“The de-rating in Western equities continues to rhyme in a surprisingly familiar way to what we experienced in Japan a decade ago (see chart below). Another cyclical rally has led to a temporary pause in the structural de-rating process just as it did in Japan a decade ago. US equities looked cheap verses bonds last year but will look even cheaper next year!”
Albert Edwards, Soc Gen, August 2010
Below are some articles/videos I have found interesting over the last week:
1. “Valuing the S&P 500 Using Forward Operating Earnings“: Hussman Funds: “If you take away one thing from this week's comment, it is that stocks are a claim to a long-term stream of cash flows that will actually be distributed to investors over time, and that this stream of cash flows cannot be estimated from a single year's earnings number. The main reason for this is that profit margins vary from year-to-year over the business cycle, and tend to mean-revert over the long-term. Earnings (net and operating) tend to be depressed during periods of economic strain, but when they reflect compressed profit margins, they are strongly associated with above-average rates of subsequent growth over the following 7-10 years. In contrast, earnings that reflect elevated profit margins are strongly associated with poor rates of subsequent growth. When analysts take earnings figures at face value, and presume to "capitalize" them simply by dividing by interest rates, they demonstrate a Kindergartener's grasp of securities valuation.”
2. “Why is Deflation Bad?” – Paul Krugman cites three reasons to worry about deflation, two on the demand side and one on the supply side.
3. “Welcome to the Recovery” – more administration folly this time from Tim Geithner.
4. “No need for a panicked fiscal surge” – attached by Kenneth Rogoff writing in the FT.
5. Are you an Austerati or a Stimulati? Compare and contrast two opposing views….Paul Krugman vs Niall Ferguson (watch part 1 and 2 of both).
6. Raoul Pal, who retired from managing money at the age of 36, after co-managing GLG's Global Macro Fund, and the hedge fund sales business in equities and equity derivatives at Goldman among others, has been publishing the his Global Macro Report since and has just come out with the most condensed version of truth about our economic reality. The attached report provides the most in depth observation on the "future recession in an ongoing depression" which is arguably the best way to describe the current economic predicament. I found it quite interesting he writes a paragraph on a book I’ve just started reading: “If you’ve read the book The Fourth Turning by William Strauss and Neil Howe, you’ll note that this is almost exactly as they predicted. At the end of The Fourth Turning, we start the entire process again, returning to where the super-cycle began. In this case we would be returning to a society much more like the 1950’s which was a time of economic and social conservatism, economic isolationism and a whole heap of insecurity and paranoia”. Excellent data here on UK and Hungarian economies too. Send me your email address if you want this large attachment.
7. “Uncertainty changing investment landscape” – attached by Richard Clarida and Mohamed El-Erian: “We should all feel sorry for policymakers who face such distributions. The probability of a policy mistake is materially higher, especially as policy measures are subject to lags. What is less appreciated is the extent to which this changing shape of distributions affects conventional wisdom in the investment world, together with the rules of thumb that many investors have come to rely on. We can think of five implications”.
8. Felix W. Zulauf has worked in the financial markets for almost 40 years, starting his investment career as a trader for Swiss Bank, then training in research and portfolio management in New York, Zurich and in Paris.In 1977, Felix joined Union Bank of Switzerland (UBS), Zurich, managing global mutual funds, heading the institutional portfolio management unit and being global strategist for the UBS Group. He founded his wholly owned Zulauf Asset Management AG in 1990, allowing him to independently practice his own individual investment philosophy. Here is an interview with him.
9. “Why Today’s Deflation Won’t Kill Gold” – from Peak Theories research: a) Gold’s primary trend is up b) Today’s deflation will bleed into hyperinflation c) Ultimate hoarding vehicle d) Untarnished credit quality.
10. “The Farce Is Complete: S&P Downgrades Moody's To BBB+ From A-2”.
Wednesday, August 11, 2010
Saturday, March 13, 2010
Trust Everyone, But Do Not Cut The Cards Yet
“Rising stock prices and low interest rates have been a powerful tonic for lifting business and consumer confidence during economic recoveries. The tendancy after a deep downturn has been to underestimate the impact of economic policy and the business sector’s ability to strengthen. Our bet is that barring significant negative shocks, this recovery will prove to be durable”.
