Bund e TBond: l'era del cinghiale bianco
- Creatore Discussione dan24
- Data di Inizio
gipa69
collegio dei patafisici
Un po di roba tratta quà e la
Que le dieci possibili sorprese di Byron Wien di Pequot ex Morgan Stanley:
1. In spite of Federal Reserve easing, and other policy measures, the United States economy suffers its first recession since 2001 as housing starts stay soft and banks are reluctant to lend to anyone where a whiff of risk is apparent. Federal funds drop below 3%. The unemployment rate moves definitively above 5% and consumer spending is lackluster.
2. Standard and Poor’s 500 earnings decline year-over-year and the index drops another 10%. Energy and materials stocks hold up relatively well in what is viewed as a correction rather than a bear market. Market conditions start to improve during the summer.
3. The dollar strengthens in the first half reaching US$1.35 against the euro and weakens in the second exceeding US$1.50. The European Central Bank begins an accommodative monetary policy. Foreign investors flock in to buy cheap assets in the US early in the year but the dollar declines later as several countries holding large reserves diversify into other assets.
4. Inflation rises above 5% on the Consumer Price Index as higher commodity prices and oil finally begin to have an impact in spite of modest wage increases. The 10-year US Treasury yield rises to 5%. Stagflation becomes a frequent presidential campaign and Op-Ed discussion topic.
5. The price of oil goes down early in the year and up later, sinking to US$80 a barrel in the first half as western economies slow and inventories are drawn down, and rising to US$115 in the second. Established wells continue to decline in production while China, India and the Middle East increase their consumption.
6. Agricultural commodities remain strong. Corn rises to US$6 a bushel and cotton to US$0.85 a pound. Gold reaches US$1 000 an ounce as disillusionment with paper currencies spreads across Asia.
7. The recession in the United States slows the Chinese economy modestly but its stock market declines sharply. Investors recognize that paying biotechnology stock multiples for highly cyclical companies doesn’t make sense. The Chinese revalue the renminbi by another 10% to control inflation and as a gesture to foreign governments participating in the Olympic Games who complain that Chinese terms of trade are unfair. Several long distance runners refuse to compete in certain Olympic events because of continuing air pollution problems.
8. The new Russian President Dmitry Medvedev, under the tutelage of Vladimir Putin, becomes more assertive in world affairs. He insists that Russian oil and gas be paid for in rubles and demands a Russian seat at major world conferences. Russia and Brazil stock markets lead the BRICs. The Gulf Cooperation Council markets begin to attract interest among emerging market investors.
9. Infrastructure improvement becomes an important election theme for both parties and construction and engineering stocks rally in anticipation of huge programs beginning after the new President’s inauguration. Water becomes a critical problem world-wide and desalination stocks soar.
10. Barack Obama becomes the 44th President in a landslide victory over Mitt Romney. With conditions in Iraq improving, the weak economy becomes the determining issue in voters’ minds. They want to make sure that gridlock ends and Congress gets something done for a change. The Democrats end up with 60 Senate seats and a clear majority in the House of Representatives.
Que le dieci possibili sorprese di Byron Wien di Pequot ex Morgan Stanley:
1. In spite of Federal Reserve easing, and other policy measures, the United States economy suffers its first recession since 2001 as housing starts stay soft and banks are reluctant to lend to anyone where a whiff of risk is apparent. Federal funds drop below 3%. The unemployment rate moves definitively above 5% and consumer spending is lackluster.
2. Standard and Poor’s 500 earnings decline year-over-year and the index drops another 10%. Energy and materials stocks hold up relatively well in what is viewed as a correction rather than a bear market. Market conditions start to improve during the summer.
3. The dollar strengthens in the first half reaching US$1.35 against the euro and weakens in the second exceeding US$1.50. The European Central Bank begins an accommodative monetary policy. Foreign investors flock in to buy cheap assets in the US early in the year but the dollar declines later as several countries holding large reserves diversify into other assets.
4. Inflation rises above 5% on the Consumer Price Index as higher commodity prices and oil finally begin to have an impact in spite of modest wage increases. The 10-year US Treasury yield rises to 5%. Stagflation becomes a frequent presidential campaign and Op-Ed discussion topic.
5. The price of oil goes down early in the year and up later, sinking to US$80 a barrel in the first half as western economies slow and inventories are drawn down, and rising to US$115 in the second. Established wells continue to decline in production while China, India and the Middle East increase their consumption.
6. Agricultural commodities remain strong. Corn rises to US$6 a bushel and cotton to US$0.85 a pound. Gold reaches US$1 000 an ounce as disillusionment with paper currencies spreads across Asia.
7. The recession in the United States slows the Chinese economy modestly but its stock market declines sharply. Investors recognize that paying biotechnology stock multiples for highly cyclical companies doesn’t make sense. The Chinese revalue the renminbi by another 10% to control inflation and as a gesture to foreign governments participating in the Olympic Games who complain that Chinese terms of trade are unfair. Several long distance runners refuse to compete in certain Olympic events because of continuing air pollution problems.
8. The new Russian President Dmitry Medvedev, under the tutelage of Vladimir Putin, becomes more assertive in world affairs. He insists that Russian oil and gas be paid for in rubles and demands a Russian seat at major world conferences. Russia and Brazil stock markets lead the BRICs. The Gulf Cooperation Council markets begin to attract interest among emerging market investors.
9. Infrastructure improvement becomes an important election theme for both parties and construction and engineering stocks rally in anticipation of huge programs beginning after the new President’s inauguration. Water becomes a critical problem world-wide and desalination stocks soar.
