Equity Inflation Without Consumer Confidence?

This chart comes from credit strategists at BNP Paribas today. Click on chart to enlarge, courtesy of BNP Paribas, my annotations.

Can we draw any conclusions? Striking parallels?

What's Going On At Macro Level?

Credit Agricole published its Macro Prospects today, looks among others at issue like:
Greece: A long hard way ahead...; Spain: The austerity trap; MENA: 2010 a difficult year for the budget etc.

This is a quite contemporary stuff...

However, I was reading quite interesting longer-term perspective yesterday: "Monetary Policy, Vagabonding Liquidity and Bursting Bubbles in New and Emerging Markets - An Overinvestment View" by Gunther Schnabl and Andreas Hoffmann, University of Leipzig.

Something Going On At A Micro Level

Dylan Grice, the strategist at Societe Generale, cannot get very much of optimism over the lips and writes today:

Based on Shiller PE ratios, S&P500 valuations are back in their top historic quintile, historically this is a strong signal of poor long-term returns. Although Europe looks less egregiously expensive the investment case is far from compelling. So what do we do? The simple answer is nothing. The potential rewards being offered for the risks entailed in being aggressively overweight equities (or even just overweight) seem scant. But even when the macro case isn’t interesting, there’s usually something going on at a micro level.

And some nice charts for better visualization of dry words. Click on charts to enlarge, courtesy of Societe Generale.

Nothing to do?

Japanese Candlestick Masters Draw Rings

This chart comes from Nomura today, and one should obviously pay attention to green rings? Click on chart to enlarge, courtesy of Nomura.

Stretched? I do not like small cap stocks in the US today...

US Consumption Driven Recovery?

My favorite Jeff Saut was writing (influenced by macro-philosophy of the GaveKal organization) two weeks ago:

Longer-term, I maintain this is not the “new normal,” but rather the typical economic cycle. That is, corporate profits surge, which drives an inventory rebuild. Currently, profits have indeed surged with the largest ramp in corporate cash (y/y) since 1983. Combined with the increased activity at seaports, and the rise in shipping prices, it suggests inventory restocking has begun. Following an inventory rebuild comes a capital expenditure cycle and then companies begin to hire people. Then, and only then, comes a noticeable increase in consumption. It is important to note that hiring and consumption come on the back end of the cycle, not the front end.

However, today I look at chart that shows US personal consumption and income (look for more on Keynesian nature of US disposable personal income here), both in nominal terms, by Nordea Markets. Click on chart to enlarge, courtesy of Nordea Markets.

And I should conclude that we are indeed back to "old normal", as personal consumption is obviously leading the recovery. Back in September last year the economist team led by Jan Hatzius at Goldman Sachs wrote:

... capital spending represents "induced" demand. Few businesses will step up capital spending sharply unless they see a meaningful improvement in end demand for their products. Since the most important component of end demand for US companies is the domestic consumer, our cautious view of the outlook for personal consumption also implies a cautious view of capital spending, other things being equal. In essence, capital spending is the caboose of recovery, not the locomotive.

Click on chart to enlarge, courtesy of Goldman Sachs.

Well, it looks like GaveKal is misleading to another "Our Brave New World"? And Goldman's guys failed to estimate the US consumption recovery? Assuming the fact, that personal consumption is supported by lifeline provided by government, this comes as a puzzle for corporates to step up capital expenditures and job creation? It seems that America has got a problem? Government taking on the liabilities of a sub-prime nation?

There was an even more interesting proposition by the economists at DBS last week, as much it can be regarded as irrational for corporate sector:

How much profits grow by depends on two things: how fast the economy grows and how that pie gets split up. The latter is by far the more important in the short- and medium term. Consider a couple of numerical examples below:

In the first scenario, assume that nominal GDP / national income grows at a 5%annualized rate through the four quarters of 2010. That’s a relatively fast clip (that could be achieved by, say, 4% real growth and 1% inflation). So it creates favorable conditions for continued profit growth. Second, assume that GDP growth leads to job growth and that the labor share of income returns to 51.5% by the end of 2010. That’s a relatively modest clawback for labor – the labor share would recoup about one-half what it lost in the previous year. Under reasonable assumptions, this scenario is consistent with payrolls growth of about 350k per month (on average) over the course of 2010. While that may sound high, it is only 62% of the monthly pace at which payrolls fell between Sep08 and Sep09 (when losses averaged 560k per month). As for the other components of national income – Mom & Pop shops, interest income, rental income and so on – assume their shares remain steady so as not to distort what happens as between wages and profits.

