Tuesday, March 26, 2013

Even the Bears Are Bullish Now

With Jeremy Grantham's valuation models suggesting that the average large cap and the average small cap US stock will underperform an A-rated 7-year non-callable tax-exempt bond, it strikes yours truly as the sign of a top or at least topping process when even the bears are bullish.  Here is a compendium:

Carter Worth of Oppenheimer is insistent that a correction is due-- but he expects it's onward and upward after that.  If so, how can he be sure that a correction is coming, and why should a client take the risk of missing the up-move just to catch what may be as little as a brief 6% decline that could be reversed in less than one bullish week?  (LINK)

More pertinent, Zero Hedge quotes Bob Janjuah- a well-known bear- as predicting new highs-- then the usual call for a crash.  But-- new highs!  So- stay in is the message, or at least buy the dip.  (LINK)

Perhaps most dramatic is the turnaround from the economic bears ECRI.  They have been talking recession since September 2011.  In their public commentary introducing their recession call back then, they referenced a dire state of affairs.  Something to the effect that if you thought the Great Recession was bad, just wait until you see how bad things will get soon.  Now they have changed their tune.  They allege that the US is still in a recession, but it's mild, and they point out that in 1945 and 1980, recessions were associated with bull markets in stocks.  But what the emphasize is the other modern recession with a bull, not bear stock market- 1927.  That's the one they highlight.  The message is clear:  buy stocks, a massive bull market may await (LINK).

The well-known bear Gary Shilling, who I believe was predicting a recession both in 2011 and definitely was predicting one for 2012, is out with a series of articles in BBG predicting deflation-- but now it's the "good" deflation.  It's the sunniest article, of many, I've ever seen out of him (LINK).  It's called The Benefits of Chronic Deflation.  But it's good deflation!

Richard Russell, who 1-3 years ago was calling our times a depression, worrying about his grandchildren, etc., and who a year-and-a-half ago was espying "gold fever" as gold got to its 2011 peak, is now-- what else-- bullish.  Why is he bullish?  Silly question.  Stocks are going up!  Gasp - the industrials are going up and- mirabile dictu- so are the trannies.  Thus, res ipsa loquitur- buy, baby, buy.  Did you evah-- they printed money, speculators speculated, they speculated in both industrials and transportation stocks-- so, many Dow points higher than when he was bearish, he is now bullish.

These are just some examples.  Rosie turned bullish a while ago.  So did Tyler of ZH.

The fly in the ointment is that the latest crutch to GDP, the newest potential bubble, is not housing and it is certainly not tech (that was so 20th century)-- it is Federalizing education by calling aid to students "loans".  The problem is that many of them can't pay the loans back.  This is turning into a decent-sized problem.  Then there is the issue that it was recently casually reported at the end of a (what else?) bullish BBG or Reuters article on the wonderful recovery in auto sales that something like 42% of new auto loans were subprime.

If interest rates were really too low, the ubiquitous "they" wouldn't have to resort to this sort of stuff to keep appearances up.  Students would get loans to go to school, then they would get jobs, and pay back or their loans.  Many of them would not want to waste time in school, because they would prefer just to be working and earning money rather than being bored in school at great  expense.  But from the standpoint of the current crop of politicians, getting these people in school means they are not counted as unemployed.

So it goes.

There are a few boring stocks I like, such as LNC, which trades way under book value with record and rising earnings and a low P/E.  But overall, there's lot of hopium.  The US economy- remember that- continues in its prescribed Reinhart-Rogoff pattern of moseying along with several more years of working through the horrible and spectacular collapse of the 2008 period; said collapse made a mockery of many years of financial statements and underlying assumptions about the economy.  Thus ZIRP and more ZIRP.

But overall, as Jim Rogers said very recently, those of us of a certain age just watch the bulls running.  We can't run fast enough anymore to run with them, and if you short a bull run, you're liable to get trampled, so you just go about your life and let the speculators go about theirs.