10. Barack Obama becomes the 44th President in a landslide victory over Mitt Romney. With conditions in Iraq improving, the weak economy becomes the determining issue in voters’ minds. They want to make sure that gridlock ends and Congress gets something done for a change. The Democrats end up with 60 Senate seats and a clear majority in the House of Representatives.
gipa69
collegio dei patafisici
Lo stategist di citi commentato un pò acidamente.. 
Another who is keeping the faith based on historical precedent is Citi strategist Tobias Levkovich. In a Monday note, he argues that despite the recent sell-off in markets volatility has not spiked to the extent one might expect.
Despite the sharp decline in indices, he argues, the VIX has not jumped meaningfully this time round implying that such moves are becoming more accepted. (Bespoke also argued here that the uptick in volatility is less dramatic when put in perspective with long term trends).
With the number of stocks trading at or below their 200-days moving averages, Levkovich thinks a relief rally is likely soon.
Perhaps not just yet though. US stocks advanced on Monday as focus turned from the deteriorating economic outlook to the increased likelihood of rate cuts - but the rally didn’t last as indices on both sides of the Atlantic turned lower in mid-afternoon London time.
Levkovich also used January 2nd’s slump as reason to peer back through the historical looking glass. A bad start to the year need not mean tough times across the 12 months, he cautions.
His numbers, right, consider when the year has started with a down day of more than 1 per cent.
Indeed when removing the Great Depression years from the equations, the outcome tends to be quite favourable.
Oh good. Take comfort then in those stats. Excluding the possibility of an absolute unmitigated meltdown, it’s all going to be fine
Another who is keeping the faith based on historical precedent is Citi strategist Tobias Levkovich. In a Monday note, he argues that despite the recent sell-off in markets volatility has not spiked to the extent one might expect.
Despite the sharp decline in indices, he argues, the VIX has not jumped meaningfully this time round implying that such moves are becoming more accepted. (Bespoke also argued here that the uptick in volatility is less dramatic when put in perspective with long term trends).
With the number of stocks trading at or below their 200-days moving averages, Levkovich thinks a relief rally is likely soon.
Perhaps not just yet though. US stocks advanced on Monday as focus turned from the deteriorating economic outlook to the increased likelihood of rate cuts - but the rally didn’t last as indices on both sides of the Atlantic turned lower in mid-afternoon London time.
Levkovich also used January 2nd’s slump as reason to peer back through the historical looking glass. A bad start to the year need not mean tough times across the 12 months, he cautions.
His numbers, right, consider when the year has started with a down day of more than 1 per cent.
Indeed when removing the Great Depression years from the equations, the outcome tends to be quite favourable.
Oh good. Take comfort then in those stats. Excluding the possibility of an absolute unmitigated meltdown, it’s all going to be fine
ditropan
Forumer storico
gipa69 ha scritto:
... infatti è il più pericoloso at the moment ...
... mentre il t-bronx è tenuto a bada dal discorso inflazione a quanto pare ... il 10 anni pare essere più legato al merito discorso del taglio tassi + recessione usa ... ergo ... il t-note in questi giorni è molto più forte del t-bond. Lo vedi pure da quanta strada si è fatto dai dati sull'ism di settimana scorsa ... il t-note in pratica ha corso tanto quanto ha fatto il t-bond (circa 2,5 figure), tenenendo conto della diversa duration dei due obbligazionari il t-note proporzionalmente ha corso molto più del t-bond.
gipa69
collegio dei patafisici
ditropan ha scritto:... infatti è il più pericoloso at the moment ...
Lo vedi pure da quanta strada si è fatto dai dati sull'ism di settimana scorsa ... il t-note in pratica ha corso tanto quanto ha fatto il t-bond (circa 2,5 figure), tenenendo conto della diversa duration dei due obbligazionari il t-note proporzionalmente ha corso molto più del t-bond.
chiaro.
gipa69
collegio dei patafisici
MS prevede una mild recession..
United States
Is Recession Now in the Price?
January 07, 2008
By Richard Berner & David Greenlaw | New York
Source: Morgan Stanley Research E = Morgan Stanley Research Estimates
Incoming data suggest that tighter credit has pushed the US economy to the brink, and we reiterate our call for a mild US recession in the first half of 2008. Weak employment data and slowing in export orders reported by purchasing managers undermine the case that a healthy consumer and strong global growth would forestall a downturn. Moreover, the ongoing housing recession is deepening, declines in capital goods bookings hint that business equipment spending will contract, and inventory liquidation seems likely. Our headline growth forecast for 2008 is unchanged at 1.1% using year-on-year arithmetic, but that largely reflects a stronger-than-expected 4Q07. On a Q4/Q4 basis, we now see real growth at 0.5%, 0.3% lower than a month ago. Most of the weakness is concentrated in the first half of the year; we project the economy will contract by about ¾% annualized in the first half of 2008, compared with 0.3% last month.
The key question now is how deep the recession will be and how long it will last. We continue to expect that the downturn will be comparatively mild and short; after all, recessions abroad are unlikely, so global growth will still be a prop; US excesses are modest away from housing, and peaking inflation should give the Fed latitude to ease monetary policy further. However, the slide in job growth hints at near-term downside risks. Private payrolls contracted by 13,000 in December; that’s the first such decline in four years. And more employment weakness is likely in construction and housing-related industries, in retailing, and in capital-goods producing industries. While wage income as measured by the 5.2% annualized gain in weekly payrolls over the past three months has so far held up well, such gains seem unsustainable.