Click on chart to enlarge, courtesy of DBS.

The results for such an experiment are shown in the chart above. A modest rise in the wage share, even along side a 5% growth rate in national income / GDP leaves profits languishing. Indeed, they drift southward over the course of 2010 from peak levels at 4Q09...

Raise the GDP growth rate to 8%? That helps, but not a lot. Profits still drop by about 1% per quarter if the wage share rises to 51.5%. Be more conservative on the wage share?Okay, put it at 51% by end-10 compared to 50.2% today. But with a 5% growth rate, that still implies profits falling by about 0.5% per quarter in 2010. The bottom line is that while in the long-run profits and wages go hand in hand, in the short-run one comes at the expense of the other.

Can it be that payroll growth is negative for corporate profits, and, despite what corporate sector has done so far, they will commit this irrational behaviour by not maximizing shareholder profits? Or the economists have made it wrong with their model?

Equities Fall 80%+ Of Time 6 Months Post ECRI Peaks?

Although ECRI assures us there is no double dip in question ...
... Equities Fall 80%+ Of Time 6 Months Post ECRI Peaks?


To such conclusion came Teun Draaisma today, the admired European equity strategist at Morgan Stanley. In addition to the overall tactical caution he suggests following for European equity sectors:

OVERWEIGHTS: Consumer Staples, Healthcare, Energy, Materials;
UNDERWEIGHTS: Tech, Consumer Discretionary, Financials, Utilities.

Click on chart to enlarge, courtesy of Morgan Stanley.

Hmmm. Who ever thought?

UPDATE: Here you can get more of Draaisma ...

Chinese Vs Indian Consumer

China has been in spotlight for a long time. Edward Chancellor of GMO was even forced to raise "China's Red Flags", without registration available via The Pragmatic Capitalist. The legendary Russell Napier of CLSA Asia-Pacific Markets back in the beginning of March wrote:

Many investors ignore the order evolving out of India’s apparent chaos, while also failing to accept that China’s state-imposed order will one day decompose. This dynamic means that returns from Indian equities are likely to far surpass Chinese equities over the medium and long term.
....

When it comes to economics, youth and inexperience, key drivers of consumption, are often more rewarding than the age and guile that brings conservatism and savings. Japan may not be a template for how poor financial returns have to be in an aging society, but it provides a warning of how poor they can be. The following histograms reveal two very different demographic outcomes for China and India.

Click on charts to enlarge, courtesy of CLSA Asia-Pacific Markets.

This one paragraph, if applied in general, serves quite well for long run:

The problem with forecasting price is that we are forecasting the product of a social activity. This is difficult because of the lack of fixed variables in a social system. Indeed, demographics may be the nearest things we have to a fixed variable when we look to the future, and long may it remain so. Now everybody knows that things happen painfully slowly in demographics, but they have the advantage of also happening with painful certainty. China will need to mobilise more savings to support its aging population, whereas India can focus on mobilising its savings to facilitate consumption. This too will change, but not for a very long time.

Youth is probably the key ingredient for a population moving towards a consumer society. The older generation in India and China remember the deprivations of a different age and the risks or apparent stupidity of borrowing to consume. However, the youth of both countries increasingly comes with less of such baggage. In an era of growth, debt is good or not bad, and higher living standards make debt less dangerous. Indian and Chinese households save more because they need to protect themselves from negative outcomes. Such negative outcomes are just less likely for those possessing youth, innocence and a bad haircut. India has a lot more youth than China; this will be a key strength in making the transition from mercantilism and will promote higher returns for investors.

So, buy the youth ... and your own children is very likely the best investment!

SocGen Boldly Makes Seven Key Calls

Global asset allocation strategy team at Societe Generale boldly makes "Seven Key Calls" today:

SG central scenario assumption: No double dip in the pipeline, outflows continuing from money market funds benefiting all asset classes. FX at the centre of successful multi asset strategies.

Key Call 1: Dynamic Allocation - Anything but Cash (0% return) as global growth reaches 4%. Continue to prefer Commodities and Equities over Government Bonds.

Key Call 2: Commodities - Our preferred asset class, backed by sustained global growth, rising inflation fears and significant inflows. Switch from Base Metals into
Oil. Buy Gold (inflation hedge).

