Global Markets in Review: Risky Assets Disconnect from Fundamentals 22 comments
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Risky assets remained in favor during the past week, generally helped along by fairly robust economic data and better-than-expected corporate earnings reports. A number of bourses, crude oil, inflation-linked bonds and high-yielding corporate bonds and currencies recorded fresh highs for the year, whereas gold hit an all-time high of $1,070.20 per ounce.
Assets such as government bonds and the U.S. dollar saw fading demand as safe havens, now that the global economy is on the mend. Similarly, credit default spreads tightened markedly and the CBOE Volatility Index (VIX) declined to its lowest level since early September 2008.
The Dow Jones Industrial Index passed a psychological milestone this week as the Index broke above the 10,000 level for the first time in a year, although it then declined again to fall shy of the roundophobia number by four basis points by the closing bell. The Dow first broke above 10,000 more than ten years ago in 1999 and has since done so on 26 occasions. Yes, a ten-year buy-and-hold index investor has had no capital gain over the period!
Click to enlarge:
Source: The Wall Street Journal, October 16, 2009.
Meanwhile, according to the Financial Times, a survey of 44 leading economists by the National Association of Business Economics (NABE) showed the jobs that were lost during the Great Recession are not expected to return before 2012, while anemic wage growth of only 1% this year and 2.2% next year is forecast - the slowest two-year period on record. But FT’s investment editor, John Authers warned:
But the way that investors are almost relying on unemployment to stay high [and central banks not to start exiting from the exceptionally low interest rates any time soon] demonstrates that the recovery, in markets and the economy, remains on shaky foundations,
Source: Walt Handelsman, October 14, 2009.
The past week’s performance of the major asset classes is summarized by the chart below - a set of numbers that indicates an increase in risk appetite.
Click to enlarge:
Source: StockCharts.com
A summary of the movements of major global stock markets for the past week, as well as various other measurement periods, is given in the table below.
The MSCI World Index (ACWI) (+1.4%) and MSCI Emerging Markets Index (EEM) (+2.1%) both made headway last week to take the year-to-date gains to +25.6% and an impressive +70.4% respectively. Interestingly, Chile is now only 1.5% down from its July 2007 highs and could be one of the first markets to wipe out all the financial crisis losses.
Notwithstanding a down-day on Friday, U.S. indices closed higher for the week. The year-to-date gains remain firmly in positive territory and are as follows: Dow Jones Industrial Index +13.9%, S&P 500 Index +20.4%, Nasdaq Composite Index +36.8% and Russell 2000 Index +23.4%.
Click here or on the table below for a larger image.
Top performers among stock markets this week were Sudan (+22.6%), Kazakhstan (+8.9%), Cyprus (+7.6%), Egypt (+6.0%) and Hungary (+5.5%). At the bottom end of the performance rankings countries included Nigeria (‑4.2%), Thailand (-4.0%), Qatar (-3.2%), Bahrain (-2.8%) and Ireland (‑2.4%).
Of the 99 stock markets I keep on my radar screen, 76% recorded gains, 21% showed losses and 2% remained unchanged. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)
John Nyaradi (Wall Street Sector Selector) reports that, as far as exchange-traded funds (ETFs) are concerned, the winners for the week included United States Gasoline (UGA) (+11.1%), United States Oil (USO) (+8.9%), PowerShares DB Energy (DBE) (+8.8%) and iShares S&P GSCI Commodity (GSG) (+7.4%).
On the losing side of the slate, ETFs included iShares MSCI Thailand (THD) (-6.0%), Market Vectors Solar Energy (KWT) (-2.8%), Claymore/MAC Global Solar Energy (TAN) (-2.6%) and ProShares Short MSCI Emerging Markets (EUM) (-2.5%).
Referring to the declining U.S. dollar, the quote du jour this week comes from 85-year-old Richard Russell, author of the Dow Theory Letters. He said:
Now I’ll let you in on an awful secret. The U.S., despite all its BS talk, really wants a lower dollar. The fact is that the U.S. is doing absolutely nothing to defend the dollar. Of course, if the Fed wanted to defend the dollar they could halt their mass printing of dollars, and they could raise interest rates. And Bernanke could win the 800 meter race at the next Olympics at Rio.
