Some predictions for the rest of the decade

Michael Pettis

Markets have been crazy this month, but rather than try to wade through all the news, much of which doesn’t seem to have much informational content, I thought I would duck out altogether and instead make a list of things I expect will happen over the next several years. We are so caught up in noise and market volatility – as the market swings first in one direction and then, as regulators react, in the other direction – that it is easy to lose sight of the bigger picture.

My basic sense is that we are at the end of one of the six or so major globalization cycles that have occurred in the past two centuries. If I am right, this means that there still is a pretty significant set of major adjustments globally that have to take place before we will have reversed the most important of the many global debt and payments imbalances that have been created during the last two decades. These will be driven overall by a contraction in global liquidity, a sharply rising risk premium, substantial deleveraging, and a sharp contraction in international trade and capital imbalances.

To summarize, my predictions are:

• BRICS and other developing countries have not decoupled in any meaningful sense, and once the current liquidity-driven investment boom subsides the developing world will be hit hard by the global crisis.
• Over the next two years Chinese household consumption will continue declining as a share of GDP.
• Chinese debt levels will continue to rise quickly over the rest of this year and next.
• Chinese growth will begin to slow sharply by 2013-14 and will hit an average of 3% well before the end of the decade.
• Any decline in GDP growth will disproportionately affect investment and so the demand for non-food commodities.
• If the PBoC resists interest rate cuts as inflation declines, China may even begin slowing in 2012.
• Much slower growth in China will not lead to social unrest if China meaningfully rebalances.
• Within three years Beijing will be seriously examining large-scale privatization as part of its adjustment policy.
• European politics will continue to deteriorate rapidly and the major political parties will either become increasingly radicalized or marginalized.
• Spain and several countries, perhaps even Italy (but probably not France) will be forced to leave the euro and restructure their debt with significant debt forgiveness.
• Germany will stubbornly (and foolishly) refuse to bear its share of the burden of the European adjustment, and the subsequent retaliation by the deficit countries will cause German growth to drop to zero or negative for many years.
• Trade protection sentiment in the US will rise inexorably and unemployment stays high for a few more years.

A Reprieve from Misguided Recklessness

John P. Hussman, Ph.D. – http://www.hussmanfunds.com/wmc/wmc110829.htm

An immediate note on market conditions. Last week’s market advance cleared out the "predictable" expectation for constructive returns that briefly emerged from the recent market selloff. That doesn’t mean that the market can’t advance further, but given that the expected return/risk profile of stocks has now shifted hard negative again, any such advance would be a random fluctuation rather than a predictable one. Strategic Growth and Strategic International Equity have shifted from a briefly constructive position back to a full hedge. Our principal investment position in Strategic Total Return remains a 20% allocation to precious metals shares, where the ensemble of conditions remains very favorable on our measures, despite what we view as a welcome correction in the spot price of physical gold. The Fund has a duration of only about 1.5 years in Treasury securities, mostly driven by a modest exposure in 3-5 year maturities.

It is now urgent for investors to recognize that the set of economic evidence we observe reflects a unique signature of recessions comprising deterioration in financial and economic measures that is always and only observed during or immediately prior to U.S. recessions. These include a widening of credit spreads on corporate debt versus 6 months prior, the S&P 500 below its level of 6 months prior, the Treasury yield curve flatter than 2.5% (10-year minus 3-month), year-over-year GDP growth below 2%, ISM Purchasing Managers Index below 54, year-over-year growth in total nonfarm payrolls below 1%, as well as important corroborating indicators such as plunging consumer confidence. There are certainly a great number of opinions about the prospect of recession, but the evidence we observe at present has 100% sensitivity (these conditions have always been observed during or just prior to each U.S. recession) and 100% specificity (the only time we observe the full set of these conditions is during or just prior to U.S. recessions). This doesn’t mean that the U.S. economy cannot possibly avoid a recession, but to expect that outcome relies on the hope that "this time is different."

