Stock Markets are Losing Momentum

Monday, December 7th, 2009

I was involved in a spectacular World Cup Final Draw in Cape Town last week, an event that said to the world that South Africa was ready to host one of the greatest World Cup events ever. As I have waved my foreign guests goodbye, it is back to blogging and I thought I would share with you the paragraphs below from London-based David Fuller, co-author of the daily Fullermoney commentary. (Please note that a number of interesting charts from the vast Fullermoney library have been included by means of hyperlinks.)

“We believe global stock markets are currently in an overall corrective phase, mainly in response to the strength of earlier gains. While the majority of share indices remain steady during this process, including on Wall Street, a loss of upside momentum is clearly evident on most daily and weekly charts for stock market indices.

“We think this corrective phase represents a somewhat more lengthy consolidation and reversion towards the trend mean, represented by rising 200-day moving averages, best seen on weekly charts. This consolidation can occur in primarily ranging patterns, as we have seen with many indices to date, or with somewhat deeper corrections where the sequence of higher reaction lows is broken for more than a day or two.

“We maintain this process is occurring within cyclical bull markets for equities, fuelled mainly by monetary policies that remain very accommodative. However, markets have reached a point where a rising tide of liquidity no longer lifts all boats. In the global beauty contest, investors are shunning, at least temporarily, markets with local or regional problems in addition to the earlier slowdown in global GDP.

“For instance, Dubai has been a source of concern within the Middle East, which continues to underperform generally. Political concerns have weighed on Nigeria and some other African stock markets. Slovenia reflects the particularly sharp recessions experienced by some of the smaller Eastern European economies. These are minor markets, which may stage a late run in the latter stages of the global bull trend.

“Interestingly, among major stock markets only Japan has been a clear underperformer in recent months. However, this week’s upward dynamic has reaffirmed support within the lower recesses of the Topix Index’s still developing base formation. Potentially, this is a more important signal than the downside weekly key reversal that capped the earlier recovery just below 1,000 in early September. It is no coincidence that this rally has coincided with the yen’s recent reversal of strength (shown inversely against the US dollar), a development we have maintained was essential for Japan’s economy and stock market.

“Returning to the upside leaders, there is still a possibility that having lost momentum, breaks in the progression of higher reaction lows could lead to a correction towards the 200-day moving averages before the upward trends are extended. Meanwhile, the key stock markets, in terms of influence, remain the USA and China. We also think Fullermoney themes, led by Asian emerging markets and South American resources markets, will enable the Emerging Markets Index to lead the next advance as well.”

Source: Fullermoney, December 4, 2009.

Tags: Beauty Contest, Bull Markets, China, Co Author, Corrective Phase, David Fuller, Emerging Markets, Global Beauty, Global Gdp, Global Stock Markets, Lows, Monetary Policies, Moving Averages, Political Concerns, Recessions, Regional Problems, Reversion, Rising Tide, Share Indices, Slowdown, Spectacular World, Stock Market Indices
Posted in Markets | No Comments »

Rob Arnott: Deficits, Debt, and Demographics Will Impede Real Returns For Next 25 Years

Thursday, November 26th, 2009

In his latest newsletter (November 2009), The “3-D” Hurricane Force Headwind, Robert Arnott (founder, Research Affiliates) examines how Deficit, National Debt, and Demographics, the 3 Ds, mean that we should lower our expectations for real return from markets over the next 25 years. Arnott, a fundamental indexing academic and innovator, has been warning, via his papers, that investors be modest. For example, it is interesting, given that Research Affiliates, the creators of fundamental equity indices, that its founder, Arnott, has spent most of the last year discussing bonds, and reversion to mean.

Here are a few excerpts from the latest newsletter.

In this issue we examine three critical long-horizon issues — the deficit, the national debt, and demographics—and find a disturbing structural headwind that will impede the real returns we can expect from financial assets in the years ahead. The coming quarter century will be very, very different from the past quarter century; the lessons we’ve learned in the past generation may lead us astray in the coming  generation.