Key Call 3: Currency markets - The Euro is now burdened by a widening Atlantic gap and governance problems. The Fed will start raising rates before the ECB. Go long the USD funded by the Euro.

Key call 4: Equities - Gear your fund to the best leverage on a falling Yen. Buy an
outright call on the ultra-cheap Nikkei.

Key call 5: Go US - Employment creation & end of USD crisis should support cheap equities. Buy the Nasdaq, backed by rising prospects of IT spending.

Key call 6: Bonds – Burdened by growing sovereign risk and prospect of Fed tightening. Caution on Bonds and bond proxies like Global Consumer Staples (relative to the market).

Key call 7: Emerging markets - Policy tightening to fight inflation. Emerging equities expensive. Buy a basket of Emerging FX and go short BRIC Equities/long Developed Equities

Let' s see how it runs going forward, and not less interesting would be to see the performance since 2007?

Reading Swedbank Analysis: Competitiveness adjustment in Latvia – no pain, no gain?

Swedbank goes kinda against the Anglo-Saxon wisdom as you can read these pieces posted earlier:

Reading Auerback/Parenteau: Coming to a Country Near You: Let a dozen Latvias bloom?
Edwardian Clash Over The Future Of Latvia
Reading On Latvia's Recession And Cost Of Adjustment With An "Internal Devaluation"
Deutsche Prescribes The Focus On Fiscal Performance For Baltics
Nordea's Litmus Test Of A Solid Foundation For Latvia's Long Term Growth
BNP Paribas EcoWeek Focus: Turmoil In The Baltic Countries

Somewhat wishful thinking (IMHO), but with focus on how to get on from here, worth reading thoughts on depression economics - Swedbank Analysis: Competitiveness adjustment in Latvia – no pain, no gain?

Disneyland Provides The Cure For Brain Damage?

The stock price of Walt Disney (DIS) has staged a nice V-shaped recovery, and erased the brain damage by Lehman's Psychopaths made in 2008. Disney runs, of course, a global business ...

Click on chart to enlarge, courtesy of Reuters.


It is interesting to see how the US consumer is getting around, as there is so much hope right now in the markets.

Click on chart, courtesy of CLSA Asia-Pacific Markets.



Despite all the hope, Christopher Wood, the strategist at CLSA Asia-Pacific Markets, wrote yesterday:

The data suggests that the annualised 2.2% pick up in real consumer spending in the past two quarters has been driven by tax cuts and transfer payment benefits. Personal current transfer receipts rose by 14.3% YoY in 4Q09 while personal current taxes declined by 25.8% YoY. This consumption pick up is not ultimately sustainable unless underlying income growth or wage growth revives, of which there is as yet scant sign. Thus, while real disposable personal income has risen by 1.5% over the past two years as a result of tax cuts and transfer payment benefits, real wages and salaries have declined by 6% over the same period.

Very Keynesian? There are some grounds for optimism on capital expenditures in corporate sector... and some (all buyers of equities today?) believe this will revive the consumer spending thereafter, as corporate sector starts hiring again.

Some Ideas On European Geographical Exposure And "Secure Growth"

Depending on belief in either Greek Victory or Eurozone's Structural One, or even both, this may be a useful tool that comes via Pictet, sourced from Chevreux. Click on picture to enlarge.

Closing Expectation Gaps And Getting Real With Options ...

I am back from Spring break ...

There are much more of a thing to do and share, but this appears to me the issue of the day. While watching the Michael Mauboussin, the Chief Investment Strategist at Legg Mason Capital Management and the author of “Think Twice: Harnessing the Power of Counterintuition,” speaking with James Surowiecki of The New Yorker ...

... I should admit that I enjoy reading the strategy pieces by Michael, click for them here. However, there are two issues that I am keeping in my mind. First, the minor issue, as his colleague Bill Miller, was nominated with THE 2008 ASSHAT OF THE YEAR AWARD by brutish "The Fly".

BUT, the BIG issue, as I recall a fascinating piece by Michael? Written back on 23rd June 1999 ...

Click on picture to enlarge, courtesy of Credit Suisse First Boston. I would like to share the whole wisdom, but no permission ...



... whereby we all got real by "Using Real Options in Security Analysis", as the historic context was challenging that time:

... a growing gap between how the market is pricing some businesses— especially those fraught with uncertainty—and the values generated by traditional valuation models such as discounted cash flow (DCF). Managers and investors instinctively understand that selected market valuations reflect a combination of known businesses plus a value for opportunities that are to come. Real options— a relatively new analytical tool—bridge this gap between hard numbers and intuition.

