Words from the (Investment) Wise for the Week That Was (March 9 - 15, 2009): Part II
Todd Sullivan (Value Plays): How violent could a rally be?
"Look at the charts below, the amount of cash sitting and waiting for a home is staggering. When it decides to flow into equities, the upside could be like nothing we have ever seen.
"What makes me think that? Well, the downside we have just seen is a once in a generation event (at least history tells us these are events that happen about every 90-100 years). We also have not seen cash levels this high in a generation.
"Now when does this happen? Hell, I don't know and anyone who tells you they do is full of it. But, what this does tell us is that the market is becoming a coiled spring. It is pulled back about as far as it can go and the cash buildup is the building tension."
Bespoke: What a difference a 10% rally makes
"Since its low of 666 last Friday, the S&P 500 has rallied by 10%. With the rally, there suddenly seems to have been a notable shift in sentiment among investors that all of the market's problems will be worked out.
"An example of the improved investor confidence can be seen in this week's survey by the American Association of Individual Investors (AAII). In it, bearish sentiment declined from last week's record high reading down to 54.5%. Isn't it amazing how a 10% rally can improve sentiment? Whether or not the rally is due to comments from CEOs in the banking sector, improved confidence in Washington, or simply an oversold bounce is debatable, but we'll take it."
Source: Bespoke, March 12, 2009.
Bespoke: S&P 500 approaching November lows ... on the upside
"After breaking through the November lows on the downside with barely a pause in late January, the S&P 500 is now testing that level on the upside. Hopefully for the bulls, it will be just as easy on the way up as it was on the way down."
Source: Bespoke, March 12, 2009.
David Fuller (Fullermoney): More than a technical rally?
"The key question for investors: Is this just another temporary technical rally or the beginning of something more important?
"I suspect the latter ... Inevitably, most investors are somewhat gun shy today and fearful of another failed rally in an ongoing bear market. There are also people who remain positioned for the bearish outcome with portfolios that are net short. There are even some who criticize us for not saying that the end of the world is nigh.
"In addition to the many obvious clues pointing to at least a good rally - markets are very oversold; sentiment is extremely bearish; more deleveraging has been completed; cash reserves have risen; valuations are more attractive; rescue operations are more advanced; some of last year's stimulus packages are beginning to kick in - we will have a technical divergence if this week's lows continue to hold for Wall Street and European stock markets.
"When the S&P 500 Index resumed its bear market last September, following a lengthy trading range, it soon took the rest of the world's stock markets with it. In contrast, this year's much more orderly decline by Wall Street, while persistent and significant in percentage terms, has not dragged all of Asia and the resources markets such as Brazil, downwards in its wake. Moreover, if the rally continues a number of stock market indices that did move to new bear market lows will register downside failures by pushing back into their prior trading ranges."
Source: David Fuller, Fullermoney, March 11, 2009.
Richard Russell (Dow Theory Letters): Is this the bottom?
"Was today THE bottom? Has a new bull market started? Or was today simply part of an overdue correction? From a timing standpoint, I don't think this is the bottom. A 25-year bull market is not going to be corrected by a 17-month bear market.
"Furthermore, current valuations are not consistent with major bear market bottoms. The P/E ratio for the Dow is now 21.98. The dividend yield for the Dow is 4.68%. At the bottom of great bear markets, I expect the Dow P/E ratio to be well under 10, with the dividend yield nearer to 6%.
"Because of the severely oversold condition of this market, we could conceivably have a normal upside correction of 1/3 to 2/3 of the ground lost. Remember the phenomenon of the short squeeze. There's no more avid buyer than a panicky short who's being killed by a rally.
"But lets give the rebound its due. Today [Tuesday] was an impressive day with the Dow up significantly, and all the major averages in harmonious advance. It looks like this could be a 90% up-day, but the acid test will be how much lasting power is behind this rally over the next week or so. The Lowry's statistics gave no hint of a preceding trend of either declining, selling or rising volume. All of which suggests that we keep our powder dry. The bear is doing his 'thing', giving the optimists a little ammunition. Says the bear, 'sit tight, stay in the market. See, this market can go up as well as down'.
