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HomeDavid Einhorn Provides Sense on Cents
Posted by Larry Doyle on October 21st, 2009 11:52 AM |
David Einhorn of Greenlight Capital
In the midst of my ‘navigating the economic landscape,’ I thoroughly enjoy reading the work of intelligent people. While I certainly never agree with all that I read, intelligent people force me to think and review my own opinions and beliefs. That process is always healthy. I also enjoy sharing the insights and perspectives of these people with those who read Sense on Cents. High five to KD of 12th Street Capital for bringing just such an individual to my attention.
David Einhorn runs Greenlight Capital, an investment management firm. He recently delivered an address entitled “Liquor Before Beer…In the Clear.” For those interested in an overview of David’s thoughts, I will clip those points I found most informative. For those with a keen interest in the economy and markets, the linked nine page document is a ‘must read.’ I agree with David’s views and welcome highlighting some of his points. Here are excerpts from David Einhorn’s speech:
1. The lesson that I have learned is that it isn’t reasonable to be agnostic about the big picture. For years I had believed that I didn’t need to take a view on the market or the economy because I considered myself to be a “bottom up” investor. Having my eyes open to the big picture doesn’t mean abandoning stock picking, but it does mean managing the long-short exposure ratio more actively, worrying about what may be brewing in certain industries, and when appropriate, buying some just-in-case insurance for foreseeable macro risks even if they are hard to time.
2. As I see it, there are two basic problems in how we have designed our government. The first is that officials favor policies with short-term impact over those in our long-term interest because they need to be popular while they are in office and they want to be reelected. In recent times, opinion tracking polls, the immediate reactions of focus groups, the 24/7 news cycle, the constant campaign, and the moment-to-moment obsession with the Dow Jones Industrial Average have magnified the political pressures to favor short-term solutions.
3. The second weakness in our government is “concentrated benefit versus diffuse harm” also known as the problem of special interests. Decision makers help small groups who care about narrow issues and whose “special interests” invest substantial resources to be better heard through lobbying, public relations and campaign support. The special interests benefit while the associated costs and consequences are spread broadly through the rest of the population.
4. Americans understand that the Washington-Wall Street relationship has rewarded the least deserving people and institutions at the expense of the prudent.
5. The proper way to deal with too-big-to-fail, or too inter-connected to fail, is to make sure that no institution is too big or inter-connected to fail. The test ought to be that no institution should ever be of individual importance such that if we were faced with its demise the government would be forced to intervene. The real solution is to break up anything that fails that test. (more…)
October 17, 2009: Month to Date Market Review
Posted by Larry Doyle on October 17th, 2009 5:46 AM |
The dynamics at work in the economy, markets, on Wall Street, in Washington, and around the world continue to be very much the same. Economic signals are decidedly mixed. The consumer and savers remain challenged. Markets remain firm. The greenback remains weak. Commodities remain firm.
While many of the Washington wizards and market mavens focus on the positives and many bloggers and naysayers focus on the negatives, I hope readers at Sense on Cents feel they can get a full and honest assessment on all these topics. Please do not hesitate to tell me when you think I’m not being objective.
I thank you for reading my work, and now let’s collectively ‘navigate the economic landscape,’ the mission of Sense on Cents.
ECONOMIC DATA
> Retail Sales: declined 1.5% but less than the expected decline of 2.1%. The media gave no credence to the fact that the prior month’s figures were revised lower by .5 %. Over the last two months, retail sales are marginally positive but the coming holiday sales will be very challenging with heavy discounting still expected.
> Consumer Price Index: rose .2 versus an expectation of .1. While prices are currently well behaved with the recent weakening of the dollar and sharp move higher in commodities, we should expect food and gas prices to move higher.
> Jobless Claims: overall claims declined marginally again, but nobody is willing to bet that the employment situation is improving rapidly. The claims data is a sign that perhaps unemployment is stabilizing, albeit at very elevated levels.
> Philadelphia Fed Manufacturing Report: registered at 11.5 versus an expectation of 12.5 and a prior month 14.1 reading. Not a sign of a robust rebound in activity.
>Industrial Production: posted a surprisingly strong reading of a .7 increase against an expectation of a .2 increase.
> Consumer Confidence: against an expected reading of 74.0, this report registered a significant disappointment of 69.4. What happened? Consumers are very nervous about the overall economic outlook.