Still thinking about the issue of brain damage ... and gigantic error of pessimism.

Breaking The Fed And Spring

While markets are busy parsing the FOMC, and is on (at least it attempts) to celebrate the end of QE, I declare the spring break for a week.

S&P Declares Greek Victory

The following is an excerpt form the press release from Standard & Poor's:

-- We view the Greek government's total package of deficit reduction measures as appropriate to achieve its 2010 fiscal target, given the deterioration in Greece's growth prospects.
-- We are affirming our 'BBB+/A-2' sovereign credit ratings on Greece and removing them from CreditWatch negative.
-- The negative outlook reflects our view of the government's ability to sustain reform momentum in the medium term.

This is how German DAX equity index (intra-day chart below) reacts to Greek "victory" of not being "junked" due to poor fiscal standards, the S&P500 in the US has no less joy! Click on chart to enlarge, courtesy of Reuters.

The debt horror is over! Greek victory?

Doing Homework By Candlelight

Candlelight? Sounds romantic? Wait a second, this is going to be a daily routine?

Albert Edwards, the prominent strategist at Societe Generale, writes today:

Ultimately, as my colleague Dylan Grice writes, I think we head back to double-digit inflation rates as governments opt to default. I certainly again expect to see CPI inflation above 25% in the UK and indeed in most developed nations in my lifetime – I have happy memories of the three-day week and doing my homework by candlelight. In the near term, however, the deflationary quicksand will suck us ever lower until we suffocate. A key driver for underlying inflation remains unit labour costs. While unit labour costs decline at an unprecedented rate, they are sucking us inevitably into a Fisherian, debt-deflation spiral. Only then will we see how far policymakers are willing to go to debauch the currency. Last year saw them cross the Rubicon. Monetisation is now the policy lever of first resort.

Click on chart to enlarge, courtesy of Societe Generale.

Sub-prime crisis evolved as people did not have enough income to serve large debts. Large debts are here because of high asset prices. So, welcome asset reflation? I am glad to think especially about the food and energy inflation of 2008 proportions ...

Globalisation has brought developed world into a deflation spiral of unit labour costs, as corporate sector relocates labour intensive production to low cost countries, which is combined with productivity growth via technology... Unemployment and deflation in labour compensation reduces the global aggregate demand, but corporate profits are distributed to ever fewer people. Does money in the hands of ever fewer people reduce its velocity in the economy, especially if bank lending is declining? So, let's cut the costs again and reflate the assets!

"2007-lite" balanced world around ...

Equities are good investments, if one believes that - without structural changes - governments around the world, by not "touching the corporate sector profits", will be able to compensate indefinitely the decline in aggregate demand that results from productivity growth and unemployment ...

Reading "China's Growth Momentum Has Peaked"

Li & Fung Research Centre published quite a detailed "PMI Quarterly on China Manufacturing" yesterday. Worth reading the piece...

I noted the peak back in December. The button has been passed to US now...

We Are So Early In Recovery?

Obsessed with recovery or a double dip? We are so early in recovery... Except for 1998.

Click on chart to enlarge, courtesy of Citigroup Global Markets.

Fears of Chinese bubble reverberates ...

Deutsche Paints Three Possible Broad Scenarios Today

Jim Reid, the strategist at Deutsche Bank, starts off the day be reminding:

'2007-lite' is our term for policy makers trying to recreate conditions as close as they possibly can to pre-crisis levels via aggressive policy intervention. Given this, there are three possible broad scenarios going forward. 1) Its possible that policymakers around the Globe have pulled off a masterstroke and have propelled the Global economy back to sustainable growth and that the 'Great Recession' will be seen as severe but not one that had any major structural long-term impact on the economy; 2) The strong rebound in the Global economy will eventually be checked by the burden of higher debt and growth will settle at a notably lower trend rate than pre-crisis levels, especially in the Developed world. This is the 'new normal' type outcome; 3) The bill from the unparalleled intervention that saved the Global economy eventually leads to huge Sovereign financing problems possibly leading to a combination of higher yields, higher inflation or possibly restructuring/defaulting Sovereign debt.