"There is absolutely no way of knowing how far this rally can carry, but I continue to think it's an upward correction in a bear market. Bear market corrections tend to travel considerably faster than bear market declines in the primary direction. Thus in a few weeks a bear market rally can wipe out months of bear market losses. It takes a very nimble trader to make money in a bear market rally. Beating the market when it's going against the primary trend is a matter of precise timing. Long ago I gave up trying to take profits out of a bear market correction. I sleep better watching a bear market correction than trying to make money in it."
Source: Richard Russell, Dow Theory Letters, March 10, 2009.
Bespoke: Earnings growth estimates - the bad, the bad and the ugly
"The ugly actually came in the Q4 '08 numbers that are now 90% reported. The S&P 500 as a whole has seen earnings decline by 61.5% in Q4 '08 versus the fourth quarter of 2007. Health Care and Consumer Staples were the only two sectors that saw earnings growth.
"In the first three quarters of 2009, Energy, Materials, and Consumer Discretionary are expected to see earnings decline the most. In the first quarter, not one sector is expected to see year-over-year growth. Hopefully the analysts get it wrong on the downside in 2009 just as they got it wrong by keeping estimates too high in 2008."
Source: Bespoke, March 11, 2009.
Bespoke: Checking up on the BRICs
"It's been a while since we checked up on the BRIC countries (Brazil, Russia, India, China), so below we highlight two performance charts comparing them to the S&P 500. Over the last year, the US has performed better than Russia and China, inline with India, and worse than Brazil. Russia's stock market is down the most of the BRIC countries at -68%. China's Shanghai Composite is down 46% and has really seen a nice pickup lately. India's Sensex is down 43%, which is right inline with the S&P 500, and Brazil is down 36%.
"The last ten years have been very tough for US equity markets, with the S&P 500 now down 42% on a simple price basis. But even after the suffering that BRIC markets have had over the last year, their ten-year returns remain strong. Russia is down 68% over the last year, but it is still up 689% over the last decade (we had to put its performance on a secondary axis in the chart below). China is up 84%, India is up 136%, and Brazil is up 314%."
Source: Bespoke, March 13, 2009.
CEP News: Japanese government may take measures to combat stock market
"The Japanese government may take measures to address the current credit squeeze due and falling share prices, Finance Minister Kaoru Yosano told reporters in Tokyo.
"'We have a strong will to combat the credit crunch caused by the decline in the stock market,' Yosano said.
"The ruling Liberal Democratic Party is currently discussing ways to support equity markets after they reached a 26-year low earlier in the week, Yosano added.
"While the minister did not elaborate on what measures were being discussed, former Bank of Japan Deputy Governor Toshiro Muto warned that stock manipulation could damage the reputation of the Tokyo Stock Exchange and that stock prices should only be set by markets.
"Muto also said that deflation is a more pressing concern in Japan than inflation and that core price growth will soon begin to fall, possibly contracting by as much as 2% over the summer. He also said exports will be the main driver in Japan's economic recovery."
Source: CEP News, March 10, 2009.
CEP News: US regulators considering uptick rule
"US officials could reintroduce measures that stifle short selling in as soon as a month, according to multiple reports.
"House Financial Services Committee Chairman Barney Frank called for the reinstatement of the rule, which was abolished in 2007. It prevents initiating a short position when the most recent trade is to the downside. Some market watchers believe it has made it easier to 'raid' stocks.
"'I am hopeful that the uptick rule will be restored within a month,' Frank told reporters on Tuesday after a meeting with US Securities and Exchange Commission (SEC) Chairperson Mary Shapiro. In January, prior to being confirmed as Chairperson, Shapiro said that examining the rule is 'one of the things that I would be committed to doing very quickly'.