Monday, March 25, 2013

More Bubble Activity- Synthetic CDOs Are B"AAA"ck

Only they are not rated AAA anymore.  They don't get ratings, that's the lesson learned from the last decade.  If you don't rate them, you will still find buyers.  BBG explains in Synthetic CDOs Making Comeback as Yields Juiced:

Derivatives that pool credit- default swaps to make magnified bets on corporate debt, popularized in the last credit bubble, are making a comeback as investors search farther afield for alternatives to bonds at record-low yields. 
Synthetic credit, which amplified the financial crisis five years ago, is enticing investors after corporate-bond yields dropped to less than half the 20-year average. By betting on the degree to which a group of companies will default, a CDO may pay relative yields of more than 5 percentage points, four times that of a typical credit-swaps transaction on similar debt. 
“That’s a valid strategy for this part of the credit cycle: Don’t stretch on credit quality, but rather leverage your exposure to better-quality credit,” Ashish Shah, the head of global credit investment at New York-based AllianceBernstein LP, which oversees $256 billion in fixed-income assets, said... 
Unlike many of the synthetic deals created during the market’s peak before 2008, the transaction pitched by Citigroup wasn’t to be sold to investors in the form of securities and wasn’t graded by ratings companies.

About $2 billion notional of similar trades were created last year and between $500 million and $1 billion in 2013, Mickey Bhatia, the head of structured credit at Citigroup, said in an interview. The trades average between $10 million and $30 million, he said, declining to comment on any specific transactions. 
“Investors are in a desperate search for yield,” said David Knutson, a credit analyst at Legal & General Investment Management America. “CDO products offer incremental yield to plain-vanilla transactions.” 
Nothing has changed.  What "inning" is it?  There is no reason to argue with Howard Marks, who said recently it was the 5th inning.

If so, could the game be called because of rain at any time?  Or, will it go into extra innings?

Meanwhile, there are lots of cheap financial stocks to allow the reflation game to be played.  These range from GNW and LNC, both of which I am long, and MS and GS, either of which I may hold my nose on and buy.  All are below tangible book value, and the longer the game goes on, the more their assets will appear to be worth stated book.

Is Jobs Growth Reaching a Higher Level?

I want to highlight a divergence between sunny views of the labor market expressed in a Bloomberg article today with the ongoing Gallup survey of hiring/not hiring responses of American workers.  Bloomberg's story is more opinion than presentation of new data.  It is called (sic) Payrolls Growth Vault to Higher Pace at U.S. Companies (LINK).  It has anecdotes and some modest info.  Here is a representative small section:

 Companies from Ford Motor Co (F). to a California tortilla maker are stepping up hiring as the economy improves. The result, say Maury Harris of UBS Securities LLC and Allen Sinai of Decision Economics Inc.: Payroll growth is vaulting to a faster pace of about 200,000 a month, after averaging 167,000 in the second half of last year.

“The new normal is 200,000,” said Sinai, chief executive officer of the New York-based investment-research company. Payrolls may rise 216,000 this month after climbing 236,000 in February, the most since November, he estimates. 
Russell Price, a senior economist at Ameriprise Financial Inc. (AMP) in Detroit, predicts employers will take on 2.5 million workers this year, after hiring 2.2 million last year. 
“And that may be a little bit on the conservative side,” added Price, the top-ranked payrolls forecaster for the two years ended in January, according to data compiled by Bloomberg.
Anyone who remembers the robust jobs market of most of the '90s remembers that these are relatively modest expectations.  They are perhaps consistent with a continued Goldilocks scenario for financial markets- strong enough to allow continued moves toward fiscal balance and also to allow ultra-low interest rates to continue.

These reports do not fit with the continued recessionary-level of hiring/not hiring seen by respondents to Gallup's daily survey (LINK).  This is at a +15, the same level that it had dropped to in September, 2008 before Lehman went under and when jobs were being shed at a rapid pace, later analysis showed.  This metric is flat as a pancake for the past year.

My own sense is that businesses have been pushing a lot of workers quite hard the past few years, and it's time for them to accept lower profit margins.  Just as equipment does, people wear out.  Here's hoping for more people working shorter hours.

Thursday, March 21, 2013

Thoughts on Cyprus

The shenanigans with Cyprus have a passing similarity to Lehman in its last days, though many differences remain.  Lehman was shopped.  South Korea comes to mind.  Cyprus is being shopped.  Somehow I doubt that the West will let it "fall" to Russia.  Cyprus is too near to Syria, where the West and its Arab allies appear to slowly be squeezing the Assad regime, and with it Russia's naval base in the Mediterranean.  If so, though, will Russian interests still help to force a disorderly event in Cyprus?

Two articles in the Greek e-paper Kathemerini discuss the latest, with insights into dissension in Europe.  LINK, LINK.

The second of these is interesting.  It shows substantial criticism within the European Parliament of how this situation was handled.