Clearly these are very broad paths but knowing which one will prevail and when, is going to be the key medium-long term question that needs answering. Its entirely possible that we'll go through all three paths chronologically. If so timing is key. For now the market is happy that we are in scenario 1 and on days when the Sovereign headlines fade there is absolutely no doubt that this looks quite like a normal economic recovery in many places, and one which equity and credit markets can prosper in. However scenario 2 would be a much more difficult environment for them and scenario 3 would be a very negative backdrop.

Well, but Societe Generale sees their defined "Inflation Scenario" as the central one for the next 3-5 years, and prepares with appropriate asset allocation. Interestingly that this "Inflation Scenario" prefers only "some Equities". Click on slide to enlarge, courtesy of Societe Generale.

Market seems enjoying the combination of "2007-lite" and "asymmetric" inflation scenario?

Reading "Psychopaths' Brains Wired To Seek Rewards..."

Is this about us? Read "Psychopaths' brains wired to seek rewards, no matter the consequences" at Physorg.com.

Some Leading Economic Indicators

These should be regarded as economic indicators, but many of them contain information from financial markets. Real economy and financial markets are allowed for divorce too, but for some time, not indefinitely ...

Well, I was doing some of routine jobs today, and I decided to post here some of charts I was looking at today. The first one is almost one month old, available via The Big Picture, courtesy of Societe Generale (should be able to read the full report till the end of March 2010). China is leading?

The next one is the Aruoba-Diebold-Scotti business conditions index for the United States, that "is designed to track real business conditions at high frequency. Its underlying economic indicators (weekly initial jobless claims; monthly payroll employment, industrial production, personal income less transfer payments, manufacturing and trade sales; and quarterly real GDP) blend high- and low-frequency information and stock and flow data." More up-to-date ADS info here. Courtesy of Philadelphia Fed.

Then, we had a newcomer for the US in the last weeks. James Hamilton has a nice post with links to additional info and sources at Econbrowser recently, read for additional info (INCLUDING COMMENTS) this post here.

Then, I had criticized this one for wrong or right late last year, the ECRI's WLI ... Barron's had the chart ready, but bearish approach, while the ECRI itself is less bearish ... Click on chart to enlarge, courtesy of Barron's.

Somehow difficult to buy stocks? I am not at the very moment. Well, we often get things wrong via media ...

Morgan Stanley Sees An Unusual Recovery

From the today's "Downunder Daily", click on chart to enlarge, courtesy of Morgan Stanley.

As I am going to push on "publish post", I open "The Sham Recovery" ...

It Is Not Only Dr. Copper Sick...

Alan Heap, the commodities strategist at Citigroup Global Markets, writes today about copper price and inventory disconnect:

Prices and Inventories are out of kilter — Prices for all the base metals are way higher than traditional price:inventory relations would imply.

Causes center on speculative/investment demand — Firstly, there is a short term influence. Investors are prepared to buy now in the expectation that markets will tighten later in 2010.

Secondly a structural influence — Increased long positions (investor buying) and reduced shorts (producer selling and speculators) create an imbalance which requires higher prices to attract sufficient shorts to balance the market.

Click on chart to enlarge, courtesy of Citigroup Global Markets.

The same virus can be detected in other commodities, here you can get much more insight about the oil markets ...

Asia Has Got New Shoes

Singaporean DBS delivers its quarterly Asian story today. There are a lot of nice charts that tell the hope. Click on charts to enlarge, courtesy of DBS.

This one is quite interesting, especially if you keep in mind the Chinese "cash for wash-machine" initiative.

A bit curious about this, as Chinas fixed asset investment is supposed to be falling since mid-2009.

At the same time local governments have been leveraging up heavily?

By the way, try to get the Chinese story on the same line with the one drawn by CLSA Asia-Pacific Markets!

US Small Business Simply Does Not Get This Rise Of Lycans

The US government' s "Wards of the State" are on big mission today again. Of course, there is a hope in case of short squeeze! Did we have this rise of Lycans already before? US banks are ready for subprime credit again! Well, we have to close still today, but there is clear attempt to break out into new recovery highs. For an up-to-date chart of KBW Bank index click here. Click on chart to enlarge, courtesy of StockCharts.com.


However, the small business in the US simply does not get this recovery, according to NFIB Small Business Confidence Survey. Societe Generale notes this morning:

Small business optimism lost 1.3 point in February, falling back to the December level of 88.0. The persistence of readings below 90 points is unprecedented in survey history, and shows that unlike other sectors of the economy, small businesses are still far from seeing light at the end of the tunnel.

