Confidence and Enthusiasm

John P. Hussman, Ph.D.

http://www.hussman.net/wmc/wmc120820.htm

The present confidence and enthusiasm of investors about the ability of monetary policy to avoid all negative outcomes mirrors the confidence and enthusiasm that investors had in 2000 about the permanence of technology-driven productivity, and in 2007 about the durability of housing gains and leverage-driven prosperity. Market history is littered with unfounded faith in new economic eras, and hopes that “this time is different.” Those periods can be difficult, at least for a while, for investors who are less willing to abandon evidence and lessons of history, not to mention basic principles of economics and valuation. We endured similar discomfort in periods like 2000 and 2007, before hard reality set in.

« Les Etats-Unis sont sans doute déjà entrés en récession »

Les Echos – ALBERT EDWARDS, RESPONSABLE DE LA STRATÉGIE GLOBALE, SOCIÉTÉ GÉNÉRALE CROSS ASSET RESEARCH

Quels sont les principaux risques pour les marchés dans les prochains mois ?

La crise est loin d’être finie. Au-delà des inquiétudes sur la zone euro - qui vont demeurer -, les craintes sur le reste du monde vont devenir de plus en plus importantes, au cours de l’été. Tous les éléments d’une récession mondiale sont en place. La Chine risque de souffrir d’un ralentissement brutal. De plus en plus de statistiques vont inquiéter les investisseurs ces prochaines semaines.

Run of the Mill

John P. Hussman, Ph.D.

http://www.hussmanfunds.com/wmc/wmc120604.htm

Since late-February, our estimates of the market’s prospective return/risk tradeoff (over a set of horizons from 2 weeks to 18 months) have persistently held in the worst 0.5% of all historical observations. It’s always important to emphasize that we try to align ourselves with the average return/risk profile that has historically accompanied the particular set of investment conditions we observe at each point in time, but that the outcome in any specific instance may not reflect the average return, and may even fall outside of what we view as the likely range of outcomes. That said, the awful behavior of the market in recent weeks is very run-of-the-mill in terms of how similarly unfavorable conditions have usually been resolved historically, and there is no evidence that this awful prospective course has changed much. The chart I included three weeks ago in Dancing at the Edge of a Cliff presents similar periods for historical perspective.

Is the Fed Promoting Recovery or Desperation?

John P. Hussman, Ph.D.

http://www.hussmanfunds.com/wmc/wmc120409.htm

On Friday, the Department of Labor reported that March non-farm payrolls increased by 120,000, falling well short of consensus expectations in excess of 200,000. For our part, we continue to expect a deterioration in observable economic variables, with weakness that emerges gradually and then accelerates toward mid-year. On the payroll front, our present expectation is that April job creation will deteriorate toward zero or negative levels.

Immediately after the payroll number was released, CNBC shot out a news story titled "Disappointing Jobs Report Revives Talk of Fed Easing." Of course it does, because this remains a market dependent on sugar. And with little doubt the Fed will eventually deliver it – perhaps following a market plunge of 25% or more – but with little doubt nonetheless, because like the indulgent parent of a spoiled toddler, the FOMC can’t stand to see Wall Street throw a tantrum without reaching for a lollipop.

David Rosenberg On What "April In January" Means For Seasonal Adjustments

Zero Hedge

Remember last year when the tiniest snowfall was reason for everyone and their grandmother to miss every possible estimate, always blaming it on the weather? Or rainfall in the spring? Or warm weather during the summer? Oddly enough one never hears about the opposite: the beneficial, and one-time, impact to trendline due to countertrend weather, such as the fact that we just had April weather in January. Granted, nobody in the programmed MSM will touch this topic, which is why we go to the most trustworthy filter of real economic data – David Rosenberg.

From Gluskin Sheff

Something’s Amiss in Stock-Market Rally

Barron’s

Though stocks gained late Wednesday on Fed news, it didn’t respond well earlier to Apple’s stellar quarter. That’s a troubling technical sign.

Once again, the Federal Reserve came to the market’s rescue, pledging on Wednesday to hold interest rates low through late 2014. This was good news for the bulls as stocks were a bit woozy early in the trading day despite Apple’s (ticker: AAPL) blowout first-quarter earnings report released late Tuesday. The good news is that stocks tend to move higher when they perceive support from the Fed. The bad news is that other than the visible gains that took place midday Wednesday, the internals of the market are not as good as people think.

Investors should remain skeptical.