But let’s be rational - how in God’s name is the U.S. going to pay off trillions in debt? By raising taxes? Impossible. They could renege on the debt like Argentina - unthinkable. But there is a way - they’ll try to minimize the importance of the debt with a cheaper, devalued dollar. That’s the time-honored U.S. way, but loyal Americans don’t believe it. If they did, gold would be selling at $4,000 an ounce.
Russell added:
It’s all so smarmy, but c’mon, what do you think the Fed has been doing since World War II? It’s been systematically inflating. They can’t fool me, I was around after the War, and I remember prices in 1945. Maybe the chief culprit was Alan Greenspan, but Bernanke is carrying on. There’s a lot of inflating coming up. ‘Strong dollar policy.’ Bite your tongue, and give me a break.
Other news is that the Federal Deposit Insurance Corporation (FDIC) closed another bank on Friday, bringing the tally of U.S. bank failures in 2009 to 99 (124 since the beginning of the recession). Meanwhile, CreditSights, which tracks the dismal data, predicts (via MarketWatch) that we could be no more than 10% of the way through this cycle of bank collapses, which is sure to be the worst run of closures since the Great Depression.
Next, a quick textual analysis of my week’s reading. Although “bank” still features prominently, the key words have started taking on a more normal pattern compared with the crisis-related words that have dominated the tag cloud for many months. “Recovery” is also gaining in prominence.
Click to enlarge:
The major moving-average levels for the benchmark U.S. indices, the BRIC countries and South Africa (where I am based) are given in the table below. With the exception of the Shanghai Composite Index, which is trading marginally below its 50-day moving average, all the indices are above their respective 50- and 200-day moving averages. The 50-day lines are also above the 200-day lines in all instances.
The U.S. indices are creeping closer to the so-called 50% retracement levels (i.e. regaining half the loss suffered between the October 2007 highs and March 2009 lows). The levels are: 10,346 for the Dow Jones Industrial Index and 1,121 for the S&P 500 Index.
The September highs and October lows are also given in the table as these levels could define a support area for a number of the indices.
Click here or on the table below for a larger image.
Bill King (The King Report) said:
We regularly note that the earnings reporting season often marks the end of the market trend into earnings announcements. The reversal tends to occur during the second week [last week] of reporting. Given this is expiration week, which often creates a short-term peak on the usual manipulation, the odds favor a short-term stock market peak late this week or next week. Of course any unexpected ugly news, like negative revenue, earnings or guidance from several key companies could commence a stock downdraft.
Talking of earnings, the third-quarter earnings season has progressed on an upbeat note since Alcoa’s (AA) results announcement on October 7 marked the onset of the reporting cycle. It is still early days in this period, but 85% of U.S. companies have so far beaten earnings estimates. According to Bespoke, the current beat rate is well above any other quarter since at least 1998. They said:
Even with analysts raising estimates significantly leading up to the earnings season, companies have still managed to come in better than expected so far.
Click to enlarge:
Source: Bespoke, October 16, 2009.
Additionally, Bespoke also highlighted that while the earnings per share numbers grab the headlines, it is what companies say about future quarters that impacts equity prices most on their reporting days. As shown in the graph below, 20.3% of U.S. companies have raised guidance so far this earnings season. Bespoke’s report said:
The highest reading for this number has barely broken 15% in any prior quarter this decade. And if we compare the percentage of companies raising guidance versus the percentage of companies lowering guidance, no other quarters come even close to this one. It will be hard to keep this up as the earnings season progresses, but it’s also shaping up to be a record-breaking quarter on the positive side.
Click to enlarge:
Source: Bespoke, October 16, 2009.
