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Just an update to show that, as of last Friday, credit spreads had reversed about half of their recent widening. The scare that started in Euroland with the Greek debt crisis and threatened to spread to the U.S. economy is passing. Given the action in HY debt funds today (higher prices), it's a safe bet that spreads today were lower than is reflected in the charts. Good news.
11 comments:
will you post a fret, worry and teeth gnashing blurb if hy prices decline tomorrow or later?
We'll leave the fretting to you, septi. It suits you better.
bill: don quixote would be proud of you.
Hi Scott, wonder what you make of this latest bulletin from a UK "super-strategist" ?
Part 1:
FOR A CHANGE, MY MID-YEAR STRATEGY BULLETIN WILL COME IN BITS AND PIECES
– INSTEAD OF ALL AT ONCE
DEBTORS: IS THERE A SOLUTION AT ALL?
Clearly I mean a (relatively) painless one, to the Pelion upon Ossa debt mess.
The more I ponder, the more the words “don’t know – nor does anyone” spring up.
The debtor nation authorities have predictably gone down the complete-desperation-fingers-crossed-and- après-nous-le-déluge route. A FIRST INCONTROVERTIBLE NVESTMENT CONCLUSION CAN BE DRAWN AT ONCE.
O’ level finance – completely forgotten by the battalions of blowhards – heightened leverage means heightened risk. Period.
Pelion on Ossa leverage; adding debt to debt, means MEGA RISK.
MEGA RISK SHOULD MEAN VERY CHEAP RISK ASSET PRICES.
SAY, FOR WALL STREET EQUITIES, AT BEST SECULAR BEAR MARKET LOW
VALUATIONS.
I show Richard Russell’s list in this matter. Dow 4000-6000? at some stage. No
prediction, obviously. But why not?
Question: Russell, you keep talking about VALUES as the essence of Dow Theory. And you say that at major bear market bottoms, stocks sell at what you call “great values”. How about giving us some examples.
Answer: All right, here are some examples of where the S&P 500 was valued at the following bottoms. I left out 1932, which was so extreme. For instance, in July 1932 the dividend yield on the Dow was 10.2%.
On June 13, 1949 the S&P sold at a P/E of 6.8 with dividend yields at 5.7%
On December 6, 1974, the S&P sold at a P/E of 7.5 with a dividend yield of 5.1%. I remember this one well, because in January 1975 I bought EXXON and TEXACO – both yielding 10% with well covered dividends.
On April 21, 1980 the S&P sold at a P/E of 6.8 with dividend yields at 5.7%.
In August 12, 1982 the S&P sold at a P/E of 7.9 with a dividend yield of 6.3%.
Based on the values listed above, the S&P 500 today is selling at sky-high valuations, more typical of a bull market top than a bear market bottom.
The utterly reckless money print by Bernanke et al has had the reverse effect. The Greenspan effect. Non-housing – already a bust bubble – risk assets have shot up in
valuation. Ages ago I suggested Bernanke could well turn out as Greenspan doubled. He has. And Obama is Bush doubled in fiscal policy. Together they multiply out as Rakes to the power of four.
As with Greenspan and houses – what do we have this time (Greenspan2
)? The second largest short term rally in US stock market history.
The previous mega Dow rally was, as you know 1932/3. Doubled plus. 70% world index gain to April peak this time.
But, had the authorities then (mid 1930s on) realised it, economically they were almost home and dry soon after Roosevelt hit the monetary accelerator (revalued gold versus the dollar) and most or all of the weaker banks had gone to the Great Banking Parlour in the sky. Sadly policy mistakes reinstated recession subsequently. Interestingly, there were actually more quarters of GDP growth in the Depression than contractions.
Part 2:
AUSTRIAN
The “Austrian” economic school would by and large recommend doing what was normal re banks until after the 1930s, i.e. more or less nothing. The ball and chain method – let the rotten buildings crumble. Destructive creation.
This is now considered unthinkable, given the carnage of the short-term likely fall-out. I would add that the debt situation now makes 1929 look like a kids’ tea party. Nothing in history compares with the current rotten heap. So the carnage could be even worse.
TEMPORARILY.
A brief reminder of the mess:
(MW note. I cannot reproduce the graphs, but one shows soaring total credit market debt as a percentage of GDP, another shows initial jobless claims at a high, and another shows a slump in organic personal income)
At least in 1929-32 they got rid of the unpayable debt and the questionable banks – and could start with a clean sheet; more or less. The suffering involved was not in vain. We are still, this time, stuck with the debt rubbish and strings of US, European and other banks that are, properly accounted, insolvent. Marvellous.