On the (D)eficit:

The latest year shows a deficit of 10% of GDP, but even this isn’t a problem as long as it’s a oneoff deficit incurred to help avert a major financial and economic crisis. Right? Right… if the past average really was 2.4% and the current deficit really is temporary.

But …

The average increase in our national debt, including unfunded obligations and GSEs, soars to 9.8% of GDP for the past 25 years. The latest 12 months saw our public debt and unfunded obligations grow by 18% of GDP! No wonder the debt seems to have grown crushingly large.

Arnott’s case is compelling, and sounds quite similar to what his Newport Beach bond market peer, Bill Gross, calls the “New Normal,” though Gross has not elaborated on it as specifically, as Arnott does here and in past letters. Whether you agree with this or not, its a must-read.

For more on Debt and Demographics, and to read Rob Arnott’s complete newsletter, click here.

Tags: Bill Gross, Bond Market, Coming Generation, Demographics, Economic Crisis, Financial Assets, Fundamental Indexing, GDP, Headwind, Horizon Issues, Hurricane Force, Innovator, National Debt, Newport Beach, Public Debt, Quarter Century, Research Affiliates, Reversion, Rob Arnott, Robert Arnott, Soars
Posted in Markets | No Comments »

Shanghai Cracks

Monday, August 31st, 2009

As mentioned in yesterday’s edition of “Words from the Wise“, the Chinese Shanghai Composite Index has now recorded four consecutive down-weeks. The Index witnessed another massive sell-off this morning, declining by a further 6.7% to take its total loss since the peak of August 4 to 23.2%.

The losses happened on concerns of large Chinese share issuance and slowing bank lending. The banking regulator has already instructed lenders to raise reserves to 150% of their non-performing loans by the end of this year - up from 134.8% at the end of June, and the central bank has increased money-market rates to drain liquidity.

I have written a fair bit over the past two weeks about the overbought level of most global stock markets and also how China - a leading market on the way up - could be the catalyst for triggering a reversal of fortune in global stock markets.

Of the global stock markets I monitor, the Shanghai Composite (2,667) is the only one to have breached its 50-day moving average (3,125) and now has the key 200-day line (2,476) firmly in its sight.

Source: StockCharts.com

Interestingly, emerging markets have now seen two back-to-back weeks of declines and have been underperforming developed markets for four weeks running, as shown by the declining trend of the MSCI Emerging Markets Index relative to the Dow Jones World Index. Could this be a sign of a broad retrenchment in risk appetite?

Source: StockCharts.com

A global stock market correction could take the form of either a pullback or a consolidation (i.e. ranging). I suspect we may see at least some degree of reversion to the 200-day moving averages in a number of instances, but will be watching closely to ascertain whether we are dealing with a normal short-term correction or a more significant move threatening the primary trend. In the meantime, sit tight and be cautious as markets hopefully realign with the reality on the ground.

Tags: August 4, Dow Jones, Emerging Markets, Global Stock Market, Global Stock Markets, Leading Market, liquidity, Money Market Rates, Moving Average, Moving Averages, Msci Emerging Markets, Msci Emerging Markets Index, Pullback, Retrenchment, Reversal Of Fortune, Reversion, Risk Appetite, Shanghai Composite Index, Stock Market Correction, Target, World Index
Posted in Emerging Markets, Markets | No Comments »

Stock markets ripe for a correction, but…

Wednesday, August 19th, 2009

I am on the road today tending to a few business matters - in an environment in which South Africa has just seen its third consecutive quarter of negative GDP growth - and the mood is not entirely upbeat.

Back to the yin and yang of equities: I have tried arguing over the past week or two that global stock markets were grossly overbought and out of kilter with economic reality, and therefore ripe for correction - a process I believe has now commenced (also for commodities, and the reverse for safe-haven assets such as government bonds, the US dollar and the Japanese yen). I have also mentioned that we may see at least some degree of reversion to the 200-day moving averages in a number of instances.

It is perhaps premature to say whether we will be dealing with a normal short-term correction or a more significant move threatening the primary trend. However, when considering longer-term data, it would seem that any correction may still be part of an overall bottoming-out process. The chart below shows monthly intervals for the S&P 500 Index since 1998 and conveys an important message when considering the three momentum-type oscillators at the bottom (RSI, MACD and ROC). These are reversing course for the first time since the primary sell signals of 2007 and now either indicate buy signals (or are getting close to them in the case of MACD).