Bernanke must not push QE3 at Jackson Hole

Financial Times – Mohamed El-Erian is the chief executive and co-chief investment officer of Pimco

Ben Bernanke, the chairman of the US Federal Reserve, is in a really tough spot. With other policymakers essentially missing in action, many hope that he will provide a remedy for America’s increasingly deep-rooted economic problems at Jackson Hole on Friday. Possibilities include enlarging the Fed’s balance sheet, extending the average maturity of the financial assets it holds and, even more controversially, expanding the range of assets it buys in the marketplace. But Mr Bernanke is far away from the world of first-best policies. He operates with imperfect tools and has little support from other policymakers. He also faces an increasingly hostile political environment and recent history is against him. As such, expectations are far ahead of what he can reasonably deliver in terms of economic outcomes. At best, he could try to provide another bridge for other policymakers; but he should only do so if he is confident that they will finally awaken from their slumber.

It has been a year since Mr Bernanke last pulled a big rabbit from his policy hat. He did so at Jackson Hole where he set the stage for what became known as quantitative easing 2 – using the Fed’s balance sheet to buy financial assets, push up prices, make people feel richer and, hence, stimulate consumption, investment, jobs and economic growth.

Why Washington Urgently Needs to Break America’s Negative Feedback Loop

Huffington Post – Mohamed A. El-Erian

It has been a rough four weeks for America. Grim economic news, paralyzing political infighting, and the shocking loss of the sacred AAA sovereign credit rating. To make things worse, Americans’ equity-heavy 401k’s have suffered from a volatile 16 percent decline in the broad-based S&P stock market index. It is tempting to dismiss all this economic, political and market volatility as just the usual — volatility that constitutes irritating "noise" rather than insightful "signals". After all, economic data always fluctuate, politicians always posture, and markets overshoot both on the way up and on the way down. But, be very careful before you are opt for this seemingly comforting interpretation.

There is a lot in play today that, critically, requires a bold response out of Washington. Indeed, the last four weeks have rendered mission critical President Obama’s economic speech scheduled for September 5th. If the speech disappoints and if Congress continues to squabble, both the economy and the market will become even more hostage to a harmful feedback loop involving the trio of deteriorating fundamentals, insufficient policy responses, and disruptive technicals.

The Shape of the Global Economy Will Fundamentally Change

MOHAMED EL-ERIAN

It’s not a crash, it’s the new normal

Who would have thought just 18 months ago that a member of the eurozone, the most elite club of economies in Europe, could have a worse credit rating than Pakistan? And yet this is the case for Greece today, perched on the verge of a debt restructuring; two other eurozone countries (Ireland and Portugal), meanwhile, are already in Europe’s intensive care unit, receiving large bailouts.

And who would have thought that a rating agency would dare question the sacred AAA credit rating of the United States, the sole supplier of global public goods such as the international reserve currency (the dollar) and a financial system that serves as the nexus of international capital flow? Still, that’s exactly what Standard & Poor’s has done: In August the agency downgraded the United States’ AAA status to AA+, citing policymaking uncertainty in Washington and the country’s lack of a long-term plan to deal with its fiscal problems.

And who would have thought that the same country, which is renowned for its flexible labor markets and dynamic entrepreneurship, would experience a persistently high unemployment rate? Well, this is the case for the United States, where unemployment is stuck at around 9 percent, unemployment among 20-to-24-year-olds is a staggering 14.5 percent, and the related joblessness problems are becoming increasingly structural in nature.

There are, of course, several bespoke reasons for these developments. But together, they speak to major realignments that are fundamentally changing the character of the global economy and how it functions. Three things in particular have had a significant influence, and they will continue to shape the world we live in for years to come.

Two One-Way Lanes on the Road to Ruin

John P. Hussman, Ph.D.

http://www.hussmanfunds.com/wmc/wmc110815.htm

First, a quick review of market conditions. Short-term measures of market action became extremely oversold mid-week, and investors took the Fed’s latest statement as an occasion to launch a fairly typical "fast, furious, prone-to-failure" rally to clear those conditions. Beyond that, however, the full ensemble of evidence remains negative at present, and we remain defensive as market internals have collapsed, our Recession Warning Composite is fully active, credit spreads have blown out as in 2008, advisory bullishness is excessive and has paradoxically increased, and valuations remain too rich.