The bad news, moreover, is that surging energy prices represent an additional threat to such wage gains when adjusted for inflation, and more broadly higher energy quotes threaten real income and spending. Because the recent oil price hikes are more the product of shocks to supply than demand, they will depress global growth and push up inflation. Only half of the $25 jump in crude quotes since the summer (to just shy of $100/bbl) has so far shown up in gasoline prices at the pump, as crack spreads have been stable and lags have delayed the pass-through to refined products. So far, that 30 cent/gallon increase has cost consumers $39 billion in annualized discretionary spending power; full escalation of refined product prices by another 30 cents would hammer consumer wherewithal at a time when soaring food quotes are also draining spending power, jobs are slipping, consumer lenders are more cautious, and household wealth is under pressure. Moreover, the escalation of both energy and food quotes seems likely to keep headline inflation as measured by the CPI above 4% at least through February, potentially complicating the Fed’s ability to respond to a weakening economy.
The good news is that aggressive central bank action to ease the tightening in money markets is working, and the pace of reintermediation may be fading. Action by the Fed and four other central banks to alleviate money-market pressures through the Fed’s Term Auction Facility (TAF), reciprocal currency swaps, and liquidity provisions abroad have all reduced market pressures (see “Bold Action: Central Banks Likely to Succeed,” Global Economic Forum, December 14, 2007). The Fed’s resolve to contain those pressures is evident in increasing the size of upcoming TAF auctions from $20 billion to $30 billion. However, money-market rates in relation to policy rates remain elevated. For example, although three-month dollar Libor-OIS spreads have declined from 108 bp over the past month to 73 bp, they are still 65 bp higher than they were in the spring. In our view, ongoing reintermediation likely will keep spreads wide — and possibly drive them wider again — at least through mid 2008, although the increase in Asset Backed Commercial Paper (ABCP) outstanding in the week ended January 2 may be a sign that the intensity of the pressure to move assets back on balance sheets is diminishing.
Nonetheless, financial conditions are becoming tighter as markets are in transition from a liquidity crunch to a classic credit cycle, which is just now spreading beyond mortgages as credit quality has peaked. In part, that reflects the fact that the earnings recession is gathering steam beyond financials. Consequently, financial restraint will persist, as lenders likely grow more cautious, high volatility sustains loan spreads over interbank lending rates, and equity prices continue to slide. For example, the spread over Libor for the LCDX 9 index of leveraged loans widened by about 20 bp to 340 bp over the past month, and yield spreads on bank loans over those money-market rates have stayed high or widened.
Against this backdrop, talk of fiscal stimulus is gaining popularity inside the Beltway and elsewhere, as some lawmakers and analysts view monetary policy as incapable of dealing with the current economic malaise. For example, former Treasury Secretary Summers has proposed a “timely, targeted and temporary” $50-75 billion package that would “contain the fallout from problems in the financial and housing sectors" and sustain growth. And NBER President Martin Feldstein advocates a uniform tax rebate per taxpayer or a percentage reduction in each taxpayer's liability that would automatically end when signs of recovery in employment appeared. More discussion will come up on Thursday at a Brooking panel including Former Treasury Secretary Rubin, Feldstein, CBO Director Orszag, and former Fed Vice-Chair Rivlin. Most analysts, us included, believe that fiscal stimulus is typically late to be enacted and is thus “pro-cyclical” — it kicks in as the economy is recovering. The 2001-03 tax cuts were the exception that proves the rule. Nonetheless, politicians want to be perceived as responding to voter angst about the economy.
While such talk may spur hopes for a quicker turnaround, we think genuine fiscal policy action is unlikely soon. The President, recognizing concerns about housing, energy prices, and the deterioration in the economy, is weighing alternatives. But he will wait until his State of the Union speech on January 28 to make any announcement.
Most important, we think it is unlikely that the President and the Democratic-led Congress will be able to agree on any substantive measures such as tax cuts or spending increases to spur growth. Their preferred policy tools are quite different from one another. The Administration will be eager to extend the Bush tax cuts beyond 2010 when they are scheduled to expire. Those include the 15% top tax rate on dividends and capital gains. For their part, Democrats may support extending those tax cuts only for middle- and lower-income taxpayers, including the 10% bottom bracket, the $1,000 child credit, and marriage penalty relief, and argue for relief on the Alternative Minimum Tax. But they don’t favor extending breaks on dividends and capital gains and they probably would push for targeted spending and expansion of unemployment benefits to help lower-income families and workers. Thus, a compromise seems unlikely unless the recession deepens and public opinion favors additional action.
With the economy weakening and headline inflation rising for a few months, the Fed will ease monetary policy further — we think by another 75 bp — and the yield curve will continue to steepen. Like our strategy colleagues, we aren’t bearish on US bonds, but much of this news is now in the price. Not so for US equities; despite more favorable valuations, our strategy team expects a 10% decline from start-of-year prices (see “There Will be Blood: 2008 Outlook,” January 7, 2008). Nor is our expectation for slower growth abroad in the price in overseas markets. Consequently, we expect that signs of a non-US slowdown will eventually promote a stronger dollar against the euro and a reversal in transatlantic spreads.
Risks for growth and inflation abound. We expect energy prices to come off their peaks in the spring, but further increases in energy and food quotes could push up inflation expectations, creating a whiff of stagflation and a deeper downturn. Likewise, with uncertainty high, additional consumer and business hesitation that shows up in consumer outlays, in hiring, or in capex orders could fuel the dynamics of the economic downturn, making it deeper or longer.
United States
Is Recession Now in the Price?
