he said. Betting on inflation is as if “we got a new book and we’ve read the last page. But if you read the entire novel, it’s a different journey.”
Despite Tuesday’s strong rally in the stock markets, shares are not a good investment, said Hendry, who continues to bet on government bonds.
“I dare you to touch an equity today. Tell me you’re making money on equities,” he said.
The unravelling of the crisis is likely to continue as world economies re-adjust after the cheap credit bubble has burst.
“We were deluded by easy finance and as that easy finance is being removed, we’re shocked,” Hendry, who said his investment fund made a 32 percent return last year and is up 10 percent this year, said.
The market has grown for about 30 years and for a long period, it will be “going nowhere,” Hendry said, likening this period with the one after the crash of 1929 and with the crisis in Japan at the beginning of the 1990s, despite claims that this time it is different because the world has evolved.
“I am saying that we are no different. Here we are, surrounded by technology and computers, and we are no different.”
Tags: Agricultural Businesses, Capital Management, Cnbc, Contrarian Views, Eclectica Asset Management, Explosive Rally, Fertilizers, Franchise Fund, George Soros, Gold Shares, Good Question, Halligan, Hugh Hendry, Potash Corporation, Present Moment, Present Time, Price Swings, Proponent, Qe, Share Price, Signs Of Life, Trading Accounts
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