Well, but small business generates majority of what? Jobs? GDP? What else? Or not anymore? Click on chart to enlarge, courtesy of Societe Generale.



Back to bull market anniversary. Tobias Levkovich, the US equity strategist at Citigroup Global Markets, wrote yesterday:

We believe upside potential remains. Given that the yr/yr recovery in equity prices relative to 10-year bond returns has been the best since the 1940s (see Figure 1), many investors believe the opportunity has passed. Yet, one does need to look at the 1930s for a moment and recognize that after the plunge in 2008/09, the ability to recover can be quite substantive and more lasting than may commonly be believed. Thus, it may be misleading to think that the upside appreciation potential from here is limited.Admittedly, this is more of a trading scenario since the outlook into 2011 does remain clouded and it is plausible that further gains may face additional challenges by late 2010.

Click on chart to enlarge, courtesy of Citigroup Global Markets.

For an alternative view read this one on "black flags" ...

Was this well said by James Montier?:

Paul Samuelson put it best when he opined “Investing should be dull, like watching paint dry or grass grow”.

Deutsche Targets 1250 For S&P500 On Futures Unwind By April Payrolls

The super-bull team led by Binky Chadha from the German house of Deutsche Bank has the "technical positioning" story of the 1250 target for S&P500:

Anatomy of the correction: Net short in futures at all-time high In terms of fundamentals, following the relatively uninterrupted rally of 70% from the March lows, there was a growing consensus for a correction (-10%). In the event, the sequence of three shocks in quick succession (China tightening; Greece sovereign risk; and Washington policy risk) trumped much-better-than-expected Q4 earnings, resulting in a peak-to-trough 9% sell-off. We argued that the selldown was a temporary correction and an economic recovery was far from being priced into US equities (US Equity Strategy, What’s Working? February 10, 2010). In terms of flows and positioning, the sell-down saw notable outflows from mutual funds (1.4% of AUM); mutual funds and hedge funds reduced exposure to the market by 8 and 20 percentage points, respectively; and most notably, the S&P 500 net futures short position increased by ~60k contracts, to an all-time high. The latter short was bigger than last March, which saw the S&P fall 15% over the month ...

The team of sweet strategists forgot to mention that "the dumb" speculators were net short with large positions at the market top in 2007, and well into 2008. Click on chart to enlarge, courtesy of Deutsche Bank, my annotation with red ellipse.

And they continue with reasoning as follows:

The underweight positioning overhang remains Equity flows turned modestly positive over the last two weeks, but have further to recover in cumulative terms. Mutual fund positioning turned up from underweight to neutral. However, long-short equity hedge funds positioning remains more than 10 percentage points underweight relative to November-December levels and 15-20 pp below pre-financial crisis levels. Most importantly, the record net short S&P 500 futures position as of Tuesday last week had barely begun to be covered.

This, however, does not fit well with this puzzle of 3.6% cash by portfolio managers ... Did we send those bears already in retirement? But you know more about the risks now.

Look forward for this:

Our estimate of the implications of an unwinding of the net futures short position to average levels is S&P 500 upside to 1250. The key fundamental catalyst for the unwinding of positions remains, in our view, a recovery in the labor market. We expect March payrolls will be up a strong +350k (underlying recovery and a snowstorm snap-back) but the market will likely only get more confident with a second increase in payrolls in April.

Be careful! We are on a mission ...

Reading Auerback/Parenteau: Coming to a Country Near You: Let a dozen Latvias bloom?

Interesting reading at naked capitalism: Auerback/Parenteau: Coming to a Country Near You: Let a dozen Latvias bloom?

This provides some flavor of the script:

The US has so far managed to resist anything of this magnitude. But as the voices of fiscal retrenchment intensify, a future not unlike Latvia, Greece and Argentina could await. It has taken the people of Iceland to make the first stand against this growing neo-liberal madness.

...

It is now time for the rest of us to follow the Lilliputians of Iceland: to take the rentier juggernaut down before it completes the task. Time to pry the vampire squid off our faces so we can see the light of day again. Hopefully, Iceland represents the future, not Latvia.

Just a wrong reminder that equity is wiped out before the debt is hit?

Ready For Subprime Credit Recovery?

US markets are in excellent mood after non-farm payrolls test last Friday. The sub-prime nation even enjoys the household credit recovery. But was it a surprise? There is no wonder that Consumer Discretionary and Financials stocks are among the best performers recently.