January 07, 2008
By Richard Berner & David Greenlaw | New York
Source: Morgan Stanley Research E = Morgan Stanley Research Estimates
Incoming data suggest that tighter credit has pushed the US economy to the brink, and we reiterate our call for a mild US recession in the first half of 2008. Weak employment data and slowing in export orders reported by purchasing managers undermine the case that a healthy consumer and strong global growth would forestall a downturn. Moreover, the ongoing housing recession is deepening, declines in capital goods bookings hint that business equipment spending will contract, and inventory liquidation seems likely. Our headline growth forecast for 2008 is unchanged at 1.1% using year-on-year arithmetic, but that largely reflects a stronger-than-expected 4Q07. On a Q4/Q4 basis, we now see real growth at 0.5%, 0.3% lower than a month ago. Most of the weakness is concentrated in the first half of the year; we project the economy will contract by about ¾% annualized in the first half of 2008, compared with 0.3% last month.
The key question now is how deep the recession will be and how long it will last. We continue to expect that the downturn will be comparatively mild and short; after all, recessions abroad are unlikely, so global growth will still be a prop; US excesses are modest away from housing, and peaking inflation should give the Fed latitude to ease monetary policy further. However, the slide in job growth hints at near-term downside risks. Private payrolls contracted by 13,000 in December; that’s the first such decline in four years. And more employment weakness is likely in construction and housing-related industries, in retailing, and in capital-goods producing industries. While wage income as measured by the 5.2% annualized gain in weekly payrolls over the past three months has so far held up well, such gains seem unsustainable.
The bad news, moreover, is that surging energy prices represent an additional threat to such wage gains when adjusted for inflation, and more broadly higher energy quotes threaten real income and spending. Because the recent oil price hikes are more the product of shocks to supply than demand, they will depress global growth and push up inflation. Only half of the $25 jump in crude quotes since the summer (to just shy of $100/bbl) has so far shown up in gasoline prices at the pump, as crack spreads have been stable and lags have delayed the pass-through to refined products. So far, that 30 cent/gallon increase has cost consumers $39 billion in annualized discretionary spending power; full escalation of refined product prices by another 30 cents would hammer consumer wherewithal at a time when soaring food quotes are also draining spending power, jobs are slipping, consumer lenders are more cautious, and household wealth is under pressure. Moreover, the escalation of both energy and food quotes seems likely to keep headline inflation as measured by the CPI above 4% at least through February, potentially complicating the Fed’s ability to respond to a weakening economy.
The good news is that aggressive central bank action to ease the tightening in money markets is working, and the pace of reintermediation may be fading. Action by the Fed and four other central banks to alleviate money-market pressures through the Fed’s Term Auction Facility (TAF), reciprocal currency swaps, and liquidity provisions abroad have all reduced market pressures (see “Bold Action: Central Banks Likely to Succeed,” Global Economic Forum, December 14, 2007). The Fed’s resolve to contain those pressures is evident in increasing the size of upcoming TAF auctions from $20 billion to $30 billion. However, money-market rates in relation to policy rates remain elevated. For example, although three-month dollar Libor-OIS spreads have declined from 108 bp over the past month to 73 bp, they are still 65 bp higher than they were in the spring. In our view, ongoing reintermediation likely will keep spreads wide — and possibly drive them wider again — at least through mid 2008, although the increase in Asset Backed Commercial Paper (ABCP) outstanding in the week ended January 2 may be a sign that the intensity of the pressure to move assets back on balance sheets is diminishing.
Nonetheless, financial conditions are becoming tighter as markets are in transition from a liquidity crunch to a classic credit cycle, which is just now spreading beyond mortgages as credit quality has peaked. In part, that reflects the fact that the earnings recession is gathering steam beyond financials. Consequently, financial restraint will persist, as lenders likely grow more cautious, high volatility sustains loan spreads over interbank lending rates, and equity prices continue to slide. For example, the spread over Libor for the LCDX 9 index of leveraged loans widened by about 20 bp to 340 bp over the past month, and yield spreads on bank loans over those money-market rates have stayed high or widened.
Against this backdrop, talk of fiscal stimulus is gaining popularity inside the Beltway and elsewhere, as some lawmakers and analysts view monetary policy as incapable of dealing with the current economic malaise. For example, former Treasury Secretary Summers has proposed a “timely, targeted and temporary” $50-75 billion package that would “contain the fallout from problems in the financial and housing sectors" and sustain growth. And NBER President Martin Feldstein advocates a uniform tax rebate per taxpayer or a percentage reduction in each taxpayer's liability that would automatically end when signs of recovery in employment appeared. More discussion will come up on Thursday at a Brooking panel including Former Treasury Secretary Rubin, Feldstein, CBO Director Orszag, and former Fed Vice-Chair Rivlin. Most analysts, us included, believe that fiscal stimulus is typically late to be enacted and is thus “pro-cyclical” — it kicks in as the economy is recovering. The 2001-03 tax cuts were the exception that proves the rule. Nonetheless, politicians want to be perceived as responding to voter angst about the economy.
While such talk may spur hopes for a quicker turnaround, we think genuine fiscal policy action is unlikely soon. The President, recognizing concerns about housing, energy prices, and the deterioration in the economy, is weighing alternatives. But he will wait until his State of the Union speech on January 28 to make any announcement.
Most important, we think it is unlikely that the President and the Democratic-led Congress will be able to agree on any substantive measures such as tax cuts or spending increases to spur growth. Their preferred policy tools are quite different from one another. The Administration will be eager to extend the Bush tax cuts beyond 2010 when they are scheduled to expire. Those include the 15% top tax rate on dividends and capital gains. For their part, Democrats may support extending those tax cuts only for middle- and lower-income taxpayers, including the 10% bottom bracket, the $1,000 child credit, and marriage penalty relief, and argue for relief on the Alternative Minimum Tax. But they don’t favor extending breaks on dividends and capital gains and they probably would push for targeted spending and expansion of unemployment benefits to help lower-income families and workers. Thus, a compromise seems unlikely unless the recession deepens and public opinion favors additional action.