It strikes an American who knows nothing special about Cyprus as quite odd that an insured depositor or a safe and sound bank in Cyprus would have to be assessed a "tax" on deposit to bail out a shareholder or bondholder of an unsound bank.  Why not force the uninsured, and if necessary, insured depositors of the insolvent banks, plus their senior or co-equal stakeholders, to take the losses?

Or else, why not place the burden on society at large, including citizens/residents would own other assets, such as real estate, stocks and bonds?

There may be unintended consequences of this situation.

In a stock market that per Value Line is "frothy" and per Jeremy Grantham is poised to underperform even moderate inflation on a 7-year basis, there's a lot to preserve by increasing cash and decreasing exposure to the continued Goldilocks scenario.

Monday, March 18, 2013

European Events Support the Fortress America Theme

Whatever will be in Europe, will be...

No matter.  In the summer and early fall of 2011, when it became clear that the US economy and markets were stronger than those of Europe, I went to and announced on The Daily Capitalist a "Fortress America" investment theme.  That applied to bonds, muni bonds being the low-hanging fruit as even AA and AAA-munis were then yielding more than Treasuries; then it applied to stocks when I invested/traded them-- AAPL being my #1 stock in 2012 and at times my only one- though it is international.

This theme continues.  It also applies to China and Japan.

Jeremy Grantham's latest valuation favors "high quality" US stocks over bonds or general stocks.  Only emerging markets rate a little better on his 7-year time frame, at the expense of greater expected error rates of what will occur versus what "should" occur.

Thus for an American, investing is easy.  Tax-exempts for income and stable asset value, Treasuries to hedge stocks, and research to find "high quality" stocks.

The Cyprus thing changes little from this side of the pond.  Will it be good for gold?  Could be, but per my latest Seeking Alpha piece, I'm concerned that the disinflationary aspects of the fiscal normalization, welcome though that direction is, resemble the trends of the later '90s, which depressed gold's price.

So maybe there's no rush to commit more funds to gold if one already has a position in place.

The rest of the world looks to be a bit more trouble than an American needs from an investment standpoint.

Sunday, March 17, 2013

Gold and Gold Stocks Could Be Ready to Rock

Jim Sinclair and his coterie may just be right.  $1600 could be in the rearview mirror now or soon.  The Cyprus mess could be a catalyst.  From a gold-bullish standpoint, I like the fact that the US media are almost ignoring it.  Also, the other thing I like is that oil is down and gold is up.  This is the one fundamental trend that actually increases the attractiveness of gold stocks.  We saw this after Lehman collapsed.

ABX has a new CEO who has stopped almost all exploration and is focusing on financial returns (he was the CFO under the prior CEO, Mr. Regent).  This could be a winner for a while.  Another very small company that is not a miner and has a high but fixed cost of gold production is a South African processor of old gold waste DRDGOLD, symbol DRD on the NYSE.

Friday, March 15, 2013

Greenspan Bullish: Uh Oh

This could be really, really bad.  The man who warned against stocks with nearly four unbelievable full years of bull bull BULL lying ahead has perhaps rung the bell at the top (LINK).

Greenspan: No 'Irrational Exuberance' in Stocks Now
That's a bad enough headline to stop here.  But let's not...

Greenspan said in a " Squawk Box " interview that stocks by historical standards are "significantly undervalued" even considering the recent moves higher. He added that the payroll tax increase didn't dent spending because of rising asset prices.
OK.  Meanwhile, at end-January prices, Jeremy Grantham's model had as its central tendency that US stocks were priced to slightly lag anticipated 2.2% annual price inflation every year (on average) for the next seven years.  But that was at lower prices.  

Grantham has a better track record than the Maestro.  But of course prior success doesn't guarantee future results, etc.  So we shall see.

Wednesday, March 13, 2013

Japan Plans To Use Sub-Sea Methane For Fuel

This is very interesting.  Who knew?  If anyone remembers Julian Simon, the optimist who debated the Club of Rome guys in the 1970s who said the world was running out of numerous natural resources, he  would have liked this one (LINK):

Japan cracks seabed 'ice gas' in dramatic leap for global energy 

Japan has extracted natural "ice" gas from methane hydrates beneath the sea off its coasts in a technological coup, opening up a super-resource that could meet the country's gas needs for the next century and radically change the world's energy outlook.  
Definitely worth a read.