There are certainly developments that could move us quickly to a more constructive investment stance, but the most promising one would involve a deeper decline, coupled with significant turn toward bearish sentiment and then a reversal from negative to positive breadth. While we focus more on aligning ourselves with prevailing conditions than on distinctions like "bull" or "bear" (which can only be confirmed in hindsight), strong reversals from negative to positive breadth can be useful in identifying the potential for multi-week advances during what are, in hindsight, continuing bear markets. Unfortunately, those reversals don’t tend to hold if overvalued and overbullish conditions are in place. This is particularly true given that typical pre-recession conditions are active, because further advances are likely to be used as selling opportunities. It is important to recognize that the S&P 500 is presently only about 13% below its April peak, and the word "only" deserves emphasis. Our valuation impressions align fairly well with those of Jeremy Grantham at GMO, who puts fair value for the S&P 500 "no higher than 950" – a level that we would still associate with prospective 10-year total returns of only about 8% annually. I would consider investors to be very fortunate if the market does not substantially breach that level in the coming 12-18 months. Wall Street continues its servile attachment to forward operating earnings, seemingly unconscious that the perceived "norms" for the resulting P/E are artifacts of a bubble period. The fact is that historical periods of overvaluation and poor subsequent long-term returns correspond to forward operating P/E multiples anywhere above 12, while secular buying opportunities such as 1950, 1974 and 1982 map to forward operating multiples of only 5 or 6 (based on the strong correlation but downward-biased level of forward operating P/E ratios, when compared with multiples based on normalized earnings).

Bloomberg

More executives at Standard & Poor’s 500 Index companies are buying their stock than any time since the depths of the credit crisis after valuations plunged 25 percent below their five-decade average. Sixty-six insiders at 50 companies bought shares between Aug. 3 and Aug. 9, the most since the five days ended March 9, 2009, when the benchmark index for U.S. equities reached a 12- year low, according to data compiled by Bloomberg. Morgan Stanley (MS) Chief Executive Officer James Gorman and two other managers purchased 175,000 shares of the New York-based bank as the shares fell to the lowest level since March 2009, according to filings with the U.S. Securities and Exchange Commission.

Almost $3 trillion has been erased from U.S. equity values in the last three weeks as signs the economy is slowing and S&P’s downgrade of the government’s AAA credit rating left the benchmark gauge for U.S. shares within 30 points of a bear market. Some analysts say insider buying is bullish because executives have the best information about their prospects. “Nobody knows a company better than the people running it,” Shawn Price, who manages $2.4 billion at Navellier & Associates Inc. in Reno, Nevada, said in a telephone interview. “It’s a positive sign that they are committing their personal capital.”

Stocks Drop

CEOs, directors and senior officers bought stock as the S&P 500 fell 18 percent from this year’s high on April 29 on concern about Europe’s debt crisis and the political battle over the U.S. debt ceiling. The index is trading at 12.3 times earnings in the past year, compared with its average since 1954 of 16.4, data compiled by Bloomberg show. Gorman’s purchase of 100,000 shares was his first since joining Morgan Stanley in 2006 and the biggest stock acquisition among the firm’s executives in more than four years, according to Princeton, New Jersey-based InsiderScore.com, which analyzes insider transactions. Chief Financial Officer Ruth Porat and Paul J. Taubman, co-head of the firm’s investment bank, also bought stock. Morgan Stanley fell 19 percent from July 21 through Aug. 4, the day of Gorman’s purchase. It has lost 17 percent since, falling to $16.45 yesterday, the lowest level since January 2009, data compiled by Bloomberg show. General Motors Co. (GM) CEO Dan Akerson purchased $250,500 in shares of the automaker on Aug. 9, a day before the stock fell 6.3 percent to $23.92, the lowest level since its November initial public offering and down 35 percent for 2011. Akerson bought 10,000 shares for $25.05 each, bringing his total to 103,600, Detroit-based GM said in a regulatory filing.

MEMC Electronic

CEO Ahmad Chatila and five other officers at MEMC Electronic Materials Inc. (WFR), which has a price-earnings ratio of 8.4, bought a combined 468,057 shares of the silicon-wafer maker on Aug. 5, when the stock sank to the lowest level since October 2002, regulatory filings showed. Shares of the St. Peters, Missouri-based company rallied 19 percent to $5.93 on Aug. 9, when the transactions were disclosed. Robert Hugin, the chairman and CEO of Summit, New Jersey- based Celgene Corp. (CELG), bought shares of the maker of blood-cancer drugs for the first time since at least 2003, according to data compiled by InsiderScore. Hugin acquired 10,000 shares on Aug. 8, when the stock fell to a five-month low, while Chief Financial Officer Jackie Fouse bought shares three times this month, according to SEC filings. The stock climbed 4.2 percent on Aug. 9 and closed at $51.85 yesterday, down 12 percent for the year, data compiled by Bloomberg show.