Add all of this economic data up and I focus on the last comment about consumer confidence. The consumer, which represents 70% of our economy, is nervous and the economy as a whole is as well.
Let’s move along to market performance. I would typically lead my review with focus on the equity and bond markets, but those sectors are actually following developments in the currency and commodity markets so let’s shift our focus accordingly.
The figures I provide are the weekly close and the month-to-date returns on a percentage basis:
U.S. DOLLAR
$/Yen: 90.87 versus 89.68, +1.3%
Euro/Dollar: 1.4894 versus 1.4635, +1.8%
U.S. Dollar Index: 75.58 versus 76.72, -1.5% !!!
Commentary: the overall U.S. Dollar Index continues to decline as the U.S. budget deficit for 2009 exploded to an astronomical $1.42 trillion. That figure is more than triple the 2008 level. The decline in the dollar continues to support the equity and commodity markets, while raising some concerns on the long end of the yield curve as a continuing decline in the dollar is inflationary which would push long maturity interest rates higher. The dollar actually did improve versus the Japanese yen while weakening versus the Euro. I recommend that readers focus on the dollar index which is why I link to it above. Track it and expect the index to move inversely to equities and commodities.
I reiterate my comments from last week. While I think Washington is not disappointed in a relatively weak dollar, although they should be (“Dollar Devaluation Is a Dangerous Game”), other countries are not overly keen about further dollar weakness. Why? A weak dollar puts those countries in a marginally less competitive position in international trade.
COMMODITIES
Oil: $78.67/barrel versus $70.39, +11.8% THE BIG MOVER THIS WEEK
Gold: $1055/oz. versus $1008.2, +4.6%
DJ-UBS Commodity Index: 134.32 versus 127.683, +5.2%
Commentary: Unless you grow your own crops or have your own source of energy, you should expect to get increasingly squeezed as prices at the supermarket and gas station are likely to head higher. While Washington will not address this development, these price moves are directly correlated with Washington’s weak dollar policy. The banks and others able to borrow cheap money for trading and investing benefit from the weak dollar. American consumers and savers get stuck with the bill.
The Baltic Dry Index did move higher this week following the upward moves in commodities, though, rather then leading the move.
I read these commodity tea leaves as a sign of inflationary expectations in these ‘inputs’ while we encounter deflationary pressures in wages and real estate.
EQUITIES
DJIA: 9996, +2.9%
Nasdaq: 212157, +1.6%
S&P 500: 1088, +2.9%
MSCI Emerging Mkt Index: 966, +5.8%
DJ Global ex U.S.: 200.56, +3.0%
Commentary: while the move by the Dow over 10, 000 did get a lot of attention and deservedly so, the number represents a psychological level more than any sort of meaningful fundamental development.
How about 3rd quarter earnings? More of the same. That is, generally speaking bottom line numbers are being generated to a greater extent by cost cutting than a real growth in sales and top line revenue. The weak dollar has supported those companies with a greater degree of international sales. Companies with pricing power should be able to benefit from the weaker dollar and improve their earnings. Those companies should outperform. Companies without pricing power will get squeezed and will continue to be forced to cut costs.
BONDS/INTEREST RATES
2yr Treasury: .96%, an increase of 1 basis point or .01%
10yr Treasury: 3.41%, an increase of 11 basis points
The yield curve steepened (longer maturities underperformed shorter maturities) a touch further again this week. I addressed my line of reasoning in the Currency Commentary. I continue to believe that we will have growing deflationary pressures (wages and real estate) offset by inflationary pressures (food, gas, health care). What’s an individual to do? Save, grow your own food, ride a bike, and don’t get sick!!
COY (High Yield ETF): 6.53, +2.0%
FMY (Mortgage ETF): 17.63, -1.0%
ITE (Government ETF): 57.80, -0.3%
NXR (Municipal ETF): 14.17, -1.9%
Commentary: while interest rates did move marginally higher over the week, overall they remain at remarkably low levels. The high-yield market remains very well bid while other sectors of the bond market have started to give ground as interest rates have started to ‘inch’ higher. Of note, the municipal bond market gave considerable ground as the reality of pressures in municipal finance increase.
Summary/Conclusion
I reiterate, the game continues. The disconnect between the overall domestic economy and the price action in the markets presents what one noted investor described as ‘the greatest experiment’ in modern finance. To the extent that people are putting money to work, I would focus on buying quality and utilizing ‘dollar cost averaging’ techniques.