Also – M3 (broad) US money supply is contracting at a rate matching the average decline from 1929 to 1933. Oh, and credit card defaults run at record levels. Despite near zero (and negative in real terms) interest rates; a 10% of GDP Federal deficit (and don’t even think of the finances of the individual states); and an exploded Federal Reserve balance sheet, US$ 2.2 trillion, the all important labour market remains a mess. Quoting: Mort Zuckerman in the FT:
America’s jobless picture is alarmingly bleak
By Mort Zuckerman
Published: June 6 2010 19:07
… Wherever you look the scene is bleak. Leading economic indicators fell in April – unusual at such an early stage in the up-cycle. Jobless claims were up by 25,000 to 471,000. And up again above expectations in the first three weeks of May – raising the four-week moving average to a level consistent with 100,000, or more, net job losses. For the past several months, claims have been nowhere near the levels of 400,000 and less that in the past were consistent with sustained job creation. We are not enjoying the normal cycle of economic improvement. If we were, employment would already have reached a new high and made up all of the jobs lost, as it did during the previous postwar recessions. This time we remain short of the old peak of employment,by an astounding 8.4m jobs. One in six Americans is either unemployed or underemployed. This is not a normal cycle when compared with a typical recession, which sees no more than 2m to 3m jobs lost.
Research by David Rosenberg, chief economist at Gluskin Sheff, reveals jobless statistics behind the headline numbers that are downright scary. More than 6.5m people (more than 45 per cent of the jobless) have not worked for 27 weeks or more, compared with 3.2m this time last year.
And after a brief surge the leading index of the economy has sharply reversed. ISMs (much used by analysts) are largely coincident indicators. ECRI is a leading indicator, by six months – suggesting 1.5% GDP growth then. Half or less than half of huckster prediction. We shall see.
The weekly ECRI series has almost gone negative. If it does and stays there a while, we may have zero or minus growth.
WE ARE JUST BASIS POINTS AWAY FROM GOING BELOW ZERO
(I concentrate analysis on the US – the UK is as bad, properly accounted, as opposed to Gordon Brown accounted and, of course, there are many other indebted regions).
Part 3:
THE HOPE ………………
(Apart from the arrival of Father Christmas!)
Obviously, buy time, gradually delever the private sector and slowly turn round the exploding public sector debt – without turning round the feeble recovery.
So far, despite endless cheerleading on the matter, the US recovery is FEEBLE GIVEN THE GARGANTUAN POLICY RESPONSE.
And note too: the smaller company sector. This represents more than half the economy.SMEs, (small and medium sized enterprises) account for 75% of the new jobs in the US economy. The job creating engine. Needless to say, this gets little mention from the vested interest shills. You see why below:
(MW note. Chart showing the majority of small firms are not raising wages, and chart showing that poor sales remain the worry for small firms).
Then there is the rather important housing market. Month after month this is “cheer-led”.
But for reasons again and again foreshadowed here – it’s gone nowhere. But down. This story has still not run its course, despite huge taxpayer help, and minimal mortgage rates,giving, currently, good affordability versus incomes. IT IS A DEFLATING BUBBLE.
New mortgage applications are plummeting and foreclosures soaring. (14 year low.)
(MW note - chart showing it is TAKING THE HOMEBUILDERS A RECORD 14.4 MONTHS TO FIND A BUYER )
Exports have picked up quite well, but the helpful dollar decline has reversed and they are a small part of the economy.
Consumer spending growth. Ah, the grand subject. So far almost entirely propped up by the taxpayer, i.e. borrowing.
Yes, there is a flicker of a sign of actual income growth from employment. BUT AT WHAT COST – and there appears, at least for now, almost no political acceptance of further major fiscal stimulus. Indeed fiscal policy is expected gradually to tighten. Latest opinion polls seek for that.
There may be a little more one-off boost from the inventory cycle. As for corporate profits they are about to get squeezed – a mathematical near-imperative if there is going to be some measurable rebalancing of the personal and government sectors. Per Capital Economics, the corporate internally-generated cash surplus has virtually disappeared. The trade sector
alone cannot do the heavy lifting.
SO?
Yes – muddle through is possible. For year, after year, year after year ….. AND THEN?
The fiscal restraint needed merely to return fiscal deficits to 2007 levels (hardly a result to bring more than one cheer) is eye-watering.
Will this be tolerated? On the bright (is it?) side they are more or less doing Austrian cold turkey in Ireland. The economy and living standards have plummeted. Nevertheless, taxpayers still guarantee bank debt to the tune of 500% of GDP!!.
But the people show extraordinary discipline and maturity and have buckled down – to get rid of the rubbish economy. Underneath there still remains a functioning “Irish tiger” (remember?) base. The Almighty is also helping a little in the collapse of the Euro.