Insiders Buying

A total of 919 insiders bought stock among all publicly listed U.S. companies between Aug. 1 and yesterday, data compiled by InsiderScore show. That compares with a monthly average of 1,065 transactions in data going back to January 2004. About 1,390 insiders bought during the first 10 days of March 2009, InsiderScore data show. Executives at 14 S&P 500 companies sold shares between Aug. 3 and Aug. 9, according to Bloomberg data, bringing the ratio of those with buyers and those with sellers to 7 to 2. Since the beginning of 2004, there have been on average 3.08 companies in the S&P 500 with sellers for every company with buyers, according to InsiderScore. “It’s a fire sale and the insiders are stepping up to buy at these prices,” Daniel Genter, who oversees about $3.7 billion as president of Los Angeles-based RNC Genter Capital Management, said in a telephone interview. “The insiders are saying that the lower valuation is unreasonable because they believe the earnings power of their companies is likely to go up.”

Rising Profits

Earnings per share increased 17 percent among the S&P 500 companies that have released quarterly results since July 11, according to data compiled by Bloomberg. About three-quarters of the companies have topped the average analyst profit forecast, the data show. Sales rose 13 percent during that period. Insider behavior doesn’t always foreshadow stock moves, according to Michael Yoshikami, chief investment strategist at YCMNet Advisors. Selling by S&P 500 executives reached a record in November as the index was in the midst of a 33 percent rally from July 2 to April 29, 2011. They increased sales in August 2009 when the S&P 500 was halfway through an advance in which it doubled, data compiled by Bloomberg and InsiderScore show. “It’s not a perfect indicator,” Yoshikami, who manages about $1 billion in Walnut Creek, California, said in a telephone interview. “Insiders can be wrong and get carried away by emotion. Just think about all the technology executives who didn’t sell at the highs because they were overly optimistic.”

The end of earnings season leads to an increase in insider transactions because executives are prevented from buying or selling before announcements, according to Ben Silverman, the Seattle-based research director at InsiderScore. Of the companies in the S&P 500, 427 have reported results since July 11, according to data compiled by Bloomberg. U.S. laws require executives and directors to disclose stock purchases or sales within two business days. The data don’t include transactions related to options and so-called 10b5-1 programs, which allow executives to cash out a portion of their holdings when stocks reach predetermined prices.

 

Point marché

Concernant le S&P500 à l’heure actuelle (-5.52%)

RSI daily de 17.6
weekly 30.8

après avoir repassé à l’instant les graphes depuis plusieurs années, on note de nombreuses variations de 2.5/3.5%.Pour les variations > 5%, je n’en ai pas vu beaucoup. Cela n’est arrivé que lors du krach de l’automne 2008

-5.28% le 5 janvier 2009
- 4.91% 1 semaine après
-4.56% 1 semaine encore après
-4.67% 2 jours 2 semaines après
-4.25% en mars 2009 pour un RSI daily de 25 et weekly 27

sinon 2 mois avant, novembre 2008
- 5.74 % le 7 octobre
- 9.03M le 5 octobre
- 6.10% le 22 octobre
- 5.27% le 5 novembre 2008
- 6.11% le 19 novembre
- 6.71% le 21 novembre

mais il y avait des rebonds entre les sessions, et le Rsi min a été 21.91 en daily et 16 en weekly (automne 2008).
A cette époque, il y a donc eu grosse survente en daily + weekly puis une poursuite de la baisse encore signivicative lors des mois suivants (cf mars 2009) avec divergence haussière en daily + weekly lors du point bas

Vers un rebond puis poursuite de la baisse avec survente importante en daily+weekly puis rebond puis resdescente vers point bas avec divergence haussière daily+weekly quelques mois plus tard ?

En regardant le graphe des variations marquées ici, puis en revenant sur le graphe des 3 dernières semaines, la baisse actuelle est impressionante. Le décrochage est beaucoup plus brutal, car il n’intervient pas lors du mouvement terminal d’une baisse initiée bien auparavant (fin d’un marché baissier). A chaud, cela laisse penser que la dynamique de la baisse est extrèmement forte, et qu’il va falloir une grosse dose de confiance pour rassurer et permettre – a priori – de reprendre ne serait-ce que 50% de la baisse…

La problématique sous-jacente est du coup:
Identifier les éléments/nouvelles ou leur enchainement qui vont modifier significativement (turning point) le niveau d’incertitude, ou permettre de reconstruire structurellement la confiance (ou l’appétit pour le risque, au niveau tactique). Cela passera entre autres par l’amélioration de la conjoncture US et l’absence de déceptions sur celle de la Chine.