Thanks for your support. If you like what you see here, please subscribe via e-mail, Twitter, Facebook, or an RSS feed.
Thoughts, comments, questions always appreciated.
Please join me this Sunday evening on BlogTalkRadio (8-9pm EDT) for what will assuredly be a fascinating dialogue with a high profile attorney, Richard Greenfield, who has three complaints ongoing versus the Wall Street regulatory organization, FINRA.
Have a great day and weekend.
LD
It’s the Economy, Stupid!!
Posted by Larry Doyle on October 16th, 2009 9:05 AM |
The American public is becoming increasingly wise to the ways of Wall Street and Washington.
Many Americans were duped by financial practices and products emanating from Wall Street. Where was Washington? I would assess Washington’s involvement and responses in the following fashion:
1. At worst, Washington was complicit given a wide array of failed public policy programs, especially in housing. These public policies were largely ‘greased’ by lobbying dollars and campaign contributions.
2. To a large extent, Washington was negligent in terms of oversight, especially on the financial regulatory front.
3. At best, Washington was naive given a general lack of understanding of markets and finance.
The American public is now responding in appropriate fashion. How so? In increasing numbers, they are choosing not to play the Wall Street game. What game is that? Active trading and investing. While the numbers of pure day traders may have increased, the American population at large is focused elsewhere. Where is that focus? On the economy at large and on their individual pocket books.
Washington’s focus on Wall Street and its selling of the market rebound as reflective of a return towards prosperity is a product that will not fly . . . try as they might. Why?
It’s the economy, stupid! Reports this morning indicate that wages will likely show the greatest decline since 1991. Even in the face of declining wages, consumers’ purchasing power is being further eroded by the continuing decline in the value of the dollar. That decline is inflationary which hurts consumers but it continues to present a very cheap funding vehicle for those who want to use the greenback to employ leverage in the markets. Who has the advantage in that process? The large banks. Do they spread that wealth in terms of increased credit and higher savings rates? Now why would they do that?
The American saver and consumer shouldered the cost of the bank bailouts in 2008. They are now shouldering the cost of the wealth transfer to the banks in 2009. While Washington would like to sell this dynamic differently, the American public gets it.
Washington will continue to sell this dynamic at its peril.
LD
Bill Gross Making Sense on Cents
Posted by Larry Doyle on October 14th, 2009 12:56 PM |
Looking beyond the liquidity provided by the Treasury and Federal Reserve to refloat our equity markets, what will be the drivers of our economy and markets going forward? While Uncle Sam may think he can leave rates at 0-.25% for an extended period, at some point even ‘extended’ runs out. Will the Uncle Sam economy have adapted and implemented the structural changes necessary to move on to a new phase of growth and prosperity?
I am very concerned and reiterate that our markets are masking significant embedded issues in our economy and overall fiscal health.
As much as I found Pimco to be challenging when trading with them, and question their integrity in handling their outstanding Auction-Rate Securities issuance, I respect their views on the markets and economy. In fact, I think Bill Gross and Mohamed El-Erian consistently provide a lot of “sense on cents.” What does Mr. Gross have to say about our economic landscape lately? He writes:
What is critical to recognize is that both California and the U.S., as well as numerous global lookalikes such as the U.K., Spain, and Eastern European invalids, are in a poor position to compete in a global economy where capitalism is morphing from its decades-long emphasis on finance and levered risk taking to a more conservative, regulated, production-oriented system advantaged by countries focusing on thrift and deferred gratification. The term “capitalism” itself speaks to “capital” – the accumulation of it and the eventual efficient employment of it – for growth in profits and real wages alike.
Regrettably, more and more capital here at home is being directed toward the servicing of our massive deficit. Additionally, taxes will surely increase to do the same. Over and above those two definites, I believe strongly that capital will increasingly look for opportunities outside our nation given the pressure on our greenback.
Gross touches upon an issue which I strongly believe is a MASSIVE drag on our current economy and our future well being, that is our secondary schools which rank 18th overall in the developed world. Gross writes:
What California once had and is losing rapidly is its “capital”: unquestionably in its ongoing double-digit billion dollar deficits, but also in its crown jewel educational system that led to Silicon Valley miracles such as Hewlett Packard, Apple, Google, and countless other new age innovators. In addition, its human capital is beginning to exit as more people move out of the state than in. While the United States as a whole has yet to suffer that emigration indignity, the same cannot be said for foreign-born and U.S.-educated scientists and engineers who now choose to return to their homelands to seek opportunity. Lady Liberty’s extended hand offering sanctuary to other nations’ “tired, poor and huddled masses” may be limited to just that. The invigorated wind up elsewhere.