These perma-bears? No, some are turning even bullish! Hmmm, there is no new normal ...

Well, some pullback is in cards. Technical setup is bullish, and the next move should be strong and large ... but still not sure - what direction?

Klarman's False Lessons

Seth Klarman (look no further than left upper corner of this web-page) in his annual letter described 20 lessons from the financial crisis which, he says, “were either never learned or else were immediately forgotten by most market participants.”

H/T My Investing Notebook, original source at http://www.valueinvestorinsight.com/

I list here the amazing "False Lessons":

There are no long-term lessons – ever.

Bad things happen, but really bad things do not. Do buy the dips, especially the lowest quality securities when they come under pressure, because declines will quickly be reversed.

There is no amount of bad news that the markets cannot see past.

If you’ve just stared into the abyss, quickly forget it: the lessons of history can only hold you back.

Excess capacity in people, machines, or property will be quickly absorbed.

Markets need not be in sync with one another. Simultaneously, the bond market can be priced for sustained tough times, the equity market for a strong recovery, and gold for high inflation. Such an apparent disconnect is indefinitely sustainable.

In a crisis, stocks of financial companies are great investments, because the tide is bound to turn. Massive losses on bad loans and soured investments are irrelevant to value; improving trends and future prospects are what matter, regardless of whether profits will have to be used to cover loan losses and equity shortfalls for years to come.

The government can reasonably rely on debt ratings when it forms programs to lend money to buyers of otherwise unattractive debt instruments.

The government can indefinitely control both short-term and long-term interest rates.

The government can always rescue the markets or interfere with contract law whenever it deems convenient with little or no apparent cost. (Investors believe this now and, worse still, the government believes it as well. We are probably doomed to a lasting legacy of government tampering with financial markets and the economy, which is likely to create the mother of all moral hazards. The government is blissfully unaware of the wisdom of Friedrich Hayek: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”)

It would be really enough if we might learn at least the false lessons, for more lessons look here ...

I am lean and with tons of cash on hands, and waiting for nuclear bomb to hit the market :) ... making myself for fresh approach next week.

Heavy Metal? No, Steel This Time ...

Here is some steel reality from BNP Paribas as of yesterday:

Most of the top Western players ... still operate at utilization rates in the 70- 80% range in Europe and the US. As the effects of restocking start fading away, a harsh reality is settling in, whereby real demand in Western economies will take a number of years before once again reaching its 2007/08 peak, with clear strategic implications. Excluding China, world crude steel production decreased by 21.5% in 2009, according to the World Steel Association. In general, restructuring and capacity mothballing will remain topical in mature markets, while most of the investments are directed towards emerging economies.

Click on chart to enlarge, courtesy of BNP Paribas.

On the raw material front, the industry is bracing for tough annual negotiations with mining companies, both for coking coal, iron ore and also secondary materials
(manganese, etc). While the industry is slowly moving towards spot pricing, annual negotiations for benchmark iron prices are likely to lead to substantial hikes, given
buoyant Chinese demand. As an indication, spot iron ore prices have relentlessly risen in the past few months and are now at record levels above $130 per tonne.

Click on chart to enlarge, courtesy of BNP Paribas.

First 8 pages provide short summary of key information ... and hope!

Invincible European Financial Credit Spreads

"Credit QuantSight" of Societe Generale was focusing on credit spreads of financials and systemic risk on Monday. Click on charts to enlarge, courtesy of Societe Generale.

Societe Generale concluded:

So, all the macro asset classes we have been looking at seem to disagree with the pessimistic view sent by financial spreads.
... the Senior Financial index is too wide and that systemic risk seems overdone.

Is the risk overdone?

That Global Aggregate Demand ...

The Fed's Beige Book is out, and even without the snow, the increases were "modest" ...

The bond king Bill Gross was writing about the fundamental economic problem of our age - lack of global aggregate demand. As the Bank Pay Rose Almost 10% in 2009, there is no wonder that the problem is our perception.

Also according to the latest China strategy report from CLSA Asia-Pacific Markets, China is NOT able to compensate the decline in the consumption in the US. Well, do not forget Europe and Japan too ... Click on chart to enlarge, courtesy of CLSA Asia-Pacific Markets.