David Rosenberg On The Difference Between The Buy And Sell Sides, And What He Is Investing In Right Now

Zero Hedge

While part of Merrill Lynch, David Rosenberg was always an outlier, in that he never sugarcoated reality, and could always be relied upon to expose the dirt in the macro and micro picture, no matter how granular or nuanced, and how much it conflicted with other propaganda research to come from the bailed out broker. Then three years ago he moved to Canadian investment firm Gluskin Sheff, transitioning from the sell side to the buy side, yet for all intents and purposes his daily letters, so very appreciated by many, never ceased, in essence making him a buysider with an asterisk – one who daily shares his latest vision with the broader public, in addition to his personal investment team. In one of his last letters of the year, Rosie presents a detailed breakdown of all the key differences between the sell and buyside, at least from his perspective, and also how, now that he manages other people’s money, he is investing in the future. To wit: "In my former role as chief economist at Merrill Lynch, I flew all over the world and saw all the legendary portfolio managers from Paul Tudor Jones to Jeremy Grantham to John Paulson to Bill Gross — at least three or four times a year. Now the only PM’s I speak to are our PM’s. Not that they "have to" agree with all of my calls, but I am here as their economic concierge 24/7. The same holds true for our clients. In my previous life on the "sell side", it was very rare for me to sit down one-on-one with private clients. Today, that takes up a good part of my day — helping our client base make investment decisions that will build their wealth in a prudent manner over time." As for what he likes (and dislikes) we will leave it up to the reader to find out, but will note that Rosie appears to take issue with being labelled a permabear. And why not: he has been far more right than not since the December 2007 start of the Second Great Depression.

From Gluskin Sheff:

Marrying The Macro And The Micro

Archives – stratégie CT au 13/12/2011

au 13/12/2011:

Le sommet du 09/12/11, présenté comme celui du 26/10/11 ("sommet de la dernière chance"),  n’a pas eu l’effet du précédent (+6.70% sur le cac le 27/10/11… et baisse de 5.50% le surlendemain !) et n’a pas crée le choc de confiance.  Encore une fois, le projet sous-jacent – renforcer l’intégration budgétaire et la crédibilité politique – est louable, mais l’exécution semble plus que délicate. Bref, l’impression est qu’on assiste des décisions mortes-nées, comme pour le FESF, et que les difficultés résident. Le chemin va donc continuer d’être long et périlleux. L’attitude de la BCE, totalement compréhensible et louable à mon sens, n’a pas changé. L’impression qui se dégage est que le marché semble trop optimiste sur une intervention de la Banque Centrale Européenne à court-terme. Draghi a en tous cas été ferme. La question est donc de savoir s’il bluffe.

UBS Cross-Asset Class Technical Overview

Une analyse technique des principales classes d’actifs en cette fin d’année. Aussi, une perspective (très) long terme via une analyse des cycles…

http://www.scribd.com/doc/75245880/UBS-Cross-Asset-Overview

European equities – trick or treat?

FT Alphaville

In keeping with the bearish mood this Monday morning, we present selected lowlights from the latest Graham Secker note. Morgan Stanley’s European strategist has downgraded equities to “underweight” following the double-digit rally, to reflect the inadequate policy response to the Eurozone debt crisis, weakening economic growth, falling margins and some technical gubbins.

Now, we should make clear, Secker’s not forecasting a big fall in stocks in the near term. Rather his downgrade reflects the fact that the overall macro environment in Europe is becoming tougher, equities are not particularly cheap and no big policy breakthrough appears to be imminent. (Indeed, one of the things that would make Secker turn positive on equities would be QE from the ECB).

But he still thinks investors should be looking to preserve wealth by selling into the recent rally.

October’s rally unlikely to be sustainable
To use seasonal parlance, we believe the market’s strong bounce in October will prove to be more of a trick than a treat. While the market may hope this is the start of a longer-lasting rally into year-end, we suspect this is just a traditional counter-trend rally in an ongoing bear market. We believe investors should look to use any residual strength in stocks and sectors as an opportunity to construct an even safer and more secure portfolio – at this time the prime goal of investors should be wealth preservation rather than wealth generation. In this regard, we are making some changes to our European model portfolio, increasing our underweight in Financials, and putting more funds into defensives.

Reduce Risk

John P. Hussman, Ph.D.

http://www.hussmanfunds.com/wmc/wmc111107.htm

A quick note on Greece – as of Friday, the yield on 1-year Greek debt has soared to 212%, up from 144% a week ago, just after the grand "solution" to the crisis was announced. Over the past week, the price of 1-year Greek debt has plunged by 20%, to 38.4 (bid 35.81, ask 40.97 to be exact). Which begs the question – if everyone has agreed that Greek debt will only be written down by 50%, why is the 1-year note trading at just 38% of face value, with longer maturities trading below 30% of face? This sort of incongruence isn’t inspiring.