Do the powers that be in Washington and in the state houses possess the necessary discipline to right our ship and set sail on smoother seas? If so, they will have to display a set of values and practices which are entirely inconsistent with how our government operates. While I remain bullish on those who want to educate themselves, practice discipline, and save for better days, I am bearish on people who think Washington or other entities can provide those necessary values. Gross is also cautious in concluding:
Now that our financial system has been stabilized, one wonders whether California’s “Governator” and indeed the Obama Administration has the capital, the vision, and indeed the discipline of its citizenry to turn things around. Our future doggie bags can hold steak bones or doo-doo of an increasingly familiar smell. For now investors should be holding their noses, their risk orientation, as well as their blue bags, until proven otherwise. Specifically that continues to dictate a focus on high quality bonds and steady dividend paying stocks that can survive, if not thrive, in our journey to a “new normal” economy of slower growth, muted profit gains, and potential capital destruction via default, abrogation of property rights, and dollar devaluation.
If we think a return to business as usual is the proper path, we will merely go in circles and end up right back in this same spot….if not worse.
I welcome comments from those who share or differ with these assessments.
LD
What Did Bank of America Know and When Did They Know It?
Posted by Larry Doyle on October 13th, 2009 8:19 AM |
Are the powers that be at Bank of America wilting under political pressure to release the details of its merger with Merrill Lynch? In fact they are and in the process, the executives at Bank of America are agreeing to waive attorney-client privilege. What are the critical points which New York Attorney General Andrew Cuomo, the SEC, those in Congress, and especially Bank of America shareholders want to learn?
1. What did Bank of America know about the ongoing deteriorating financial position at Merrill Lynch?
2. What did Bank of America executives share with their board members about the billions in bonuses to be paid at Merrill?
3. Did Ken Lewis overplay his hand? Please reference my commentary from a few weeks ago, “Documents Indicate Ken Lewis Utilized the MAC To Shake Down Bernanke and Paulson.”
The Wall Street Journal summarizes these topics this morning in writing, BofA to Hand Over Documents Related To Its Merrill Deal:
Mr. Cuomo’s investigators, as well as Judge Rakoff, have said a fuller accounting of the events surrounding the deal is a prerequisite to any resolution of the probes. BofA is hoping releasing the privileged documents will satisfy those demands, according to people familiar with the matter.
BofA’s move will likely reveal exactly what advice was provided by outside firms, according to people familiar with the matter. Those firms include Wachtell, Lipton Rosen & Katz, which represented BofA during the Merrill transaction and is a long and trusted adviser to the bank, as well as Merrill’s counsel, Shearman & Sterling LLP.
It may also show conversations with ex-general counsels Timothy Mayopoulos and Brian Moynihan. Bank of America recently hired law firm Paul Weiss Rifkind Wharton & Garrison LLP to join Cleary Gottlieb Steen & Hamilton LLP in representing the bank in the various federal and state investigations surrounding the Merrill acquisition.
“This is going to get to the down-and-dirty question of what counsel did say and did not say, what counsel meant and did not mean,” said James Cox, a law professor at Duke University.
(Associated Press) In a photo from Sept. 2008, Merrill Lynch Chairman and CEO John Thain, left, and Bank of America Chairman and CEO Ken Lewis shake hands following a news conference.
Down and dirty? I love it. Get the extra large popcorn. This should be good.
LD
October 10, 2009: Month to Date Market Review
Posted by Larry Doyle on October 10th, 2009 10:12 AM |
We are reaching a point in our new “Uncle Sam” economy where rhetoric from Wall Street, Washington, and global financial centers seems to be having greater impact than true market and economic fundamentals. Why? Our financial and political ‘wizards’ are working overtime to reconnect the great ‘disconnect’ between Wall Street and Main Street. While we receive glimmers of hope in certain economic statistics, the dark clouds in employment and housing remain daunting.
Are the ‘Washington wizards’ (Bernanke, Geithner, Summers) providing hints of support for our greenback while truly hoping for a manageable decline? I believe they are, and I believe this financial engineering is a very dangerous game.