Source: StockCharts.com

I need to be off to my appointments, but thought I would just share this thought with you while we remain cautious and await Mr Market to offer us stocks - especially in high-growth markets such as China, India and resource-based economies - at more realistic levels.

Tags: Business Matters, Chart Below Shows, Commodities, Consecutive Quarter, Dollar And The Japanese Yen, Economic Reality, Emerging Markets, GDP, GDP Growth, Global Stock Markets, Government Bonds, Growth Markets, India, Intervals, Kilter, Macd, Moving Averages, Oscillators, Realistic Levels, Reversion, Safe Haven, Yin And Yang
Posted in Commodities, Markets | No Comments »

Bill Gross: From Feast to Fast - July 2009 Outlook

Friday, July 3rd, 2009

Bill Gross, the “Bond King” is going to great lengths to get us to understand that the world is in a state of reversion to what he and El-Erian, his co-chief at PIMCO coined as the “New Normal” 3 months ago, in his latest missive - “Bon” or “Non” Appétit?.

Our economy which once feasted, no, binged, unable to stop itself, on debt and leverage, and on the basis that home and other asset prices would rise to the sky, is now fasting, cleansing itself of the fat that accumulated, and it is a long-term process that will take many years to complete.

Click Play to Listen to Bill Gross’ Investment Outlook:

Audio clip: Adobe Flash Player (version 9 or above) is required to play this audio clip. Download the latest version here. You also need to have JavaScript enabled in your browser.

Here are some of the highlights from the letter, which you may download here:

Gross re-iterates the “New Normal” - Its starting to sound a lot like “The Emperor’s New Clothes“:

Our economy’s lights, if not switched off in a rehash of the 1930s Depression, have certainly been dimmed in a 21st century version likely to be labeled the Great Recession. Much like John McSherry, U.S. and many global consumers gorged themselves on Big Macs of all varieties: burgers to be sure, but also McHouses, McHummers, and McFlatscreens, all financed with excessive amounts of McCredit created under the mistaken assumption that the asset prices securitizing them could never go down. What a colossal McStake that turned out to be. Now, however, with financial markets seemingly calmed and an inventory-based recovery in store for the balance of 2009, there is a developing optimism that we can go back to the lifestyle of yesteryear. PIMCO’s driving thesis however, if not a juxtaposition, is succinctly described as a “new normal” where growth is slower, profit margins are narrower, and asset returns are smaller than in decades past based upon the delevering and reregulating of the global economy, which in turn should substantially inhibit the “gorging” of goods and services that we grew used to in decades past.

Forecasts based on econometric models inevitably miss these secular/structural breaks in historical patterns because it is impossible to quantify human behavior, and long-term trends involving risk-taking and in turn derisking are decidedly human in their origin. Bell-shaped curves with Gaussian/random distributions fail to anticipate that human beings do not make decisions by chance or independently of each other, but in many cases in reaction to one another. Humanity’s personal and social computers appear to be programmed that way. And so, instead of “normal” distributions, economists and investors must learn to be on the lookout for “black swans,” and if not, then certainly “fat tails,” which differ from the measurement of natural phenomena accepted in science. “New normals,” flatter-shaped bell curves, and structural shifts in previously accepted standards become not only possible, but probable as human nature reacts to itself and its prior behavior. The efficient market hypothesis was always dead from the get-go, but academic tenure and Nobel prizes were food for the unwilling or perhaps unthinking.

Others are starting to wonder about the emperors new clothes, the “green shoots”:

I was impressed this weekend by an article in the Op-Ed section of The New York Times by staff writer Bob Herbert. “No Recovery in Sight” was the heading and his opening sentence asked, “How do you put together a consumer economy that works when the consumers are out of work?” That is really all one needs to ask when divining our economy’s future fortune. Unless an optimist can prescribe how to put Humpty Dumpty back together again and shuffle him/her back to work then there can be no return to an “old normal.” As unemployment approaches 10%, what is less well publicized is that the number of “underutilized” workers in the U.S. has increased dramatically from 15 to 30 million. Those without jobs, as well as those individuals who only work part-time and have become discouraged and stopped looking, total 30 MILLION people. The number is staggering. Commonsensically, one has to know that many or most of these are untrained for the demands of a green-oriented, goods-producing future economy. Imagine a welding rod in the hands of an investment banker or mortgage broker and you’ll understand the implications quicker than any economist using an econometric model.