Much of the reason Greece is seeking a voluntary exchange of debt from its bondholders is that an "involuntary" exchange would be a default event, which would trigger payments on credit default swaps. But across the global financial system, there are only about $3.7 billion in credit default swaps outstanding against Greek debt, and even in the event of an "involuntary" exchange, the actual amount of payouts would be less than that notional value.

One of the greatest advantages Greece has is that about 90% of its debt is governed by Greek law. The terms of any debt exchange, voluntary or involuntary, are more than simply technical details, as any restructuring should significantly reduce the discounted value of the new debt, and I suspect that the next stumbling block is that Greece will change its laws to impose "collective action clauses" on its debt, sufficient to restructure the debt more easily, given the consent of some supermajority of its bondholders. That would help to avoid any holdouts to "voluntary" restructuring, but it would also allow the possibility of a larger haircut. Little of this has been worked out, so even widely publicized "final" deals are not final until the details are settled. In any event, a 50% haircut still puts the Greek debt/GDP ratio above 100% by the end of the decade, so it’s possible that Greece will pursue a further haircut, even if it triggers CDS payments. We’ll see soon enough whether the widely accepted 50% figure actually holds up.

Citi: "The Bear Market Rally Is Behind Us; We Anticipate A Move To 1,000-1,015"

Zero Hedge

to sum it up:

"While we are the last to put much weight in the predictive power of technical analysis, lately it has become all too clear that the only thing more worthless than technicals is fundamentals. Which unfortunately means that with the lowest common denominator (and marginal price setter) in the market being robots, in turn programmed by 20 year old math Ph.Ds who only know charts, it may be time to revise our skepticism. Enter Citigroup’s Tom Fitzpatrick, who together with Goldman’s John Noyce, are the two best sellsiders in this particular field. In short, neither has much good to sayl in fact when it comes to near-term bearish sentiment, it will be hard to find someone as pessimistic as Fitzpatrick, even among the Janjuahs and Rosenbergs of the world. Citi’s conclusion from a just released note should be enough to scare anyone who believes that the bear market rally started just about a month ago will persist: "While we respect the October monthly close on the S&P 500, we did not close above the 12 month moving average…we believe the bear market rally is behind us and anticipate a move towards the 1,000-1,015 target over the weeks and months ahead." And while charts will never be a good guide as to what words may come out of G-Pip’s mouth next, with so much market action these days being purely backward looking, we would urge caution."

Europe: Just Getting Warmed Up

John P. Hussman, Ph.D.

http://www.hussmanfunds.com/wmc/wmc111017.htm

Last week, the financial markets mounted a striking shift back to the "risk-on" trade, as investor concerns about a recession were abandoned, and Wall Street came to believe that Europe will easily contain its banking problems. Accordingly, downside protection was largely discarded (as reflected by a plunge in the CBOE volatility index), price-volume action reflected heavy short-covering short sales, investor interest shifted strongly away from defensive sectors to speculative ones. For defensive investors, it was admittedly a difficult week, as the markets suddenly became convinced that no defense was needed, and treated defensive investments accordingly.

From my perspective, Wall Street’s "relief" about the economy, and its willingness to set aside recession concerns, is a mistake born of confusion between leading indicators and lagging ones. Leading evidence is not only clear, but on a statistical basis is essentially certain that the U.S. economy, and indeed, the global economy, faces an oncoming recession. As Lakshman Achuthan notes on the basis of ECRI’s own (and historically reliable) set of indicators, "We’ve entered a vicious cycle, and it’s too late: a recession can’t be averted." Likewise, lagging evidence is largely clear that the economy was not yet in a recession as of, say, August or September. The error that investors are inviting here is to treat lagging indicators as if they are leading ones.

The simple fact is that the measures that we use to identify recession risk tend to operate with a lead of a few months. Those few months are often critical, in the sense that the markets can often suffer deep and abrupt losses before coincident and lagging evidence demonstrates actual economic weakness. As a result, there is sometimes a "denial" phase between the point where the leading evidence locks onto a recession track, and the point where the coincident evidence confirms it. We saw exactly that sort of pattern prior to the last recession. While the recession evidence was in by November 2007 (see Expecting A Recession ), the economy enjoyed two additional months of payroll job growth, and new claims for unemployment trended higher in a choppy and indecisive way until well into 2008. Even after Bear Stearns failed in March 2008, the market briefly staged a rally that put it within about 10% of its bull market high.