Importantly, one needs to assess what is priced in by the stock market. Useful research comes from David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, who said:
We re-ran our regressions with the latest tightening in spreads and breakout in equity valuation and found that U.S. investment grade credit is now priced for 2.5% GDP growth in the coming year (was 2.0% two months ago) and the S&P 500 is now de facto pricing in 4.8%, which, by the way, is now basis points shy of what it was discounting in the summer/fall of 2007. And, backing out the fair-value P/E from the corporate bond market, and yields have been backing up sizably in recent weeks, we can see that the S&P 500 is now pricing in $85 of operating earnings, which we think will be, at best, a 2013 story. In other words, the rally continues to move further away from the fundamentals.
However, Rosenberg’s bearish prognostications are not universally accepted. In a rebuttal (via Clusterstock), Eddy Elfenbein created the chart below of profits as a share of GDP:
They’re clearly compressed, and if they revert to a historical standard, it means earnings have some spring in them,
said the report.
Click to enlarge:
Source: Clusterstock - Business Insider, October 9, 2009.
Jeremy Grantham, who has just announced his retirement as chairman of GMO, put matters into perspective in a Kiplinger article, saying:
The recent rally has been very speculative, favoring risky assets over the past few months. I’m sorry if you missed investing at the market’s March lows, but don’t compound the damage to your portfolio by chasing gains in risky assets. We’re at the beginning of a seven-year period of lean returns. You should only be buying the highest-quality blue-chip companies, where valuations are most attractive.
As stated before, share prices have moved too far ahead of economic reality. This calls for a cautious approach in anticipation of the market working off its overbought condition and fundamentals reasserting themselves. I will bide my time while the fundamentals play catch-up.
Economy
After improving steadily this past summer, global business sentiment has remained largely unchanged so far this fall, consistent with a global economy that is experiencing a tentative economic recovery. The recession is over but the nascent recovery is not quickly gaining traction,
according to the results of the latest Survey of Business Confidence of the World by Moody’s Economy.com.
Businesses remain more upbeat about the outlook into next year and broader economic conditions, and dourer when considering the strength of their sales and intentions to hire. South Americans are the most positive and North Americans generally the most negative.
Click to enlarge:
Source: Moody’s Economy.com
As far as hard data are concerned, China’s economy gained new impetus, according to U.S. Global Investors. “Passenger car sales in September rose 84% year on year to 1.02 million units. Housing starts jumped 56% in September from a year earlier, the fastest pace of growth in at least five years.
China’s exports declined 15.2% year on year in September, the smallest contraction in nine months, while imports dropped only 3.5% year on year as the domestic economy continued to recover. Exports rose 7.7% on a month-on-month basis, adjusted for seasonality.
The stronger export performance follows a similar trend in South Korea, Taiwan and Vietnam. The Financial Times reported:
Singapore, which led Asia into recession, on Monday pointed the way to further regional recovery with strong third-quarter economic growth … The Monetary Authority of Singapore (MAS) said GDP expanded 14.9% on a seasonally adjusted quarter-on-quarter annualized basis in the June to September period, after a comparable revised increase of 22% the previous quarter.
Further good news on the global economic front came from Eurozone industrial production that expanded for the fourth month in a row in August. Output rose by 0.9% from July, when it increased by a revised 0.2%.
A snapshot of the week’s U.S. economic reports is provided below. (Click on the dates to see Northern Trust’s assessment of the various data releases.)
Friday, October 16
•Widespread strength in factory report
Thursday, October 15
•Inflation remains a non-issue, for now
•The quandary between initial claims and total continuing claims
Wednesday, October 14
•Minutes of September 22-23 FOMC meeting - more of the same
•Q3 consumer spending expected jump likely, but muted growth in Q4
•Import prices are turning around
•Restocking - one of the conduits of economic growth in the months ahead
Further evidence that the recession that began in December 2007 has ended, came from the Philly Fed report that was positive for the third straight month. According to Bespoke,
the last time this indicator was positive for three straight months was from September through November 2007, which was the last three months leading up to the start of the recession.
Click to enlarge:
Source: Bespoke, October 15, 2009.
Dissecting the retail sales data shows that trends improved all over, with the exception of auto-related sales due to “Cash for Clunkers”. The chart below, courtesy of Clusterstock takes September’s year-on-year sales change (Sep 09 versus Sep 08) and subtracts August’s year-on-year sales change (Aug 09 versus Aug 08). It thus shows the change in the retail sales trend.