Re-balancing of China's economy will be slow, and the folks at CLSA explain why:

... process will be gradual for four reasons. First, there is still a large share of the population who are subsistence farmers, with little cash income. Second, investment will continue to rise for several years by about 25% YoY, from a large base, as the government continues to build out public infrastructure (without running up a significant budget deficit), and therefore investment will continue to account for a large share of growth. Third, wary of the problems experienced in Korea, Taiwan and the US, Beijing is expanding the availability of consumer credit at a cautious pace. Finally, it will take many years to establish and fund health insurance and social security programmes that lead households to reduce their precautionary savings rate, freeing up more income for consumption.

BTW, the team at CLSA has got a lot of media attention lately, including some reports ... Listen and watch about the Greek leading indicator.



Well, but even serious people are playing games around the sovereign defaults.

Pullback is All But Assured ...

Indeed, Market Technicals Appear Bullish

Despite all the bearish news and views recently, markets appear to have discounted (let's assume) and look pretty bullish technically:

Guys at the Think B.I.G. have, as always, nice charts: S&P 500 Back Above 50-DMA and Breadth Back Near Bull Market Highs .
Trader's Narrative looks at Lowry Research Update: Cyclical Bull Market Intact
The Fly brings the attitude with Non-Stop Casino

(For no particular reason?) the words by James Montier come in mind:

The psychological literature suggests that we have cognitive limits to our capacity to handle information. Indeed we seem to make the same decision regardless of the amount of information we have at our disposal. Beyond pretty low amounts of information, anything we gather generally seems to increase our confidence rather than improve our accuracy. So more information isn’t better information, it is what you do with it, rather than how much you collect that matters.

Do we fail "to learn the two most common behavioural traits ... over-optimism and over-confidence"?

We all love a story. Stock brokers spin stories which act like sirens drawing investors onto the rocks. More often than not these stories hold out the hope of growth, and investors find the allure of growth almost irresistible. The only snag is that all too often that growth fails to materialise.

Relying on technicals only is like believing in Efficient Market Hypothesis.

Japanese Ups & Downs Since 1979

European strategy team at Morgan Stanley has a nice annotated chart with UPs & DOWNs for Japanese equities (Topix index), that were triggered by policy changes ...

Click on chart to enlarge, courtesy of Morgan Stanley.

But We Know That Bad News Surely Discounted?

10 minutes after worse than expected (by economists) US Manufacturing ISM index, Dow Jones Industrial Average stages nice 30 points rally, German DAX is sent to new intra-day highs.

Well, somehow the note by mining analysts at Citigroup Global Markets from the European morning comes into my mind:

Its March already; no supercycle yet — It’s March already and the way that both metal prices and mining equities began the year (i.e. very bullish) suggests those early-2010 buyers would have hoped for more consistent economic growth signals and at least a small sign of metal inventory declines by now.

Stop-start recovery, no inventory declines — The market seems to have had the recent habit of operating on the dictum “oh, but we know that bad news already”. So it has become passé to talk about stubbornly high inventory levels because “that is surely discounted in metal prices”. It should be remembered that the subprime bubble broke a good nine months before the likes of copper and aluminium peaked in 2008. At that time, sub-prime was also ‘old news’.

Then add some kerosene to the fire by Andrew Lapthorne, the quant at Societe Generale, who writes this morning:

For example globally earnings are expected to grow by 32% in 2010 followed by a further 21% in 2011, leaving the global equity market trading on a 2011 PE multiple of just 11.3 times. The caveat is that historically such growth has typically required US nominal GDP in the 6-8% range – a tough ask given the major growth headwinds most economies are currently facing.

Yeap, and China Manufacturing PMI, the supposed pulling horse of the global economy, surprised to the downside too. Li & Fung Research Centre noted:

The PMI declined from 55.8% in January 2010 to 52.0% in February, the lowest in twelve months. Except stocks of finished goods, all sub-indices were lower than their respective levels in the previous month. Particularly noteworthy is that both output index and new orders index dropped sharply by 6.2 ppt. in February, compared to the previous month. The PMI has stayed in the expansionary zone of higher than 50% for twelve consecutive months.

There is talk about the distortions in February data by the Chinese New Year. Well, the US revisions last Friday to the 4th quarter GDP estimate are not that encouraging either, and reveal much worse picture than the headline suggests. ECRI's US WLI does not suggest improvement too? Probably distorted by Chinese too?

But, of course, there is no correlation of corporate earnings to GDP growth at all? All is discounted?