BCA Research March 2010
Below are some interesting articles I have read in the last week:
(Hover mouse over link, hold CTRL and click on links to access)
1. This January investment letter from Josh Berkowitz's global macro hedge fund Woodbine Capital says global rebalancing is the most important macro issue: "The natural adjustment for countries on the wrong side of global imbalances is to live below their means for an extended period of time, reversing the process from the pre-crisis period. Fiscal policy plays a far more important role than monetary policy in that process”. They are long fixed income and long exchange rates in regions that have seen aggressive exit strategies; they have bullish risk positions in countries like Hungary and bearish risk positions in countries like the UK for a fiscal consolidation trade; they are long capital goods providers tied to the emerging world and short companies providing capital to sectors in industrialized countries with excess supply; They have bullish Asian forex positions here and think stronger currencies will be found in countries that will be forced to raise rates. Please leave your email address on the comment page if you'd like a copy.
2. Nouriel Roubini - US Growth Outlook: Still Anemic and U-Shaped but Risks of a Double-Dip Recession are Rising:
- Temporary factors that will boost growth in H1 '10 (2.7% F) will fade in H2 (1.5% F) led by private sector deleveraging;
- This H1 f/c could prove optimistic based on some of the most recent data releases;
- Dismissive of weather as an excuse; same for anyone (he calls them V shapers) using resilience of real consumption in January or the robustness of capex spending in Q4:
“Thus, the macro data are fully consistent with – at best – a U-shaped recovery. But the last two weeks of data are actually suggesting a significant downside risk to even an anemic 2.7% growth forecast for H1 as Q1 looks on a path closer to 2.0-2.5 growth. And if this is the best we get in H2 2009 and Q1 2010, when the effect of the temporary factors is still at their peak, what will happen to growth in H2 when these temporary factors will be faded out? At best a 1.5% growth rate that looks too close for comfort to a tipping point of a double-dip recession".
Please leave your email address on the comment page if you'd like a copy.
3. Betting on the Blind Side: Michael Burry always saw the world differently—due, he believed, to the childhood loss of one eye. So when the 32-year-old investor spotted the huge bubble in the subprime-mortgage bond market, in 2004, then created a way to bet against it, he wasn’t surprised that no one understood what he was doing. In an excerpt from his new book, The Big Short, the author charts Burry’s oddball maneuvers, his almost comical dealings with Goldman Sachs and other banks as the market collapsed, and the true reason for his visionary obsession. This is a fantastic read.
4. How to Handle the Sovereign Debt Explosion – another sensible piece from Mohammed El-Erian at PIMCO, cautioning that the fiscal consolidation we are and will see will have what he calls “damaging recognition lags in both the public and private sectors”. He maintains we should expect rather than be surprised by this.
5. The European Union Trap: the latest John Mauldin piece is written by Rob Parenteau, an Austrian economist. The Austrian School holds that the complexity of human behavior makes mathematical modeling of the evolving market extremely difficult and advocates a laissez faire approach to the economy. Here’s the summary of his description of how economies will navigate the financial balances map (there’s a subtle common message between his point re blind pursuit of fiscal sustainability and PIMCO’s message above):
"The underlying principle flows from the financial balance approach: the domestic private sector and the government sector cannot both deleverage at the same time unless a trade surplus can be achieved and sustained. Yet the whole world cannot run a trade surplus. More specific to the current predicament, we remain hard pressed to identify which nations or regions of the remainder of the world are prepared to become consistently larger net importers of Europe's tradable products. Countries currently running large trade surpluses view these as hard won and well deserved gains. They are unlikely to give up global market shares without a fight, especially since they are running export led growth strategies. Then again, it is also said that necessity is the mother of all invention (and desperation, its father?), so perhaps current account deficit nations will find the product innovations or the labor productivity gains that can lead to growing the market for their tradable products. In the meantime, for the sake of the citizens in the peripheral eurozone nations now facing fiscal retrenchment, pray there is life on Mars that exclusively consumes olives, red wine, and Guinness beer."
Please leave your email address on the comment page if you'd like a copy.
6. Making the Trend Your Friend: AQR Capital's Cliff Asness describes the process driving the Managed Futures Strategy Fund, its strategy versus other absolute return funds, and the timing of its recent launch (his fund is ranked at the top for "absolute return" funds).
7. Macro Man: 20 Questions: he has a list of 20 questions that you should try to answer to see what your absolute view is on each issue. It’s an interesting exercise to reverse-engineer your macro view. Please leave your email address on the comment page if you'd like a copy.
8. BCA Research – Global Investment Strategy: BCA research is excellent - it's interesting to see how much their view of the global recovery conflicts with that of Roubini et al. The main stumbling block is private sector consumption - all previous post war recoveries have been led by a rebound in private consumption. They believe, having looked at patterns of previous recoveries, that the magnitude and speed of consumption recovery matches the average pattern. Please leave your email address on the comment page if you'd like a copy.