BofA lays off property appraisers

Perhaps the property rebound, a la Housing Bubble 2.0, isn't so strong after all, given that interest rates have been rising and job growth is not booming yet.  Bloomberg reports (LINK, bold emphasis added):

Bank of America Corp., the second- largest U.S. lender, cut about 5 percent of staff in its appraisal unit last month as the firm rid itself of delinquent mortgages, said two people with knowledge of the move.

The job reductions at LandSafe, a business with more than 1,000 employees and acquired in the takeover of Countrywide Financial Corp., began Feb. 22, said the people, who requested anonymity because the dismissals were private. Appraisers, who estimate the market value of properties, and regional managers were cut, Tracy Sanderson, a LandSafe senior vice president, told staff in a Feb. 25 e-mail.
“While we have known we were overstaffed since the fall, we did everything we could to delay impacts as long as possible,” Sanderson said in the memo obtained by Bloomberg News. “We were hopeful that our volume would return and potentially reduce the number impacted.”...
About 70 percent of work done by LandSafe appraisers was related to transactions for soured loans, including the auction of bank-owned properties and short sales in which a borrower’s home is sold for less than the amount owed, said one of the people. The bank’s expected increase in originations this year isn’t enough to offset the drop in work resulting from having fewer delinquent loans to service, the person said.

The rest of the article discusses, among other things, declining mortgage volumes for the industry as a whole, which lately have mostly been refis rather than new loans.

This is not a disaster per se, but given the bullish action in bank and homebuilder stocks, it makes me wonder if the Street is not ahead of itself on this theme.

Monday, March 11, 2013

A Little More On the Very Complex Financial System

I have finished a first reading of Nassim Taleb's latest book, Antifragile.  It's not an easy read, and it does not tell me what to do in the world of investing, but it's quite thought-provoking.

Bloomberg.com is running today an opinion piece that is more accessible than Antifragile, and is along the same lines.  It argues for more transparency and simplicity in the financial "system".  It's a good read (LINK).  Hint:  the title about embracing complexity is misleading.  Here's a core paragraph:

Complexity also helps financial institutions hide the risks they create. Despite the advertising of the International Swaps and Derivatives Association and others who create and sell derivatives, these products are only sometimes used for hedging and much more frequently for speculation. In the latter case, they are exceedingly useful in obscuring information that would be crucial to the proper judgment of values and risks. Consider the derivatives that helped Italy’s Banca Monte dei Paschi di Siena SpA hide hundreds of millions of dollars in losses as it sought a taxpayer bailout. Anyone making deals with a bank enmeshed in a largely invisible web of contracts with far-flung counterparties does so with a very incomplete view of the risks involved. 
We simply do not know what risks we are, or are not, taking with our investments these days.

Saturday, March 9, 2013

Stocks Accelerate Up As Economic Data Does Not; Crash Risk Rising?

Is the stock market responding traditionally, sniffing out economic acceleration when it rises, or it is manipulated?

ECRI is among the mainstream voices that has recently addressed this.

The ECRI latest writeup was followed by media appearances.  In the second part of Lakshman Achuthan's Bloomberg TV appearance, he comments that the economic data look recessionary both as reported by the government and the private sector, but that the only data that do not look that way are from market sources.  Thus he almost explicitly blames the Fed and the powers that be in distorting market signals.

He also highlights the 1926-7 recession in defending ECRI's recession call.  He points out that the stock market rose straight through that recession before going on to bubble until summer 1929.  

The implication is consistent with what one hears everywhere:  this stock market is going higher, and there is plenty of time to exit before a crash.

We shall see.  One worrisome sign comes from this from SentimenTrader:

March 1, 2013 Rising debt and receding cash have put investors' brokerage accounts in a deeply negative position - one of the worst in history.  January's change was the 2nd-most negative ever.

(Clicking on this does not enlarge it.)  If you look hard, you will see little red dots near the peaks in 2000, 2007 and 2011.  I think we are at a similar level.  One thing about Mr. Market-- he will inflict pain on weak hands harshly.  I am hearing the same silly theme everywhere, that a mere $85 B in monthly Fed bond buying can continue to levitate tens of trillions of dollars worth of assets.  Meanwhile, the rising bond yields are damaging the balance sheets of bondholders everywhere.  In the Japanese post-1995 experience and in the US ZIRP experience, this has within a year at most been followed by an economic downturn.

One did not see the following stories in the media in 1986, 1995, and probably not in 2005 (LINK, LINK):

For the middle class, expenses grow faster than paychecks
More than 25% of Americans raiding 401(k)s to pay bills 
One also sees continued flatlining from Gallup's hiring-not hiring metric.  Over the past few years, that flatlining has been associated with a quick drop in rising interest rates.    Gallup's estimate of the % of the population employed is unchanged from one year ago, the same as the household survey.