At present, the S&P 500 is again just 10% below the high it set before the recent market downturn began. In my view, the likelihood is very thin that the economy will avoid a recession, that Greece will avoid default, or that Europe will deal seamlessly with the financial strains of a banking system that is more than twice as leveraged as the U.S. banking system was before the 2008-2009 crisis.

It is certainly true that our aversion to these risks has been punished over the past couple of weeks, as investors have abandoned defensive positions in favor of speculative ones. But as always, our investment horizon remains the complete bull-bear market cycle, and there is no compelling evidence that the serious risks that we face have abated. On the valuation front, we presently estimate a 10-year prospective total return for the S&P 500 averaging just 4.8% annually (nominal), so long-term investment prospects are only weakly more encouraging than near-term ones.

While many Wall Street analysts continue to view stocks as cheap on the basis of forward operating earnings (which reflect expectations of a continued economic expansion and the maintenance of record profit margins indefinitely), the use of forward P/E multiples is a valid shorthand for discounted cash flow valuation only when profit margins reflect a level that is actually likely to be sustained over several decades. Even then, the benchmarks typically applied to forward operating earnings are actually based on historical norms for price-to-trailing net earnings.

Investors should recognize that P/E multiples are simply a crude shorthand for legitimate valuation calculations (specifically, the careful discounting of a whole stream of future deliverable streams of cash to the investor). P/E multiples subsume a whole set of assumptions regarding the entire future path of growth rates, profit margins, return on invested capital, and other factors. The common practice of valuing the stock market based on "forward operating earnings times arbitrary P/E multiple" is not only misguided – it’s an utterly disappointing display of Wall Street’s willingness to dumb-down the investment process. As investors have discovered through more than a decade of zero returns, the constant abandonment of intellectual effort comes at a cost over the long-term. This is a good opportunity for investors to review their tolerance for significant losses. My impression is that this may be the best opportunity to reduce risk that investors are likely to see for a while.

« Il est trop tôt pour que la banque centrale américaine annonce de nouvelles mesures »

Les Echos – RICHARD LACAILLE DIRECTEUR MONDIAL DES INVESTISSEMENTS DE STATE STREET GLOBAL ADVISORS

Que doivent faire les autorités européennes pour endiguer la crise ?

Il faut déjà commencer par mettre en oeuvre sans tarder ce qui a été annoncé le 21 juillet, notamment le renforcement du Fonds européen de stabilité financière (FESF). Il faudra aussi, sans doute, procéder à une recapitalisation des banques européennes. Si on les regarde individuellement, la plupart des banques ont suffisamment de fonds propres. Mais nous sommes au coeur d’une crise sans précédent, et il ne serait pas inutile, pour accroître le niveau de confiance, de recapitaliser le secteur bancaire européen pris dans sa globalité. Les investisseurs savent que cela serait bénéfique pour l’ensemble des marchés et des entreprises européennes, même si cela s’avère douloureux pour certaines banques.

Comment analysez-vous l’action concertée des banques centrales, jeudi ?

Cette intervention permet d’alléger la pression sur la liquidité de certaines institutions financières. Nous avons déjà vu des actions de ce type en 2008, et il y avait eu des rumeurs, aussi ce n’est pas vraiment une surprise. Toutefois, le fait de réactiver les prêts à 3 mois en dollars ne permet pas de résoudre le problème numéro un qu’est le risque de contagion de la crise de la dette européenne. Plusieurs valeurs financières européennes ont besoin d’une recapitalisation. Les problématiques de dette de la Grèce, de l’Espagne ou de l’Italie sont loin d’être résolues et vont continuer de créer des pressions sur les valeurs financières et de la volatilité dans un avenir proche. Au moins jusqu’à ce qu’il y ait des mesures pro-actives des autorités européennes.

Que peut faire de plus la Banque centrale européenne ?

Il faut qu’elle renforce son programme de rachats d’actifs. La BCE, qui a déjà acquis plus de 140 milliards d’euros d’obligations des pays périphériques, doit en acquérir davantage, comme l’a fait la Réserve fédérale américaine (Fed) avec son deuxième programme d’assouplissement quantitatif (600 milliards de dollars). Il faudrait que les achats atteignent au moins le montant du FESF pour être efficaces (440 milliards d’euros).

Les euro-obligations peuvent-elles être une solution ?

Cela aurait le mérite d’accélérer la cohésion en zone euro, de faire gagner plusieurs années à l’Union économique et monétaire. C’est une solution qui serait très « élégante » car elle permettrait de mutualiser le risque et de faire avancer la solidarité entre pays. Mais ce ne peut être une solution aux problèmes actuels. Cela prendra du temps à mettre en place, car c’est très complexe à réaliser.