But have the Americans got the huge self-discipline necessary to take this sort of thing on the chin, especially while the politicians fail (so far) to give a lead? 13
I can only repeat the words that have appeared in these bulletins year after year for a decade or so – since Greenspan went mad … WE ARE LIVING FINANCIAL HISTORY, BUT NO-ONE REALISES IT YET. Now they do. I also suggested (end 2000/2001) that we could well be seeing the end of the second “cult of the equity” in my lifetime. (1972, I wrote similarly re first “cult”.) Amen.
Part 4 (Final bit):
THE PROP IT UP POLICY
The soft option brigade seems not to have noticed that this is not a risk free exercise.
BECAUSE WILDLY EXCESS DEBT CONTINUES FURTHER TO MOUNT – AS PART OF THE POLICY. RISK IS BEING YET FURTHER ENHANCED.
What if markets, as it were, ultimately “do a Greece”? The collapse then would likely be worse than if it had occurred in 2008/9 – the underlying cause of the problem having further deteriorated.
There is no historic “route map” for this. Least of all the mid 1930s. (Well J P Morgan stood in the market place, as it were, in 1907 to stop, together with rich colleagues, the 1906/7 financial crash. Sadly there is no JPM equivalent to pick up the tab for trillions of dodgy debt and clapped out banks today!) Worldwide over US$222* trillion of private plus public sector liabilities and claims. Slightly more than resides in my wallet recently.
By and large, as I said, nature used to take its course. But because of the (so-called) curse of the gold standard, matters did not get as far out of hand as currently.
And, hey, life went on as the next surge in prosperity occurred.
NO DOUBT IT WILL AGAIN – BUT GETTING FROM HERE TO THERE COULD
BECOME A BIT EXCITING.
*For comparative reference US GDP is some US$13-14 trillion
CURRENT MACRO POLICY
EUROPE FISCAL - TIGHTENING; SLIGHT MONETARY EASING.
US FISCAL – ABOUT TO TIGHTEN
UK FISCAL – ABOUT TO TIGHTEN
JAPAN FISCAL – ABOUT TO TIGHTEN
GROWING CREDITOR ECONOMIES - MOSTLY TIGHTENING MONETARY
POLICY
WE MAY THUS “NEED” (!?) ANOTHER AVALANCHE OF MONEY PRINTING
FROM THE “OLD” ECONOMY NATIONS.
Could turn already over-valued risk assets into yet another bubble? Now there’s a thought. Dow 20,000!
Whilst further heightening risk.
What a Fred Karno’s Circus.
THE “EYE OF THE HURRICANE NOW?”. STILL POSSIBLE
INVESTMENT
More in my next piece.
PRO TEM:
1. We have, as I start writing (9/6), a massive OVERSOLD position in equities
(except for opinion surveys, interestingly) and the euro; OVERBOUGHT in gold
and government bonds.
2. Latest Bloomberg survey: 13 big “houses”: – ALL BULLISH re S & P to the year
end. Least bullish: 6% gain.
This is medium term kiss of death stuff, as longstanding readers know.
Many asset classes stand at make or break technical levels.
Interesting times.
ENDS
Rob: that looks like a good collection of all the reasons to be bearish. I see so many things like this, but not many that are bullish. There is no shortage of reasons to worry, that's for sure. That leads me to believe that the market is priced for some pretty bad news.
Thanks Scott.
I have come to realise just how true Keynes was about the market being wrong longer than you can be solvent.
I always tried to go against the crowd, or at least to look for a pendulum point in changing sentiment.
Sadly it led me into more disasters than successes. My biggest disaster was at the end of May, beginning of this month.
Recklessly optimistic and buoyed by blog pundits such as yourself, I went long the Dow Jones, using a lot of leverage (spread bets).
Despite mounting losses I held my position, saw the losses trimmed only to rebuild as the market volatility shredded my account and my nerves.
In the darkest hour just before the dawn (ie around 9800) I was thrown out of the casino for good with a loss that I am still coming to terms with.
Obviously, all responsibility is 100% my own. But I have started to think how much money this amazing new invention, the Interet, has cost me: blogs, spread betting, the illusion of empowering real-time information ... and that'snot even counting all the money I lost in the dot-com bust !
So, you were right - the market pulled back from its recent fear-index plummet .. and that is like a double-whammy negative for me since I wasn't able to hold on long enough to recoup my losses and go on to make profits.
Just venting and maybe sharing as a warning to others inclined to get in over their head.
Rob
Rob: think of it like this: you just got an expensive lesson in how the market works. It may pay off at a later date.
Thanks for the encouragement Scott.
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