Yes, this matters: American retail trends have to become less negative before they go positive,
said the report.
Click to enlarge:
Source: Clusterstock - Business Insider, October 14, 2009.
The minutes of the Federal Open Market Committee’s (FOMC) September meeting indicated that most participants thought the recession was over. Although they expected the recovery to be weak initially, most members also upgraded their expectation for near-term growth.
Participants generally expected inflation to remain low in the near term. Asha Bangalore of Northern Trust said:
The Fed is in the most favorable spot in the near term with regard to inflation because the excess capacity in the economy allows the Fed to maintain a focus on economic growth and leave inflation on the back burner, for now.
Cautioning against bullish expectations, David Rosenberg said (via MoneyNews) that the economy was being held together by very strong tape and glue provided by the Fed, Treasury, and Congress, and that the recovery would be weak.
He predicted the economy would stagnate this quarter and then grow no more than 2% in 2010. The economy won’t take on the “V” shape of previous rebounds, Rosenberg said.
It’s going to look like this whole string of lowercase Ws for the next five years.
Week’s economic reports
Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.
Date | Time (ET) | Statistic | For | Actual | Briefing Forecast | Market Expects | Prior |
Oct 14 | 8:30 AM | agriculture | Sep | 0.0% | NA | NA | 0.7% |
Oct 14 | 8:30 AM | oil | Sep | 0.6% | NA | NA | 0.3% |
Oct 14 | 8:30 AM | Sep | -1.5% | -2.7% | -2.1% | 2.2% | |
Oct 14 | 8:30 AM | Retail Sales ex auto | Sep | 0.5% | -0.3% | 0.2% | 1.0% |
Oct 14 | 10:00 AM | Aug | -1.5% | -1.2% | -1.0% | -1.1% | |
Oct 14 | 2:00 PM | FOMC Minutes | Sep | - | - | - | - |
Oct 15 | 8:30 AM | 10/10 | 514K | 540K | 520K | 524K | |
Oct 15 | 8:30 AM | Continuing Claims | 10/03 | 5992K | 6000K | 6000K | 6067K |
Oct 15 | 8:30 AM | Core CPI | Sep | 0.2% | 0.1% | 0.1% | 0.1% |
Oct 15 | 8:30 AM | Sep | 0.2% | 0.2% | 0.2% | 0.4% | |
Oct 15 | 8:30 AM | Empire Manufacturing | Oct | 34.57 | 17.5 | 17.25 | 18.88 |
Oct 15 | 10:00 AM | Philadelphia Fed | Oct | 11.5 | 13.5 | 12.0 | 14.1 |
Oct 15 | 11:00 AM | Crude Inventories | 10/09 | .334M | NA | NA | -0.98M |
Oct 16 | 9:00 AM | Net Long-term TIC Flows | Aug | $28.6B | NA | $30.0B | $15.3B |
Oct 16 | 9:15 AM | Sep | 70.5% | 70.1% | 69.8% | 69.9% | |
Oct 16 | 9:15 AM | Sep | 0.7% | 0.4% | 0.2% | 1.2% | |
Oct 16 | 9:55 AM | Mich Sentiment Preliminary | Oct | 69.4 | 74.0 | 73.3 | 73.5 |
Source: Yahoo Finance, October 16, 2009.
Click the links below for the following economic reports:
•Wells Fargo Securities: Weekly Economic & Financial Commentary
•Wells Fargo Securities: Monthly Outlook (October 2009)
U.S. economic data reports for the week include the following:
Tuesday, October 20
•Building permits
•Housing starts
•PPI
Wednesday, October 21
•Fed’s Beige Book
Thursday, October 22
•Initial jobless claims
•Leading economic indicators
•FHFA Housing Price index
Friday, October 23
•Existing home sales
Markets
The performance chart obtained from the Wall Street Journal Online shows how different global financial markets performed during the past week.
Click to enlarge:
Source: Wall Street Journal Online, October 16, 2009.