With the economy weakening and headline inflation rising for a few months, the Fed will ease monetary policy further — we think by another 75 bp — and the yield curve will continue to steepen. Like our strategy colleagues, we aren’t bearish on US bonds, but much of this news is now in the price. Not so for US equities; despite more favorable valuations, our strategy team expects a 10% decline from start-of-year prices (see “There Will be Blood: 2008 Outlook,” January 7, 2008). Nor is our expectation for slower growth abroad in the price in overseas markets. Consequently, we expect that signs of a non-US slowdown will eventually promote a stronger dollar against the euro and a reversal in transatlantic spreads.
Risks for growth and inflation abound. We expect energy prices to come off their peaks in the spring, but further increases in energy and food quotes could push up inflation expectations, creating a whiff of stagflation and a deeper downturn. Likewise, with uncertainty high, additional consumer and business hesitation that shows up in consumer outlays, in hiring, or in capex orders could fuel the dynamics of the economic downturn, making it deeper or longer.
gipa69
collegio dei patafisici
Investment Strategy by Jeffrey Saut Raymond James
“Certainty or uncertainty; you pick it!”
January 7, 2008
As we enter the new year, the media is replete with pundits stating that, “There is a lot of ‘uncertainty’ and markets don’t like uncertainty.” While we too are uncertain if the overspent, under saved U.S. consumer is sated with debt; uncertain as to the extent of the mortgage mess; uncertain how much worse the housing situation is going to get; uncertain as to how market-impactful the “raise taxes” political rhetoric is going to get; and consequently uncertain about the economy, don’t give us that hogwash that the markets like “certainty” and don’t like “uncertainty.” While at the margin this “uncertainty” comment might hold a modicum of truth, it is blatantly untrue at inflection points like the major market “lows” that occurred in 1933, 1937, 1942, 1949, 1974, and the summer of 1982 when “uncertainly” was ubiquitous! Moreover, just seven short years ago things were “certain” and investors embraced the “new era” mentality, right before the S&P 500 lost nearly half its value and the NASDAQ fell some 80%.
Plainly, “uncertainty” was rampant at last August’s “lows” when it looked like the sub-prime contagion was going to topple a number of financial institutions. Yet, we were bullish at those “lows,” cautious at the subsequent mid-September throwback-rally “highs” and, bullish again at the successful late-November downside retest of those August lows. Our mantra has been that we remain positive on stocks into year end, but enter the new year “in cautious mode.” Still, even we were surprised by this year’s first day of trading “trashing” (-220 DJIA). The resulting sell-off left the senior index below its December low and us thinking about the December Low Indicator that states – if the Dow Jones Industrial Average (DJIA) breaks below its December low at anytime during the first quarter of the new year, watch out!
Interestingly, the S&P 500 and the NASDAQ did not break below their December lows in last Wednesday’s Wilt, potentially setting up a downside non-confirmation. Consequently, we stated in Thursday morning’s comments, “we are watching the Dow’s November closing low of 12743.44, as well as the Dow Jones Transportation Average’s (DJTA) closing November low of 4366.78, as fail-safe (or uncle) points since a penetration of those lows should be viewed negatively, as well as a confirmation of the November 21, 2007 Dow Theory sell-signal.” We further opined, “It should also be noted that we view the 1435-1440 level for the S&P 500 as an uncle point. If any of these levels are decisively violated, we would consider it to be the stock market’s message that tough times lie ahead. The quid pro quo,” we said, “is that failing those downside violations should be viewed as a sign that the stock market has seen, and discounted, the worst with no recession on tap for the foreseeable future.” Additionally, we have learned the hard way that the first few sessions of the new year can often be “noisy” and hence ignored. Therefore, we are currently “sitting on our hands” consistent with another of our mantras – “sometimes me sits and thinks; and sometimes me just sits.”
To this point, last Thursday night I reviewed my notes of some 40 years and found that January’s employment report tends to set the market’s trend into the State of the Union address. My notes also confirmed that the first few weeks of the new year are often accompanied by initial straight-up, or straight-down, moves that suddenly reverse on the employment numbers. The year 1988 is a good example. The mood in early 1988 had turned positive. The Dow had “crashed,” and bottomed, in October 1987 even though the stock market’s breadth (advance/decline line) continued to deteriorate into year’s end. As the new year began (1988), stocks traded sharply higher into the early-January employment numbers; and then b-a-n-g, in one session the Dow lost nearly 7%. From there, stocks never regained their poise until AFTER the State of the Union address.
We had hoped that last Wednesday’s weak ISM report, and concurrent 221-point Dow Dive, might preempt Friday’s employment report and stated in Friday’s strategy comments, “Our guess is today’s numbers will set the tone for the next three weeks. If the report is street friendly, the market’s trend into the State of the Union should be irregularly higher. If, however, the report is bad, we think stocks will have a tough time into the January 28th address.” Intuitively, this makes perfect sense because a lot of folks set their “policy statements” on the State of the Union rhetoric. So as one portfolio manager said to us late Thursday, “Hey Jeff, believe in God, but be sure to tie-up your horse!” Clearly, that has been our strategy as we entered the new year in cautious mode.
Regrettably, Friday’s employment numbers were ugly, with December Nonfarm Payrolls rising by a mere 18,000 versus expectations of +70,000. Worrisome is that the recondite birth/death model added 66,000 to that 18,000 figure, or Nonfarm Payrolls would have actually been negative. Also of worry is that the Unemployment Rate rose to 5% (median forecast was 4.8%), its highest reading since November 2005 and 0.6% above the low water mark of 4.4%. Myles Zyblock, of RBC, had this to say about the employment report:
“We flagged all periods since 1948 when the unemployment rate increased by greater than or equal to 0.6 percentage points over a 12 month period. There have been 10 prior episodes where this has occurred. In all ten prior episodes we were in recession . . . ALL 10! This is the eleventh such occurrence. It could be different this time but as we wait to find out, I think it is prudent to lower the risk in our equity portfolio.”