9. Varieties of internal devaluation: Peripheral Europe in the Argentine mirror – this Voxeu piece looks at the similarities between Europe's fiscal woes now and those of Argentina in the earlier part of this century and explains why the internal devaluation options explored by Argentina (a "zero deficit rule" and an alternative currency) didn’t work.
10. These two articles - Stiglitz (The Dangers of Deficit Reduction) and Rogoff (Japan’s Slow Motion Crisis) are from a fantastic website that has regular well-informed contributions worth following.
BCA Research March 2010
Below are some interesting articles I have read in the last week:
(Hover mouse over link, hold CTRL and click on links to access)
1. This January investment letter from Josh Berkowitz's global macro hedge fund Woodbine Capital says global rebalancing is the most important macro issue: "The natural adjustment for countries on the wrong side of global imbalances is to live below their means for an extended period of time, reversing the process from the pre-crisis period. Fiscal policy plays a far more important role than monetary policy in that process”. They are long fixed income and long exchange rates in regions that have seen aggressive exit strategies; they have bullish risk positions in countries like Hungary and bearish risk positions in countries like the UK for a fiscal consolidation trade; they are long capital goods providers tied to the emerging world and short companies providing capital to sectors in industrialized countries with excess supply; They have bullish Asian forex positions here and think stronger currencies will be found in countries that will be forced to raise rates. Please leave your email address on the comment page if you'd like a copy.
2. Nouriel Roubini - US Growth Outlook: Still Anemic and U-Shaped but Risks of a Double-Dip Recession are Rising:
- Temporary factors that will boost growth in H1 '10 (2.7% F) will fade in H2 (1.5% F) led by private sector deleveraging;
- This H1 f/c could prove optimistic based on some of the most recent data releases;
- Dismissive of weather as an excuse; same for anyone (he calls them V shapers) using resilience of real consumption in January or the robustness of capex spending in Q4:
“Thus, the macro data are fully consistent with – at best – a U-shaped recovery. But the last two weeks of data are actually suggesting a significant downside risk to even an anemic 2.7% growth forecast for H1 as Q1 looks on a path closer to 2.0-2.5 growth. And if this is the best we get in H2 2009 and Q1 2010, when the effect of the temporary factors is still at their peak, what will happen to growth in H2 when these temporary factors will be faded out? At best a 1.5% growth rate that looks too close for comfort to a tipping point of a double-dip recession".
Please leave your email address on the comment page if you'd like a copy.
3. Betting on the Blind Side: Michael Burry always saw the world differently—due, he believed, to the childhood loss of one eye. So when the 32-year-old investor spotted the huge bubble in the subprime-mortgage bond market, in 2004, then created a way to bet against it, he wasn’t surprised that no one understood what he was doing. In an excerpt from his new book, The Big Short, the author charts Burry’s oddball maneuvers, his almost comical dealings with Goldman Sachs and other banks as the market collapsed, and the true reason for his visionary obsession. This is a fantastic read.
4. How to Handle the Sovereign Debt Explosion – another sensible piece from Mohammed El-Erian at PIMCO, cautioning that the fiscal consolidation we are and will see will have what he calls “damaging recognition lags in both the public and private sectors”. He maintains we should expect rather than be surprised by this.
5. The European Union Trap: the latest John Mauldin piece is written by Rob Parenteau, an Austrian economist. The Austrian School holds that the complexity of human behavior makes mathematical modeling of the evolving market extremely difficult and advocates a laissez faire approach to the economy. Here’s the summary of his description of how economies will navigate the financial balances map (there’s a subtle common message between his point re blind pursuit of fiscal sustainability and PIMCO’s message above):
"The underlying principle flows from the financial balance approach: the domestic private sector and the government sector cannot both deleverage at the same time unless a trade surplus can be achieved and sustained. Yet the whole world cannot run a trade surplus. More specific to the current predicament, we remain hard pressed to identify which nations or regions of the remainder of the world are prepared to become consistently larger net importers of Europe's tradable products. Countries currently running large trade surpluses view these as hard won and well deserved gains. They are unlikely to give up global market shares without a fight, especially since they are running export led growth strategies. Then again, it is also said that necessity is the mother of all invention (and desperation, its father?), so perhaps current account deficit nations will find the product innovations or the labor productivity gains that can lead to growing the market for their tradable products. In the meantime, for the sake of the citizens in the peripheral eurozone nations now facing fiscal retrenchment, pray there is life on Mars that exclusively consumes olives, red wine, and Guinness beer."
Please leave your email address on the comment page if you'd like a copy.