The emotional brain responds to an event more quickly than the thinking brain,
said Daniel Goleman, author of Emotional Intelligence and Primal Leadership. Let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will assist the thinking brains of readers of Investment Postcards and take the emotion out of their investment decisions.
Click here for more thought-provoking items and quotes.
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This article has 22 comments:
Regarding Eddy Elfenbein's bullish conclusions based on the % of GDP comprised by corporate profits, I expect that percentage to be under constant pressure as current political powers do their best to redistribute wealth and prefer to impose expensive corporate demands over direct taxation of middle-class America.
As for preferring "quality" investments, quality is in the eye of the investor. In my world, quality is determined less by size than by growth potential, balance-sheet cleanliness, return on equity, and low valuation multiples of earnings, cash flows, sales and book values. My search for quality has taken me primarilly to emerging markets, most notably China where economic strength seems to be accelerating (as your article well demonstrates).
Many Thanks for your continued fine work.
Gee, did Bespoke explain why we have these tremendous beats? Job cuts that will not be replicated infinitely into the future. What about revenue losses at all of these firms? What about unemployment continuing upward, and consumer credit continuing downward?
This article has too much information. I don't care for this style of writing. I would rather have something more focused. Give us what others are saying, in brief, and then give us your opinion, disagree or agree, and why.
The economy has been run over by a train and the patient has been in a coma with life support attached. The eye lids have started to flicker, but that's all. To say we are out of the woods, is to start counting your chickens before they are hatched. If the patient survives, the corresponding convalescent period is going to be long and fraught with difficulties. Much more pain to come during rehabilitation.
The storm appears to have passed, we may make it to that distant shore, we may have to throw more of the crew overboard (just make sure it's the old ones and the lower castes).
The captain, the first officer, and the quartermaster are optimistic - but they stand to have the most rum and wenching if we reach that distant shore called "recovery" and they will be the last to go overboard.
Unless...of course...there is mutiny...
Way too many financial reports look like hype to get the suckers to buy into the market. Laying off employees to increase profits is no reason to buy into the market. Can the financial reporters be stupid or are they sly? Not mentioning a huge drop in Y-T-D revenues must be intentional.
Regards.
On Oct 18 10:27 AM Philo Beddoe wrote:
> Good article, lot of food for thought. I thought we were getting
> over extended when the DOW hit 9500. Of course the market can continue
> to go up at its current pace if GS wants it to.
All the charts are just to much b.s. and. they sure didn't help call the last crash. They won't help call the next one looming.
Read some James Quinn, Martin Weiss, or a host any other SA contributors, and don't so noddingly accepting of the Wall Street schills that keep pushing their same self-serving agenda.
On Oct 18 02:07 PM John Eickholt wrote:
> Oil traders at it again, sticking it to the American consumer. Thanks
> to the help of our media CNBC. Facts that oil went up 9% on the week.
>
> refinery run rate down to 80.9%.
> Distillate fuel demand has averaged 3.4 million barrels per day over
> the
> last
> four weeks, down by 10.8 percent from the same period last year.
> Jet fuel
> demand is 3.5 percent lower over the last four weeks compared to
> the same
> four-week period last year.
> Fadel Gheits is the one guy that CNBC won't bring on.
>
> seekingalpha.com/artic......
>
> FG: Two things. Oil prices have not been driven by supply and demand
>
> fundamentals for years. This was exacerbated by the incredible influx
> of
> money from financial players into the commodity markets over the
> last five
> years and especially oil, which basically created the oil bubble
> that we had
> last year. Supply and demand fundamentals are beginning to play a
> secondary
> role now in oil prices. Financial players have much more clout and
> basically
> manipulate-influence, if not manipulate-oil prices; that is very
> clear.
> That's why we have the investigation by the CFTC and all the hearings.
> I am
> not holding my breath to see any changes because the politically
> motivated
> individuals and the incredible lobbying by financial institutions
> make it
> very, very difficult to regulate or enforce regulations in the books
> to stem
> that incredible increase in financial institution influence on the
> commodity
> prices.