While we are still not in the recession camp, and would note that employment figures are often revised, we still have to admit the odds of a recession have risen. And, when Friday’s figures were taken in concert with last Wednesday’s weak ISM report, it proved to be too much for stocks, leaving ALL of the indices we follow sharply lower into Friday’s closing bell. The result also caused most of the indexes to break below their respective December lows, while some of them broke below their November, as well as their August, lows. Surprisingly, the DJIA remains above its respective November low of 12743.44, potentially setting-up a short-term downside non-confirmation and a subsequent one- to three-session “throwback” rally since the markets are currently oversold (short-term, but not long-term, oversold). Nevertheless, history suggests that stocks should not regain their poise until after the State of the Union address, which is why we remain cautious.
That said, the recent economic data clearly shows the economy is slowing and that the mortgage/housing situation is worsening. In our opinion, this leaves the Federal Reserve with little choice other than to reduce short-term interest rates until the yield curve steepens. A steepening yield curve should help financial institutions recapitalize and ameliorate some of the financial contagion. Recently, the markets seem to be telegraphing this outcome with the price of crude oil, gold, commodities, etc. all trading higher. The last time the Fed reliquidfied the system like this, equities were over valued, while bonds, commodities, and real estate were under valued. Today the opposite is true. Indeed, using the Fed Model, which compares equities “earnings yield” (earnings ÷ price) to the yield of the 10-year T’note, shows equities’ “earnings yield” is more than 4% greater than the benchmark T’note’s yield (according to a study of 29 various countries compiled by Lehman Brothers). The last time such a wide dispersion occurred was back in September 1974 right before the equity markets rallied strongly. While other valuation metrics (price-to-book, price-to-dividends, price-to-sales, etc.) are nowhere near as “cheap” as they were in 1974, it is worth noting the Fed Model’s current valuation in light of the probability of lower short-term interest rates. We mention the Fed Model this morning for while we are cautious, we think it’s a mistake to become too bearish.
As for our recommendation on Outperform-rated Verifone (PAY/$18.50), we recommended buying a one-third tranche of PAY on its initial price collapse to under $20/share back in early December. We are considering buying a second tranche, and then still another one-third tranche somewhere in the future, to complete this investment position. A similar strategy may be employed with Motorola (MOT/$15.07/Strong Buy) and Avnet (AVT/$31.64/Strong Buy). As always, we never buy, or sell, an entire position all at one time. This strategy has served us well over the years, as can be seen with our tranche “in,” and partially tranched-out, approach to Monsanto (MON/$119.63), which was recommended in the mid-teens four years ago as part of our agricultural theme.
The call for this week: We think that this is a critical week! The Transports (DJTA) are 106 points below their November low, while the Industrials (DJIA) are 57 points above their November low (a potential non-confirmation). Moreover, the DJIA has traced out a head-and-shoulders “top” formation in the charts (see nearby chart) and has fallen below both its 50-day moving average (DMA) at 13340, as well as its 200-DMA (13366). Additionally, last week the Dow’s 50-DMA crossed below its 200-DMA and thus, by our interpretation of moving averages, is negatively configured. Further, for the past few weeks new daily lows have vastly exceed new highs. We have learned over the years that it is extremely difficult to make money in the equity markets when new lows are expanding over new highs. Consequently, we remain cautious. Recall, this is the same strategy that we began 2007; and, it worked. The Analysts’ Best Picks for 2007 returned 30.5% last year, while the Focus List gained 10.7%. Hopefully, this same risk-adjusted approach to the markets will treat us as well in 2008.
“Certainty or uncertainty; you pick it!”
January 7, 2008
As we enter the new year, the media is replete with pundits stating that, “There is a lot of ‘uncertainty’ and markets don’t like uncertainty.” While we too are uncertain if the overspent, under saved U.S. consumer is sated with debt; uncertain as to the extent of the mortgage mess; uncertain how much worse the housing situation is going to get; uncertain as to how market-impactful the “raise taxes” political rhetoric is going to get; and consequently uncertain about the economy, don’t give us that hogwash that the markets like “certainty” and don’t like “uncertainty.” While at the margin this “uncertainty” comment might hold a modicum of truth, it is blatantly untrue at inflection points like the major market “lows” that occurred in 1933, 1937, 1942, 1949, 1974, and the summer of 1982 when “uncertainly” was ubiquitous! Moreover, just seven short years ago things were “certain” and investors embraced the “new era” mentality, right before the S&P 500 lost nearly half its value and the NASDAQ fell some 80%.
Plainly, “uncertainty” was rampant at last August’s “lows” when it looked like the sub-prime contagion was going to topple a number of financial institutions. Yet, we were bullish at those “lows,” cautious at the subsequent mid-September throwback-rally “highs” and, bullish again at the successful late-November downside retest of those August lows. Our mantra has been that we remain positive on stocks into year end, but enter the new year “in cautious mode.” Still, even we were surprised by this year’s first day of trading “trashing” (-220 DJIA). The resulting sell-off left the senior index below its December low and us thinking about the December Low Indicator that states – if the Dow Jones Industrial Average (DJIA) breaks below its December low at anytime during the first quarter of the new year, watch out!