Qu’attendez-vous de la réunion du comité monétaire de la Fed, cette semaine ?

Je ne crois pas qu’il faille attendre grand-chose de cette réunion. Elle est en fait assez mal placée dans le calendrier. Barack Obama vient à peine d’annoncer son plan pour l’emploi, de près de 450 milliards de dollars. Celui-ci va suivre tout un processus parlementaire et il faut voir dans quel état il ressortira. A mon sens, il est trop tôt pour que la banque centrale américaine annonce de nouvelles mesures.

Les investisseurs ne risquent-ils pas d’être déçus si rien n’est annoncé ?

Je ne le crois pas. Le président de la Fed, Ben Bernanke, ne s’est engagé à rien. Lors du discours de Jackson Hole, il a simplement dit que la Fed avait différentes armes à sa disposition si c’était nécessaire. Mais elle n’a pas encore toutes les cartes en mains pour décider.

Comment voyez-vous les marchés évoluer dans ce contexte ?

Nos indicateurs d’aversion au risque sont extrêmement élevés. Même si la valorisation des actions est faible, les investisseurs restent très prudents. La Bourse est guidée par la macroéconomie. Toutefois, dès que les investisseurs auront plus de visibilité, les marchés vont se reprendre. Les sociétés sont en bonne santé financière et elles ont dégagé de solides résultats. C’est pourquoi nous surpondérons toujours les actions européennes. Nous nous attendons à une hausse de 8 à 10 % du MSCI Europe dans les six à douze mois.

Crise de la zone euro : les 10 questions clefs

Les Echos

«Les Echos» passe au crible les principales interrogations que suscite la crise de la dette grecque.

Peut-on parler de krach boursier ?

Les marchés semblent englués dans une spirale baissière dont ils ont bien du mal à s’extraire. Chaque jour, les Bourses s’enfoncent un peu plus vers le bas. Le CAC 40 a porté hier à plus de 12% sa chute depuis le début du mois. Au total, depuis le 22 juillet, l’indice parisien a dégringolé d’environ 25%. Face à cette plongée, le mot «krach» commence à émerger, même si chaque spécialiste a son propre seuil -en général une baisse à deux chiffres -pour parler d’un tel événement. Les plus anciens ont à l’esprit celui de 1987, où le Dow Jones avait perdu presque 23% en une seule séance. «C’est un terme générique qui implique en général une forte baisse en un laps de temps court -en un ou plusieurs jours ; une notion de panique avec une dimension irrationnelle où les intervenants se mettent à vendre sans distinction», explique Pascal Quiry, coauteur du Vernimmen. Actuellement, on n’en est pas loin.» «Personne n’ose en parler, mais il me semble que l’on est entré dans un krach où les considérations fondamentales, telles celles de valorisation, sont devenues inopérantes», ajoute Pierre-Yves Gauthier, cofondateur d’AlphaValue. Quoi qu’il en soit, la plupart s’accorde à dire que les Bourses sont désormais dans un «bear market» (marché baissier) défini comme un recul de plus de 20% par rapport au point haut en quelques semaines (on parle en général de 2 mois). Stratégistes et gérants ont pour la plupart modifié leur recommandations et allocations pour prendre en compte cette nouvelle donne.

Le recul des marchés est-il dû seulement à la crise grecque ?

Non. La crise des dettes publiques dans la zone euro et en particulier en Grèce n’est pas l’unique raison de l’inquiétude des marchés financiers. La conjoncture économique mondiale constitue un autre facteur d’inquiétude. Depuis le début de l’été, les différentes enquêtes d’opinion parmi les milieux d’affaires et les statistiques économiques pointent dans le même sens. Un ralentissement de l’activité économique est en cours. Les opérateurs de marchés ont pris conscience progressivement d’un nouveau plongeon possible des économies développées dans une nouvelle récession (scénario dit du double dip, «double plongeon»). D’autant plus que les résultats enregistrés au deuxième trimestre n’ont pas été encourageants. Résultat : les grandes organisations internationales ont revu leurs perspectives de croissance à la baisse. A commencer par l’OCDE qui, la semaine dernière, a indiqué que, hormis au Japon, la croissance «restera inférieure en moyenne à 1%» en rythme annualisé au second semestre. Jeudi dernier, le président de la Banque centrale européenne, Jean-Claude Trichet, a admis s’attendre «à une croissance bien plus modérée en zone euro». Les ministres des Finances du G7, à Marseille, ont reconnu qu’il «y a désormais des signes clairs de ralentissement de la croissance mondiale». La semaine prochaine, le Fonds monétaire international devrait, lui aussi abaisser ses propres prévisions.