Thus I suspect that adjusting for government deficit spending funded in large measure by the Fed, the US would still be in recession.  Whether it actually is in recession as ECRI argues is not my argument.

My guess is that now that the deficit is shrinking as a % of (inflated) nominal GDP, we are at high risk of starting to see further deceleration of economic activity.  At the same time, the "bond vigilantes" who have made Jeff Gundlach happy by letting him buy 10-year  T-notes above 2% will have done their job.

I'm suspicious of a crash in stock prices and interest rates this year, possibly next.  This is March, and in March 1987, I was sensing during that rising rate environment underlying weakness in the stock market but not in the economy.  Now I am seeing something more like 1999.  Instead of the NAZ trading at some insane multiple of earnings, but where the leading stocks had rapid growth, now the new version of the NAZ is the Russell 2000 (IWM), where the iShares guys who run the IWM index find an average P/E well over 25 and a P/E/G of about 5:1 based on 5-year average growth of only 5%.  

People such as Stanley Druckenmiller are telling us not to worry, we have a few years.  So is  Lakshman Achuthan, though more subtly.  I'm watching gold, silver, oil and Dr. Copper.  Let's see if they either break down or melt up (They may do neither).  If the former, I'd expect stocks and bond yields to do the same.  If the latter, bonds are toast.

Wednesday, March 6, 2013

ECRI Updates, Remains Bearish On The Economy

I'll have more to say after I reread this, but ECRI has responded to the many critics of its 2011 and beyond recession call with a new and interesting position paper.  Here's the LINK.  I do think it's worth thinking about.  One of the facts they adduce is that non-exchange-tradable commodity prices have lagged those listed on exchanges.  There are indeed underlying deflationary pressures that are being held at bay by leveraged speculators.

They highlight the 1927 recession and hint that we may be in for a bubble surge in stocks such as was seen into summer 1929-- and as was seen in the late '90s.  My preference is to play it safe

Sunday, March 3, 2013

Sunday Night Potpourri

Two bits of potpourri.  One is that you may have already seen that per ZH, the BBC confirms that the Swiss people indeed are more "revolutionary" than the Socialist countries (LINK):

Swiss referendum backs executive pay curbs

Daniel Vasella, chairman of Swiss drugmaker Novartis There was outrage in Switzerland over a $78m pay off, later scrapped, to the outgoing Novartis chairman.Swiss voters have overwhelmingly backed proposals to impose some of the world's strictest controls on executive pay, final referendum results show.

The other is that investors are getting more and more believing of the strength of the bull (LINK):

Short Sales Fall 53% With U.S. Bull Market Starting Fifth Year
Investors reduced bearish stock bets to the lowest level since at least 2007 as the bull market in American equities begins its fifth year.
Short sales in the Standard & Poor’s Composite 1,500 Index fell to 5.6 percent of shares available for trading in February, down from a record 12 percent during the credit crisis and the lowest ever in data compiled by Bespoke Investment Group and Bloomberg starting six years ago. 

Investor's Intelligence shows a dangerous chart:  the NYSE bullish percentage has risen from a fairly low level in the past 18 months, and has begun to roll over.  The rollover is the danger sign, not the high bullish level.

The belief is that the US economy is a supertanker, and that the Fed's ministrations are either harmless or not really necessary.  Yet at 7% of GDP, the Fed's money-printing effort likely continue to cover up for the Reinhart-Rogoff continuing depressed state of the economy.

Given all the money-printing, underlying good economic dynamics should show much faster nominal growth than has been measured.  It appears that there is no nominal GDP recession, but it's hard for me to see such a high P/E when there is such widespread underlying weakness.

The best solution for Japanese investors during their prolonger ZIRP period was to purchase shares of Japanese multinationals at fair prices, such as Honda (HMC) on dips.  This might be a good strategy at home, along with shares of truly stellar domestic companies on dips.

Meanwhile, the gold bugs are making a more effective case than befiore that sentiment is washed out.  That doesn't mean  a new money buy should be made, but let's watch for a trigger.  I am also watching for a test below the reaction low around $1522, which would force lots and lots of liquidation.  Gold has cycled from massively in favor in summer 2011 to moderately out of favor, and stocks have gone the other way.

Thinking different.