Interestingly, the S&P 500 and the NASDAQ did not break below their December lows in last Wednesday’s Wilt, potentially setting up a downside non-confirmation. Consequently, we stated in Thursday morning’s comments, “we are watching the Dow’s November closing low of 12743.44, as well as the Dow Jones Transportation Average’s (DJTA) closing November low of 4366.78, as fail-safe (or uncle) points since a penetration of those lows should be viewed negatively, as well as a confirmation of the November 21, 2007 Dow Theory sell-signal.” We further opined, “It should also be noted that we view the 1435-1440 level for the S&P 500 as an uncle point. If any of these levels are decisively violated, we would consider it to be the stock market’s message that tough times lie ahead. The quid pro quo,” we said, “is that failing those downside violations should be viewed as a sign that the stock market has seen, and discounted, the worst with no recession on tap for the foreseeable future.” Additionally, we have learned the hard way that the first few sessions of the new year can often be “noisy” and hence ignored. Therefore, we are currently “sitting on our hands” consistent with another of our mantras – “sometimes me sits and thinks; and sometimes me just sits.”
To this point, last Thursday night I reviewed my notes of some 40 years and found that January’s employment report tends to set the market’s trend into the State of the Union address. My notes also confirmed that the first few weeks of the new year are often accompanied by initial straight-up, or straight-down, moves that suddenly reverse on the employment numbers. The year 1988 is a good example. The mood in early 1988 had turned positive. The Dow had “crashed,” and bottomed, in October 1987 even though the stock market’s breadth (advance/decline line) continued to deteriorate into year’s end. As the new year began (1988), stocks traded sharply higher into the early-January employment numbers; and then b-a-n-g, in one session the Dow lost nearly 7%. From there, stocks never regained their poise until AFTER the State of the Union address.
We had hoped that last Wednesday’s weak ISM report, and concurrent 221-point Dow Dive, might preempt Friday’s employment report and stated in Friday’s strategy comments, “Our guess is today’s numbers will set the tone for the next three weeks. If the report is street friendly, the market’s trend into the State of the Union should be irregularly higher. If, however, the report is bad, we think stocks will have a tough time into the January 28th address.” Intuitively, this makes perfect sense because a lot of folks set their “policy statements” on the State of the Union rhetoric. So as one portfolio manager said to us late Thursday, “Hey Jeff, believe in God, but be sure to tie-up your horse!” Clearly, that has been our strategy as we entered the new year in cautious mode.
Regrettably, Friday’s employment numbers were ugly, with December Nonfarm Payrolls rising by a mere 18,000 versus expectations of +70,000. Worrisome is that the recondite birth/death model added 66,000 to that 18,000 figure, or Nonfarm Payrolls would have actually been negative. Also of worry is that the Unemployment Rate rose to 5% (median forecast was 4.8%), its highest reading since November 2005 and 0.6% above the low water mark of 4.4%. Myles Zyblock, of RBC, had this to say about the employment report:
“We flagged all periods since 1948 when the unemployment rate increased by greater than or equal to 0.6 percentage points over a 12 month period. There have been 10 prior episodes where this has occurred. In all ten prior episodes we were in recession . . . ALL 10! This is the eleventh such occurrence. It could be different this time but as we wait to find out, I think it is prudent to lower the risk in our equity portfolio.”
While we are still not in the recession camp, and would note that employment figures are often revised, we still have to admit the odds of a recession have risen. And, when Friday’s figures were taken in concert with last Wednesday’s weak ISM report, it proved to be too much for stocks, leaving ALL of the indices we follow sharply lower into Friday’s closing bell. The result also caused most of the indexes to break below their respective December lows, while some of them broke below their November, as well as their August, lows. Surprisingly, the DJIA remains above its respective November low of 12743.44, potentially setting-up a short-term downside non-confirmation and a subsequent one- to three-session “throwback” rally since the markets are currently oversold (short-term, but not long-term, oversold). Nevertheless, history suggests that stocks should not regain their poise until after the State of the Union address, which is why we remain cautious.
That said, the recent economic data clearly shows the economy is slowing and that the mortgage/housing situation is worsening. In our opinion, this leaves the Federal Reserve with little choice other than to reduce short-term interest rates until the yield curve steepens. A steepening yield curve should help financial institutions recapitalize and ameliorate some of the financial contagion. Recently, the markets seem to be telegraphing this outcome with the price of crude oil, gold, commodities, etc. all trading higher. The last time the Fed reliquidfied the system like this, equities were over valued, while bonds, commodities, and real estate were under valued. Today the opposite is true. Indeed, using the Fed Model, which compares equities “earnings yield” (earnings ÷ price) to the yield of the 10-year T’note, shows equities’ “earnings yield” is more than 4% greater than the benchmark T’note’s yield (according to a study of 29 various countries compiled by Lehman Brothers). The last time such a wide dispersion occurred was back in September 1974 right before the equity markets rallied strongly. While other valuation metrics (price-to-book, price-to-dividends, price-to-sales, etc.) are nowhere near as “cheap” as they were in 1974, it is worth noting the Fed Model’s current valuation in light of the probability of lower short-term interest rates. We mention the Fed Model this morning for while we are cautious, we think it’s a mistake to become too bearish.
As for our recommendation on Outperform-rated Verifone (PAY/$18.50), we recommended buying a one-third tranche of PAY on its initial price collapse to under $20/share back in early December. We are considering buying a second tranche, and then still another one-third tranche somewhere in the future, to complete this investment position. A similar strategy may be employed with Motorola (MOT/$15.07/Strong Buy) and Avnet (AVT/$31.64/Strong Buy). As always, we never buy, or sell, an entire position all at one time. This strategy has served us well over the years, as can be seen with our tranche “in,” and partially tranched-out, approach to Monsanto (MON/$119.63), which was recommended in the mid-teens four years ago as part of our agricultural theme.