I thank you for reading my work, and now let’s collectively ‘navigate the economic landscape,’ the mission of Sense on Cents.
ECONOMIC DATA
> Non-manufacturing Institute of Supply Management: this report rose above 50 (an indication of growth) with a positive development in new orders (this is clearly good), but with no signs of improvement in employment and pricing power by manufacturers.
> Redbook: indications of slight improvement in same store sales although next week’s Retail Sales report will likely look exceptionally weak as it incorporates an end to the ‘Cash for Clunkers’ program. Overall signs point to what is expected to be a weak holiday retail season.
> Jobless Claims: overall claims declined, which presents a sign of stability within employment. That said, it is hard to be optimistic on the employment front on the heels of the employment report released on October 2nd (embedded within the Equity section of this commentary).
> Trade Deficit: this deficit surprisingly narrowed, with a slight increase in exports combined with a slight decrease in imports. All other things being equal, this report would be positive for our dollar but the noise surrounding our currency is overwhelming the focus within this one month reading.
I would typically lead my review with focus on the equity and bond markets, but those sectors are actually following developments in the currency and commodity markets so let’s shift our focus accordingly.
How did the markets handle the Fed-speak, the data, and technical flows? Let’s continue navigating. The figures I provide are the weekly close and the month-to-date returns on a percentage basis.
U.S. DOLLAR
$/Yen: 89.78 vs. 89.68
Euro/Dollar: 1.4709 vs. 1.4635
U.S. Dollar Index: 76.35 vs. 76.72
Commentary: the overall U.S. Dollar Index has declined by approximately .5% this month, but the volatility and focus on movements in this space have been tremendous. Precipitated by an increase in rates by the Australian Central Bank midweek, the U.S. Dollar Index plunged below 76 which represents multi-year lows. The dollar weakness led to a move higher in global equities as traders, investors, and speculators were emboldened to enter into more ‘positive dollar carry trades.’
While I think Washington is not disappointed in a relatively weak dollar, although they should be (“Dollar Devaluation Is a Dangerous Game”), other countries are not overly keen about further dollar weakness. Why? A weak dollar puts those countries in a marginally less competitive position in international trade. ECB President Jean-Claude Trichet voiced his concerns on this topic. Rest assured, the Asian nations feel the same way although they are careful in their comments. Adding further fuel to dollar weakness was speculation that the trading of oil and a basket of other commodities, which are currently transacted in U.S. dollars, would shift trading away from being dollar-based. On that note, let’s review the action in commodities.
COMMODITIES
Oil: $72.29/barrel vs. $70.39
Gold: $1050.1/oz. vs. $1008.2 !!!! THE BIG WINNER !!!!
DJ-UBS Commodity Index: 129.177 vs. 127.683
Commentary: I view this segment of the market to be the STRONGEST indicator of the global economic pulse. Additionally, the price action in commodities is likely a strong indication of the ‘positive carry’ trade put on by hedge funds and other traders.
The overall commodity index has moved higher by approximately 1.2% on the month, but the movements within specific commodities is gaining the real focus. Gold specifically has soared by over 4% this month. Why? Market speculation about a potential further slide in the greenback would be inflationary. Oil and other commodities also benefited from the story I referenced above. The conundrum I find in this space revolves around overall levels of international trade. Are these commodities moving higher truly because of an increase in demand or merely because of speculative investing and trading? Where do we go to get a pulse on that? The Baltic Dry Index. How is our friendly indicator of global shipping activity doing?
The Baltic Dry Index continues to move marginally lower. Can global equities in general and commodities specifically increase in value if the major indicator of global trade, that being the BDI (Baltic Dry Index), is in a downtrend? I think not for the long haul, but for a period of time a cheap funding vehicle, that is the U.S. dollar, can override market fundamentals.
I read these commodity tea leaves as sign of inflationary expectations in these ‘inputs’ while we encounter deflationary pressures in wages and real estate. What a world.