"US Senator Christopher Dodd also said on Tuesday that he wants the rule to be reinstated. 'I wish they'd do it quickly,' the Senate Bank Committee Chairman told reporters.
"The SEC will make the final decision on the rule, but it will have to undergo a period of public scrutiny before it can be reintroduced."
Source: Adam Button, CEP News, March 10, 2009.
John Authers (Financial Times): Devaluing the Swiss franc
"If the world is really following the script of the 1930s, then we are due for competitive devaluations, as nations attempt to make themselves more competitive at the expense of everyone else.
"So the Swiss National Bank's announcement that it is intervening to push down the Swiss franc sounds alarming. The speed with which the franc responded, dropping 3% against the euro in a matter of minutes, also shows that if a central bank wants its currency to fall, it can deliver.
"The problem is that not everyone can devalue at once - someone has to be left with an overvalued currency.
"The SNB's action does not necessarily herald such an outcome. The Swiss franc, like the Japanese yen, has been a 'safe haven' currency, and thus had a perverse gain last year.
"With inflation virtually zero already, an overvalued franc created a severe risk of outright deflation - something the SNB reasonably wants to avert. As it also cut rates and said it would buy bonds, this move has more to do with attacking deflation than with boosting Swiss trade.
"Indeed, a cheaper franc is good news for eastern Europe. Their consumers had indulged in the Swiss franc carry trade, taking out mortgages denominated in Swiss francs. Since last July, the franc gained more than 50% against the Hungarian forint, making those mortgages unbearable.
"Thus, if anyone can pull off a deliberate devaluation without sparking ugly consequences elsewhere it may be the Swiss.
"But the precedent of a central bank attacking its own currency is disquieting. The falls in industrial production and world trade suggest that everyone on the planet would like a cheaper currency.
"This even includes China, which has allowed its currency to gain 26% on a trade-weighted basis over the past four years, and seen its exports suddenly tumble."
Source: John Authers, Financial Times, March 12, 2009.
Times Online: Russia urged to coin currency
"President Nazarbayev of Kazakhstan has invited Russia and other former Soviet republics to set up a common currency to replace the US dollar or euro for use in trade between the states. Mr Nazarbayev, 68, said that the 'yevraz' could be a stepping stone to a new international currency, and urged world leaders at next month's G20 summit in London to take up the idea. The proposal was seen as a snub, however, to Russia's ambitions of turning the rouble into a regional reserve currency."
Source: Tony Halpin, Times Online, March 13, 2009.
Financial Times: Change of tack on commodities
"The majority of investors plan to increase their exposure to commodities but are shifting away from the long-only, passive indices that characterised the asset class in the early 2000s and are instead moving into more sophisticated instruments.
"The findings, in a survey by Barclays Capital among 230 institutional investors, corroborate anecdotal evidence that pension funds, sovereign wealth funds and other investors were shifting away from indices such as the S&P GSCI.
"The survey showed that only 12% of the investors anticipate gaining exposure to commodities in the coming year through long-only indices, with most shifting to long/short indices (26%) and third-party active management (22%), such as commodities hedge funds or in-house management.
"Exchange-traded products and structured commodity products are also popular.
"The Barclays Capital survey has been a reliable indicator of investors' appetite in commodities, predicting correctly the pick-up in money flows towards raw materials in 2006, 2007 and early-2008.
"The move away from the long-only, passive indices represents a sharp divergence with previous years when up to 40% of the investors said they planned to use those instruments.
"The majority of investors - 79% - said that they will increase their exposure to commodities in the next three years. with only 8% warning that they will cut their exposure or remain uninvested.
"The remaining 13% planned just to maintain their investment at the current level.
"Gold and crude oil are the preferred commodity investments for the year, according to the survey. Grains and freight were also cited by investors as potential winners, while base metals, such as copper and aluminium, attracted little interest."
Source: Javier Blas, Financial Times, March 9, 2009.
Telegraph: Ambrose Evans-Pritchard on gold