6. Making the Trend Your Friend: AQR Capital's Cliff Asness describes the process driving the Managed Futures Strategy Fund, its strategy versus other absolute return funds, and the timing of its recent launch (his fund is ranked at the top for "absolute return" funds).
7. Macro Man: 20 Questions: he has a list of 20 questions that you should try to answer to see what your absolute view is on each issue. It’s an interesting exercise to reverse-engineer your macro view. Please leave your email address on the comment page if you'd like a copy.
8. BCA Research – Global Investment Strategy: BCA research is excellent - it's interesting to see how much their view of the global recovery conflicts with that of Roubini et al. The main stumbling block is private sector consumption - all previous post war recoveries have been led by a rebound in private consumption. They believe, having looked at patterns of previous recoveries, that the magnitude and speed of consumption recovery matches the average pattern. Please leave your email address on the comment page if you'd like a copy.
9. Varieties of internal devaluation: Peripheral Europe in the Argentine mirror – this Voxeu piece looks at the similarities between Europe's fiscal woes now and those of Argentina in the earlier part of this century and explains why the internal devaluation options explored by Argentina (a "zero deficit rule" and an alternative currency) didn’t work.
10. These two articles - Stiglitz (The Dangers of Deficit Reduction) and Rogoff (Japan’s Slow Motion Crisis) are from a fantastic website that has regular well-informed contributions worth following.
Saturday, March 6, 2010
Homogenous bond market
“The Kings, in the process of increasingly shedding their clothes, begin to look more and more like their subjects. Kings and serfs begin to share the same castle”.
“Government bailouts and guarantees such as those evidenced and envisioned in Dubai and Greece, as well as those for the last 18 months with banks and large industrial corporations across the globe, suggest a more homogeneous “unicredit” type of bond market. If core sovereigns such as the U.S., Germany, U.K., and Japan “absorb” more and more credit risk, then the credit spreads and yields of these sovereigns should look more and more like the markets that they guarantee”.
Bill Gross, March Investment Outlook
Below are some articles I have found interesting in the last week:
1. Hugh Hendry's latest investor letter out of his Eclectica Fund and his Absolute Macro Fund. He has sold over half of his 2 year forward curve steepeners in the UK. As of the end of January, currency positions represented 31% of their NAV, while government bonds (greater than 10 year) represented 18.3%. Looking at his top ten holdings, you see quite a mix of macro bets and equity plays. What's interesting is that ALL of Hendry's top 10 equity holdings are tobacco or cigarette companies. Overall though, the vast majority of their Absolute Macro holdings are appropriately in macro bets with currencies and fixed income. They also have a 1.5% short equity allocation via Eurostoxx put options.
2. Here is an in-depth look at Greek finances (Industrial Output, PMI, retail sales, car sales, borrowing needs, tax and income policy).
3. In a related topic, the difficulties Greece face is eloquently summarized by George Soros.
4. Martin Wolfe recently wrote an article in the Financial Times "The world economy has no easy way out of the mire". This blog analyses the article and its' gloomy conclusions.
5. “Industry investment research is often more useful in defining what assumptions are already factored into share prices than highlighting what is likely to move them going forward. Much of what passes for “analysis” in the investment industry is simply the extrapolation of current trends into perpetuity.” – Argonaut February letter my Barry Norris. I couldn’t have put it better myself and this analysis is rife in such a turbulent and uncertain market. This is a clever piece though, touching on the access-to-debt party we all had at Germany’s expense from 1999. The writer queries the sustainability of Chinese growth rates in the absence of fixed asset investment growth and all the associated commodity EM consequences.
6. Bill Gross from PIMCO focuses his entire March letter on sovereign debt. He basically discusses the prospect of a more homogenous type of bond market as per the quote above.
7. “Empires on the Edge of Chaos” - Niall Ferguson theorizes about the consequences of things going wrong in complex systems (argues that the scale of disruption is nearly impossible to anticipate). This is heavy reading.
8. “The Idiocy of Hope” - Marc Faber from January (pls request this from me). Investment considerations in 2010 include weakness in the Yen and Japanese government bonds (so strength in equities), preference for large cap high quality stocks and avoidance of small caps (I guess the credit access trade) and finally a nervousness of the near unanimous consensus that emerging markets will continue to outperform US equities.
9. “Japan – Past the Point of No Return”: Presentation (pls request this from me)focusing on one fact that's been known for a while: the Japanese savings rate is declining as their population ages. But, the main thing to take away from that is that the Japanese will become net sellers of bonds and this has consequences. In order to fight off the yen's depreciation against the dollar, Japan will have to sell some of their dollar reserves. That's a much bigger deal than it sounds when you consider that Japan is the largest holder of US treasuries. Conclusively, Katsenelson argues that the US economy should work things out naturally rather than relying on continuous stimulus spending so we don't end up like Japan.