EQUITIES
DJIA: 9865, +1.6%
Nasdaq: 2139, +0.8%
S&P 500: 1071, +1.3%
MSCI Emerging Mkt Index: 946, +3.6%
DJ Global ex U.S.: 197.6, +1.5%
Commentary: equities regained momentum after last week’s selloff. Recall how just one week ago, we faced a remarkably weak and disappointing Unemployment Report which culminated a week in which equities had given up approximately 2%. Well, we not only recaptured that decline but rallied further by another 1-2%. This past week accounted for the strongest advancement in equities since early July. Are we poised for a breakout past 10,000 on the Dow? Well, we need to remain focused on what is driving the market . . . and that is the weak greenback.
Indications of economic strength in Australia compelled the Australian Central Bank to raise rates which drove the Aussie higher and the dollar to new lows. In the process, the ‘dollar carry trade’ gained momentum propelling global equities higher.
The initial earnings reports released continue to show no real signs of improvement in top line revenue generated by increased sales while the bottom lines have improved given ongoing cost cutting progams. If a company cuts ALL its costs, will its stock still go higher? Rising stock values ultimately need to be driven by ‘growth.’
BONDS/INTEREST RATES
2yr Treasury: .97%, an increase of 2 basis points or .01%
10yr Treasury: 3.39%, an increase of 9 basis points
The yield curve steepened (longer maturities underperformed shorter maturities) under the weight of another Treasury refunding (3yr, 10yr, and 30yr). The 30yr auction on Thursday was disappointing which precipitated the selloff. The bond market has been trading in sync with equities for the last few months. That price action is an anomaly as typically bonds will trade in an inverse relationship with equities. Comments by Bernanke in the latter part of the week about an eventual and timely increase in rates by the Fed did take the wind out of the bond market’s sails.
COY (High Yield ETF): 6.64, +3.8%
FMY (Mortgage ETF): 17.85, +0.3%
ITE (Government ETF): 57.77, -0.3%
NXR (Municipal ETF): 14.46, +0.1%
Commentary: while interest rates did move marginally higher over the week, overall they remain at remarkably low levels. The high-yield market remains on fire as that sector is benefiting from a lot of hedge funds allocating capital via the ‘dollar carry trade’ referenced previously.
Summary/Conclusion
The game continues. The disconnect between the overall domestic economy and the price action in the markets presents what one noted investor described as ‘the greatest experiment’ in modern finance. To the extent that people are putting money to work, I would focus on buying quality and utilizing ‘dollar cost averaging’ techniques.
Thanks for your support. If you like what you see here, please subscribe via e-mail, Twitter, Facebook, or an RSS feed.
Thoughts, comments, questions always appreciated.
Have a great day and weekend.
LD
What Are Credit Suisse Clients Doing and Saying?
Posted by Larry Doyle on October 9th, 2009 11:30 AM |
High five to a good friend for sharing with us tremendous insights just released by Credit Suisse. While individuals can and should develop opinions on the economy and markets, the global flow of capital from investors (obviously central banks now count as investors given massive quantitative easing programs) will determine overall market levels. Let’s navigate and assess how Credit Suisse’s client base has positioned themselves and decipher what it all means.
Credit Suisse research analysts report the following:
We are close to finishing our marketing trip in the US and Continental Europe—and take a look at the main issues our clients are focused on at the moment.
1. Caveated bullishness: Hedge funds appear optimistic (focusing on Q3 earnings as the next catalyst). Long-only funds seem cautious, while retail investors are buying bonds rather than equity. We feel there is enough scepticism to leave us bullish.
LD’s comment: CS means bullish on equities.
2. Many asset allocators still prefer credit (bonds) to equity, so there is switching potential.
LD’s comment: Asset allocators are money managers, investment advisors, et al. This comment translates into the fact that money which has been allocated to the bond market could move into equities causing a move higher in equities and a move down in bonds.
3. Investors’ main dilemma: Why have margins stabilised at such high levels? Most feel the reason is cyclical (leaving limited upside in earnings), but we suspect it could be more structural.
LD’s comment: Margins refer to corporate profit margins. The fact that CS believes that profit margins are being supported by structural developments in companies and the economy is a VERY positive assessment as it indicates a change in the foundation of the global economy which would drive equities higher.
4. Economy: Very few clients are positioning themselves aggressively on a macro view. There is little confidence on final demand given the level of excess household leverage. A third of investors are bearish on US housing (too many, in our view). Clients still see inflation, not deflation, as the main risk.
LD’s comment: investors would appear to be more cautious than optimistic with concerns that there is excess liquidity from central banks which will ultimately lead to inflation.