Fifteen Words to describe the era that led us to our current economic crisis:

The supersizing of financial leverage and consumer spending in concert with the politicizing of deregulation describes in fifteen words our most recent brush with irrational behavior and inefficient markets. Greed will come again. But for now, the trend is the other way and it promises to persist for a generation at a minimum. The fact is that American consumers have suffered a collapse in wealth of at least $15 trillion since early 2007. Global estimates are less reliable, but certainly in multiples of that figure. And when potential spenders feel less rich by that much, the only model one can use to forecast the future is a commonsensical one that predicts higher savings, lower consumption, and an economic growth rate that staggers forward at a new normal closer to 2 as opposed to 3½%. There’s no magic in that number, and no model to back it up, just a lot of commonsense that says this is how people and economic societies behave when stressed and stretched to a near breaking point.

Where do we go from here:

Investors who stuffed themselves on a constant diet of asset appreciation for the past quarter-century will now be enclosed in a cage featuring government-mandated, consumer-oriented fasting. “Non Appétit,” not Bon Appétit, will become the apt description for the American consumer, and significant parts of the global economy, including the U.S. Because this is so, short-term policy rates will be kept low for longer than cyclical norms, and the outlook for risk assets - stocks, high yield bonds, and commercial and residential real estate will involve just that - risk. Investors should stress secure income offered by bonds and stable dividend-paying equities. Consumer Cuisinart consumption is a relic of the past.

Tags: Asset Prices, Asset Returns, Bill Gross, Burgers, Econometric Models, Excessive Amounts, Financial Markets, Global Consumers, Global Economy, Great Lengths, Gross Investment, Investment Outlook, John Mcsherry, Juxtaposition, Missive, Mistaken Assumption, PIMCO, Profit Margins, Recession, Reversion, Yesteryear
Posted in Emerging Markets, Markets | No Comments »

Buffett’s Metric says its time to buy

Monday, February 9th, 2009

Fortune/CNNMoney ran the following article on February 4, 2009, positing that one of Warren Buffett’s key metrics, Market Capitalization vs. GNP has reached a low of between 70-80%, indicating that it is time to buy stocks:

“According to investing guru Warren Buffett, US stocks are a logical investment when their total market value equals 70% to 80% of Gross National Product.

“Is it time to buy US stocks?

“According to both this 85-year chart and famed investor Warren Buffett, it just might be. The point of the chart is that there should be a rational relationship between the total market value of US stocks and the output of the US economy - its GNP.

“Fortune first ran a version of this chart in late 2001. Stocks had by that time retreated sharply from the manic levels of the Internet bubble. But they were still very high, with stock values at 133% of GNP. That level certainly did not suggest to Buffett that it was time to buy stocks.

“But he visualized a moment when purchases might make sense, saying, ‘If the percentage relationship falls to the 70% to 80% area, buying stocks is likely to work very well for you.’

“Well, that’s where stocks were in late January, when the ratio was 75%. Nothing about that reversion to sanity surprises Buffett, who told Fortune that the shift in the ratio reminds him of investor Ben Graham’s statement about the stock market: ‘In the short run it’s a voting machine, but in the long run it’s a weighing machine.’”

Source: Carol Loomis and Doris Burke, CNN Money, February 4, 2009.

Tags: Buying Stocks, Cnn, Cnn Money, Cnnmoney, Doris Burke, Gnp, Gross National Product, Internet Bubble, Loomis, Market Capitalization, Metrics, Might Make Sense, Percentage Relationship, Reversion, Sanity, Stock Market, Stock Values, Voting Machine, Warren Buffett, Weighing Machine
Posted in Economy, Markets | No Comments »