10. Paul Krugman: “The Fed, and equally importantly the ECB, is seriously underestimating the deflationary danger. The basic rules haven’t changed: a slack economy puts downward pressure on inflation. One measure of core inflation is the Dallas Fed’s trimmed-mean personal consumption expenditures deflator, in two big recessions and aftermath, 1981-82 and 2007-2009. There’s a hint here in the data of stickiness as inflation gets close to zero. But zero isn’t a magic number: even falling inflation raises real interest rates when nominal rates can’t fall”.
“Government bailouts and guarantees such as those evidenced and envisioned in Dubai and Greece, as well as those for the last 18 months with banks and large industrial corporations across the globe, suggest a more homogeneous “unicredit” type of bond market. If core sovereigns such as the U.S., Germany, U.K., and Japan “absorb” more and more credit risk, then the credit spreads and yields of these sovereigns should look more and more like the markets that they guarantee”.
Bill Gross, March Investment Outlook
Below are some articles I have found interesting in the last week:
1. Hugh Hendry's latest investor letter out of his Eclectica Fund and his Absolute Macro Fund. He has sold over half of his 2 year forward curve steepeners in the UK. As of the end of January, currency positions represented 31% of their NAV, while government bonds (greater than 10 year) represented 18.3%. Looking at his top ten holdings, you see quite a mix of macro bets and equity plays. What's interesting is that ALL of Hendry's top 10 equity holdings are tobacco or cigarette companies. Overall though, the vast majority of their Absolute Macro holdings are appropriately in macro bets with currencies and fixed income. They also have a 1.5% short equity allocation via Eurostoxx put options.
2. Here is an in-depth look at Greek finances (Industrial Output, PMI, retail sales, car sales, borrowing needs, tax and income policy).
3. In a related topic, the difficulties Greece face is eloquently summarized by George Soros.
4. Martin Wolfe recently wrote an article in the Financial Times "The world economy has no easy way out of the mire". This blog analyses the article and its' gloomy conclusions.
5. “Industry investment research is often more useful in defining what assumptions are already factored into share prices than highlighting what is likely to move them going forward. Much of what passes for “analysis” in the investment industry is simply the extrapolation of current trends into perpetuity.” – Argonaut February letter my Barry Norris. I couldn’t have put it better myself and this analysis is rife in such a turbulent and uncertain market. This is a clever piece though, touching on the access-to-debt party we all had at Germany’s expense from 1999. The writer queries the sustainability of Chinese growth rates in the absence of fixed asset investment growth and all the associated commodity EM consequences.
6. Bill Gross from PIMCO focuses his entire March letter on sovereign debt. He basically discusses the prospect of a more homogenous type of bond market as per the quote above.
7. “Empires on the Edge of Chaos” - Niall Ferguson theorizes about the consequences of things going wrong in complex systems (argues that the scale of disruption is nearly impossible to anticipate). This is heavy reading.
8. “The Idiocy of Hope” - Marc Faber from January (pls request this from me). Investment considerations in 2010 include weakness in the Yen and Japanese government bonds (so strength in equities), preference for large cap high quality stocks and avoidance of small caps (I guess the credit access trade) and finally a nervousness of the near unanimous consensus that emerging markets will continue to outperform US equities.
9. “Japan – Past the Point of No Return”: Presentation (pls request this from me)focusing on one fact that's been known for a while: the Japanese savings rate is declining as their population ages. But, the main thing to take away from that is that the Japanese will become net sellers of bonds and this has consequences. In order to fight off the yen's depreciation against the dollar, Japan will have to sell some of their dollar reserves. That's a much bigger deal than it sounds when you consider that Japan is the largest holder of US treasuries. Conclusively, Katsenelson argues that the US economy should work things out naturally rather than relying on continuous stimulus spending so we don't end up like Japan.
10. Paul Krugman: “The Fed, and equally importantly the ECB, is seriously underestimating the deflationary danger. The basic rules haven’t changed: a slack economy puts downward pressure on inflation. One measure of core inflation is the Dallas Fed’s trimmed-mean personal consumption expenditures deflator, in two big recessions and aftermath, 1981-82 and 2007-2009. There’s a hint here in the data of stickiness as inflation gets close to zero. But zero isn’t a magic number: even falling inflation raises real interest rates when nominal rates can’t fall”.
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