5. Consensus catalyst for next leg down is severe dollar weakness (LD’s highlight), leading to a US bond funding crisis or government tightening fiscal policy too early. Two areas of worrying consensus: 99% of investors appear to be dollar bears and nearly everyone believes the Fed will be very slow to raise rates.
LD’s comment: if 99% of investors are dollar bears and are positioning themselves that way in one way, shape or form, then the dollar will find support. Why? When too many people are on one side of a boat, that boat tips. If the dollar does rally, then many ‘dollar carry trades’ may enter the ‘pain chamber’ and risk-based assets would likely sell off.
6. Regions: Strong consensus to be long of emerging markets (NJA is felt to have large upside potential if US retail sales recover and the dollar remains weak). Clients are more positive on Europe than they have been for the past two years. Investors have quickly capitulated on a tactically positive call on Japan. Renewed focus on domestic plays in dollar-linked countries (especially the Middle East).
LD’s comment: NJA is non-Japan Asia
7. Sectors: We believe most clients have a bar-bell type strategy. Consensus longs are tech and commodities/gold. We found far too many oil bulls for our liking. There is a huge variance of views on banks. Sectors where there is still doubt: life companies (too opaque), media, telecoms, steel and pharma. There were very few questions on defensives.
8. Style: Clients are looking for quality growth, shifting away from the credit-related plays.
Overall, I view this report as decidedly constructive on the economy and markets, albeit with plenty of reasons for caution.
Thoughts, comments, questions always appreciated.
LD
U.S. Markets Play “Follow the Leader”
Posted by Larry Doyle on October 7th, 2009 9:40 AM |
Yesterday’s rise in rates by the Australian central bank is a bellweather sign of the global shift in the balance of economic power. While the rise in rates by the Aussies is the first central bank move, it certainly will not be the last. Why did the Aussies raise rates and what does it mean both in the short term and for the long haul? Let’s navigate.
The Australian economy did not have near the level of debt that burdens the U.S. and Europe and thus they did not need near the amount of monetary stimulus to weather this global recession. Additionally, Australia has benefited from extensive trade in the Asian hemisphere.
The knee jerk reaction in the markets was focused primarily on a selloff in the greenback which supported a move higher in commodities and global equities via the ‘positive carry trade.’ The commodity which garnered the greatest focus was gold, which moved toward $1040/ounce.
What do these moves mean? I see cross currents on the economic landscape, including:
1. The dollar may not necessarily continue to weaken, but given its current weakness it will support those companies which garner a greater degree of sales overseas.
2. A weak dollar is usually affiliated with inflation. I do not think we are in a position to look at prices in terms of one overall index. Why? Given the technical and fundamental factors in our economy, certain price components will likely project increased inflation while others will not.
To be more specific, given the labor situation in our country, I do not see any appreciable increase in wages anytime soon. In fact, I think it is likely wages will trend lower.
Given the glut of supply and vacancies in both the residential and commercial real estate markets, I have a tough time believing these prices will move appreciably higher anytime soon.
Commodities may very well move higher. Why? High five to MC for sharing with me that there is increased dialogue in the international trade community to move oil away from trading in dollars. In fact, that story likely had a big impact in yesterday’s trading. Even if there is not an immediate shift in this market dynamic, the mere fact that it is being discussed will support oil specifically, oil-based products broadly, and other commodities as well.
Given that these commodities are primarily inputs, the prices for the outputs will likely move higher. This development is clearly inflationary.
3. What happens to interest rates here in the United States? While on one hand we have some deflationary forces at work which would keep rates low, we have the tug of other factors pushing them higher. How does it play out? My gut instinct tells me that overall pools of capital will be flowing away from the United States and, as such, people and private corporations will have to pay more to attract capital here in our country. I think those entities which focus the bulk of their economic activity here in the United States will be forced to pay higher rates to attract funding.
4. What about our equity markets and the Fed? While the Fed will want to keep our rates low for an ‘extended period,’ they may not have that luxury. If other nations follow Australia in raising rates, the U.S. may need to withdraw some liquidity sooner rather than later. Kansas City Fed chair Thomas Hoenig made this very assertion yesterday.
What would higher rates mean or even the thought of higher rates mean? Slower growth and a tough road for equities going forward.
Thoughts, comments, questions always appreciated.
LD
Related Sense on Cents Commentary
Dollar Carry Trade Drives Global Equities (September 16, 2009)