The call for this week: We think that this is a critical week! The Transports (DJTA) are 106 points below their November low, while the Industrials (DJIA) are 57 points above their November low (a potential non-confirmation). Moreover, the DJIA has traced out a head-and-shoulders “top” formation in the charts (see nearby chart) and has fallen below both its 50-day moving average (DMA) at 13340, as well as its 200-DMA (13366). Additionally, last week the Dow’s 50-DMA crossed below its 200-DMA and thus, by our interpretation of moving averages, is negatively configured. Further, for the past few weeks new daily lows have vastly exceed new highs. We have learned over the years that it is extremely difficult to make money in the equity markets when new lows are expanding over new highs. Consequently, we remain cautious. Recall, this is the same strategy that we began 2007; and, it worked. The Analysts’ Best Picks for 2007 returned 30.5% last year, while the Focus List gained 10.7%. Hopefully, this same risk-adjusted approach to the markets will treat us as well in 2008.
gipa69
collegio dei patafisici
Ed il nostro scettico Marc Faber
2008 outlook for currencies, stocks and commodities
Back in the summer of 1988 I was glomming around northern Virginia. My best friend worked at Mount Vernon Manor, George Washington's solid gold house, making and selling hamburgers. He explained to me that there had been a couple of instances of Japanese tourists trying to pay for a $1 orange juice with a $100 bill (and not looking for $99 in change).
When purchasing power gets out of whack, as is currently happening in the US, it makes the news. However, there are many factors other than currency movements that can lead to a rebalancing of purchasing power parities. Let me explain.
When I arrived in 1973 in Hong Kong, I frequently asked when people quoted me prices if they meant US dollars or Hong Kong dollars. Prices were simply so inexpensive. At the time you could take a fairly long taxi drive for less than one US dollar.
But what happened thereafter was not that the Hong Kong dollar appreciated against the US dollar but that inflation in Hong Kong exceeded US inflation for so long that in the end the Hong Kong dollar was devalued against the US dollar by more than 40%.
Profit outlook
Since both commodity prices and interest rates peaked out in 1980/81 it is safe to assume that the principal cause for the profit margin expansion in the 1980s and 1990s were meaningful declines in interest rates and commodity prices.
However, in the current environment where cost pressures are becoming more common because of rising commodity prices, while at a time when revenue growth is slowing down, corporate profits are likely to disappoint over the next twelve months or so and put pressure on equity prices.
As of late November, stock markets around the world became very oversold. With the prospect of the money-printing Fed cutting interest rates further and now also with other central banks likely to follow the Fed, stock markets have begun to rebound.
The rebound is likely to last until around the turn of the year whereby new highs will most likely not be achieved. Thereafter, stocks should resume their downtrend as it will become evident even to the diehard optimists that the economy is already in recession and that corporate profits will contract further.
New Year sell
Therefore, we would use further strength in equity markets as a selling opportunity (for the S&P selling is recommended on a rebound to around 1500).
On balance, conditions for a dollar rally have improved and a shift from Euros into dollars or a long US dollar position versus the Euro or the British Pound is recommended as an intermediate trade. As mentioned before the easier trade may be to buy the Yen against the British Pound or against the Euro.
I am cautious about industrial commodity prices, which could come under pressure as global liquidity growth and the global economy slows down. And while I still think that gold will outperform equities in the years to come I believe that a more meaningful correction in the price of gold is now underway.
2008 outlook for currencies, stocks and commodities
Back in the summer of 1988 I was glomming around northern Virginia. My best friend worked at Mount Vernon Manor, George Washington's solid gold house, making and selling hamburgers. He explained to me that there had been a couple of instances of Japanese tourists trying to pay for a $1 orange juice with a $100 bill (and not looking for $99 in change).
When purchasing power gets out of whack, as is currently happening in the US, it makes the news. However, there are many factors other than currency movements that can lead to a rebalancing of purchasing power parities. Let me explain.
When I arrived in 1973 in Hong Kong, I frequently asked when people quoted me prices if they meant US dollars or Hong Kong dollars. Prices were simply so inexpensive. At the time you could take a fairly long taxi drive for less than one US dollar.
But what happened thereafter was not that the Hong Kong dollar appreciated against the US dollar but that inflation in Hong Kong exceeded US inflation for so long that in the end the Hong Kong dollar was devalued against the US dollar by more than 40%.
Profit outlook
Since both commodity prices and interest rates peaked out in 1980/81 it is safe to assume that the principal cause for the profit margin expansion in the 1980s and 1990s were meaningful declines in interest rates and commodity prices.
However, in the current environment where cost pressures are becoming more common because of rising commodity prices, while at a time when revenue growth is slowing down, corporate profits are likely to disappoint over the next twelve months or so and put pressure on equity prices.
As of late November, stock markets around the world became very oversold. With the prospect of the money-printing Fed cutting interest rates further and now also with other central banks likely to follow the Fed, stock markets have begun to rebound.
The rebound is likely to last until around the turn of the year whereby new highs will most likely not be achieved. Thereafter, stocks should resume their downtrend as it will become evident even to the diehard optimists that the economy is already in recession and that corporate profits will contract further.
New Year sell
Therefore, we would use further strength in equity markets as a selling opportunity (for the S&P selling is recommended on a rebound to around 1500).
On balance, conditions for a dollar rally have improved and a shift from Euros into dollars or a long US dollar position versus the Euro or the British Pound is recommended as an intermediate trade. As mentioned before the easier trade may be to buy the Yen against the British Pound or against the Euro.
I am cautious about industrial commodity prices, which could come under pressure as global liquidity growth and the global economy slows down. And while I still think that gold will outperform equities in the years to come I believe that a more meaningful correction in the price of gold is now underway.
Similar threads