>
> TER: So do you have a view as to where oil is going to go over the
> next 6 to
> 12 months?
>
> FG: I can tell you oil prices will remain inflated and not fully
> reflect
> supply and demand fundamentals. I just got a call from the Kuwait
> National
> Oil Company. They are wondering when this is going to end. I said,
> don't
> hold your breath. It's not going to end. They basically believe what
> I
> believe-that financial players are more in control now than oil companies
> or
> OPEC or anybody else. They play on the perception or the outlook-oh,
> OPEC is
> going to cut production. Okay, then they jack up, they start making
> bets
> that oil prices will go higher. We have not had any supply problems
> with the
> brief exception of the hurricane and, even with the hurricane, the
> fact of
> the matter is that the hurricane impaired our refining capacity more
> than
> oil supply. The Kuwait guy was just telling me that after Hurricanes
> Rita
> and Katrina, everybody said, 'oh, send us more oil.' He said, why
> do you
> need more oil? You don't have the refining capacity to process the
> oil.
> There's no shortage, yet oil prices obviously moved up very sharply
> because
> financial players, again, gave this perception that, my God, we're
> going to
> run out of this or out of that. But in fact, we had a shortage of
> gasoline
> not because we did not have enough oil. It's because we didn't have
> enough
> facilities available to process the oil that we have.
to NIPA profits is 1.35.....with NIPA corporate profits at 920 fair value
for the S&P 500 is 1250.
govt is trashing the greenback as the major strategy for debt reduction but there are always unintended consequences.
falling dollar = rising oil = renewed demand destruction = down we go AGAIN
alternatively,
bump interest rates to save bucky = blow up real estate "recovery" = banks fail and govt dept soars = down we go AGAIN
Banks now sell mortgages at 5.xx % which can hardly cover the default risk let alone infation etc. The only reason they do is because they can dump them on Fannie Mae, Fredie Mac, Treasury, Federal Reserve, or FHA. Thus the taxpayer is taking all the risk. No bank in their right mind would sell one without being able to sell it to a government or quasi-government entity. Thus, traditional bonds have also becoming low interest paying garbage manipulated by the government so they won't reflect real risk either.
Thus we have what's left, stock and equity speculation, commodities to reflect real inflation and curb real dollar depreciation, and high yielding junk that at least pays enough to cover the 15% currency devaluation we are looking at this year and perhaps next year. At this rate, if you think the Peso was garbage 20 years ago get ready to feel like you're living in the real New Mexico. I wonder what they will think when Americans start accepting pesos as the preferable curency for payment over greenbacks. The Federal Reserve is shameful.
"The Dow first broke above 10,000 more than ten years ago in 1999 and has since done so on 26 occasions. Yes, a ten-year buy-and-hold index investor has had no capital gain over the period!" This neglects inflation, so in fact buy and hold has *lost* you more than 25% (official CPI). In reality, because CPI tends to under-report, you've probably lost more than that.
The only way to beat the market is to identify winning horses early in the stretch. Index investing is a losing proposition.
Read what Einhorn has to say and LEARN: www.marketwatch.com/st...
On Oct 19 09:00 AM Moon Kil Woong wrote:
Certainly safe assets like US Treasuries don't even cover for dollar devaluation, let along current inflation and future inflation.
Those of us who have 20% to 30% in cheap emerging market index funds are quite happy.
It's takes 15 to 20 years of continuous stock picking to isolate true talent from noise.
Not encouraging for stock pickers ....
On Oct 19 12:29 PM Value Added wrote:
> Buy and hold has performed worse than that, my friend. You wrote:
>
> "The Dow first broke above 10,000 more than ten years ago in 1999
> and has since done so on 26 occasions. Yes, a ten-year buy-and-hold
> index investor has had no capital gain over the period!" This neglects
> inflation, so in fact buy and hold has *lost* you more than 25% (official
> CPI). In reality, because CPI tends to under-report, you've probably
> lost more than that.
>
> The only way to beat the market is to identify winning horses early
> in the stretch. Index investing is a losing proposition.