Le marché est en train de re-pricer le risque, ie ré-intégrer un  certain nombre d’incertitudes et de risques dans les cours.

Point marché

Frédéric Gilbert

après 9 baisses consécutives sur le Cac, le marché semble près pour un rebond de très court terme. Totalement survendu en daily (RSI 14  de 21), l’indice parisien revient sur son support de long terme ce soir en cloture. La plupart des craintes semblent à ce niveau intégrées dans les prix. Ce n’est en revanche peut-être pas le cas sur le moyen terme. Il est probable que, si rebond i y a, celui ci soit violent et bref. On peut également s’attendre à retourver un niveau de survente en weekly sur les valeurs et les indices. Le point bas est du coup potentiellement devant nous, notamment aux vues des problèmes macro-économiques qui se profilent à échéance de quelques mois ou semaines (marché qui devrait aller tester les autres pays périphériques de l’UE, la crainte d’une baisse de la note des USA par S&P, la faiblesse des chiffres US, et en aparté les craintes sur la croissance chinoise – cf indice ISM du début de semaine – et les prochains résultats des sociétés cet autonme, avec peut-être un pic sur les marges au S1 2011). Les 3000 pts sont atteignables cette année.
Le mouvement récent est donc préoccupant sur le moyen terme (cf rupture de la MM200 sur le S&P et le Dax) et appelle à alléger les posisitons sur rebond (3600 pts ?). Sur le très court terme, on restera passif ou acheteur pour jour un rebond. Les profits seront pris rapidement, sans attendre un econfirmation du rebond. Les nouvelles macro-économiques feront la tendance. Une bonne nouvelle à court terme pourrait déclencher des rachats de put de la part des hedge funds.

Will the Market Selloff Continue?

Barron’s

The technicals suggest that U.S. stocks are oversold at this point. But let’s be clear: All is not well.

After nearly two weeks spent in a free fall, the bears may have gotten a little bit ahead of themselves. With the Dow Jones Industrial Average down 18 points in late-day trading Wednesday, it appeared that the Dow was set to register its ninth straight day in the red. So expect a modest recovery in the near future as bears take some profits.

From a technical perspective, just about every sector has fallen very far in a very short amount of time. This condition is called "oversold" by technical analysts, and it often results in a rebound, albeit a temporary one. I like the analogy of a rubber band stretched too tightly. Either it breaks or it snaps back to relieve the excess tension. Since market crashes are rare, more likely we’ll see it snap back. There is never a guarantee, but we’ll go with the odds on this one. Whether it rebounds a little or a lot in the near term, the long-term picture is not pretty. The stock market is on the edge of a major change in trend from sideways to down. In just the first few days of August, there have been several major — and bearish — developments.

The first, which grabbed the attention of many market pundits, was the market’s steep drop below the 200-day moving average, a key metric of trend direction. In June, the Standard & Poor’s 500 traded lower to meet its average for the first time in nearly 10 months (see Getting Technical, "Meditating on a Popular Market Measure," June 29). The Nasdaq actually dipped slightly below its respective average and stayed there for several days. In that case, however, the market’s overall condition was still robust, and the 200-day average acted as a support, or floor. But now, major market indexes have sliced through their respective averages like the proverbial hot knife through butter (see Chart 1).

The next widely watched feature is the giant head-and-shoulders pattern discussed here last week (see Getting Technical, "Giving a Cold Shoulder to Bullishness," July 27). Without rehashing the details, it is a form of trading range that began in January and was broken to the downside Tuesday. I have my reservations about this being the last straw breaking the bull’s back, however. Breakdowns that occur on such an uninterrupted bout of selling have a habit of failing or at least thumbing their noses at the bears for a while. I would be much more comfortable calling it a breakdown had it paused a day or two before the break. Or, if it stabilizes a day or two right where it is now and then drops again.

The reason is that breakdowns are supposed to represent changes from the sideways action in a pattern to the vertical price movement of a trend. Declines that start at the top of a pattern, as this one did, and move through the bottom of the pattern may be the result of momentum.