Today marks three important events:
- The Red Cross was founded
- Charles Lindberg landed The Spirit of Saint Louis in Paris
- My wife has her birthday!
John Hussman sees the negative market action in recent weeks as well nigh inevitable. Last night he wrote:
The Market Climate is characterized by unfavorable valuations, unfavorable market action, and a continued army of hostile syndromes that have historically been associated with unusually steep market losses over the following 6-18 month period. On a very short horizon, the market appears significantly compressed and open to a standard “fast, furious, prone-to-failure” bout of short covering in order to clear that condition.
So, he basically says that after recent declines we should see a strong bounce, followed by further declines. Right on time the market has given us at least the beginnings of a fast and the furious bounce. As for what comes next if it isn’t good don’t say you were not warned.
Barry Ritholtz weighs in on the bounce as well.
The millionaire has always been a great cocktail, but with the sudden influx of grand wealth from Facebook Fox News suggests we look to those cocktail masters at Employees Only for a proper cocktail, The Billionaire. As a confirmed fan of whiskey forward cocktails, the recipe is worth me getting in on the action:
- 2 ounces Baker’s 107-proof bourbon
- 1 ounce freshly squeezed lemon juice
- 1/2 ounce simple syrup
- 1/2 ounce grenadine
- 1/4 ounce absinthe bitters
- 1 lemon wheel, for garnish
Pour the bourbon, juice, syrup, grenadine and bitters into a mixing glass. Add large cold ice cubes and shake vigorously for 8 to 10 seconds.
Strain into a chilled cocktail glass and garnish with the lemon wheel.
One big hitch is that Wall Street expects to see earnings growth recelerate later this year. Notice how the yellow earnings line bumps up this summer. This receleration is hardly a given and it depends on how quickly Europe can recover.
Those are some pretty big hitches if you ask me. Here is the chart he is looking at:
I would say that the chances of that happening are very slim. Even if it does it sets up disappointing earnings for a long time after that. Throw in that Europe recovering quickly is pretty dicey, maybe even extremely unlikely. I would throw in China rolling over is a big risk as well. But hey, you need to hear the other side.
While I think that the economy is in a very fragile and vulnerable state, there are reasons to expect we may be able to muddle through. Over at Bonddad blog there has been lots of good work on that front, including on the numbers we are seeing from housing and automobiles. I would be more sanguine, but still concerned, if the issue was just one of the US economic cycle. However, the developing global slowdown may overwhelm the positives.
The Best Grilled Fish Tacos. Period.
I keep getting requests for my opinion on Facebook. Frankly it is so far from on my radar at this point that I have nothing intelligent to say, nor any interest in forming my own opinion. Could it work out at these prices? Possibly, but it looks pretty dicey. However, I think this analaysis is not ridiculously far from what I expect I would come up with, if maybe more positive than I would be:
If Facebook can earn $1 per share next year, therefore, it could presumably trade at $20-$30 ($50 billion to $85 billion) based on that.
If Facebook’s earnings come in as low as Wall Street currently thinks, meanwhile, it could trade below that–possibly well below that.
If Facebook traded at Apple and Google’s valuation based on Wall Street’s current estimate for Facebook’s 2013 earnings ($0.60), for example, it would trade at $6-$7.
And, remember, the market is still very excited about the prospects for Apple and Google, especially Apple. So I’m just hard-pressed to come up with reasons why Facebook should trade at a multiple that is so vastly much higher than Apple’s.
Time for a Velvet Divorce:
The real problem, however, is political. The euro does not have a political union behind it so it simply lacks the key institutions needed to make monetary union work. There is no strong central government to enforce budgetary discipline and no large federal budget to fund transfers from rich to poor areas. And, as we are discovering, there is no euro-wide bank-deposit insurance scheme.
In theory, the eurozone might rectify this error by moving to a real political union. But the idea of a permanent transfer of sovereignty from Athens to Brussels has been rejected by all sides in Greece. Meanwhile, in Germany, the idea of a transfer union – involving a permanent gush of subsidies from northern to southern Europe – remains anathema.
Even if EU politicians were able to overcome such objections and create a real federal union, this giant new entity would essentially hollow out the powers of national democracies. Sacrificing national self-rule on the altar of the euro is inherently objectionable – and would invite a nationalist backlash across Europe. This “cure” for the ills of the euro would be worse than the disease.
It is true that even a “velvet divorce” for the eurozone would involve enormous dangers. But at least it would offer a believable exit from the present maze. As a (very) German proverb puts it – “Better an end with horror, than a horror without end.”
Markets are not waiting for Europe to discover the inevitable:
In a fascinating research note*, Matt King of Citigroup calculates the outflows of capital from various euro zone nations, in particular Italy and Spain. He concludes that Italy saw 160 billion euros exit in 2011, while Spain lost 100 billion euros, in a mixture of bank withdrawals and sales of government and corporate bonds. He thinks a further 200 billion euros could follow.
Foreign bank deposits have fallen 64% in Greece, 55% in Ireland and 37% in Portugal; in Italy, the fall is 34% and Spain 13%. Foreign government bond holdings have dropped 56% in Greece, 18% in Ireland and 25% in Portugal; in Italy the fall is 12% and Spain 18%. So if Italy and Spain were to move to the average for the other three, a further 200 billion euros would flow out.
A final thought. This is another example of the nationalisation of markets, in which official flows are steadily replacing private sector capital. It is a trend that seems unstoppable.
As great a risk as Europe is, China may be just as large. As we have have repeatedly warned China is a great risk of a major slowdown, a bursting housing bubble and a financial crisis. The timing has been the real concern (just as it had to be admitted about warnings I gave in 2005, 2006 and 2007.) Now it appears the Chinese economy may be rolling over
Deliveries of raw materials and commodities are being delayed and defaulted upon. More here.
The economic data from April was bad.
The Real Estate data was disastrous:
Year-on-year sales in Q1, for all real estate, was down -14.6%. The decline was even steeper, -17.5%, in residential property, which accounts for about 80% of the market. Office sales were down -10.2%, while growth in “commercial” (i.e., retail) property sales, which saw a boom in 2011, decelerated to +10.5%. Although many people were touting a month-on-month sales recovery in March, compared to the Chinese New Year period, March sales were still down -7.8% from the year before, for the sector as a whole, and -9.7% for residential properties (by comparison, sales in January-February were a disaster, falling -20.9% overall, compared to the first two months of 2011, -24.7% for residential).
The financial sector looks like it may be starting to shake.
Last Fall after local investment advisor Andy Anderson recommended Green Mountain Coffee at a local investment club meeting I was asked what I thought about it. I sent them the presentation from David Einhorn about why he was shorting the company (betting it would go down.) That the company was primed for a fall obviously didn’t surprise me, though I had no direct evidence myself that they were fraudulent. They were just too darned expensive to interest me even if they were angels.
However, the over 75% decline isn’t made better when company management plays the “I am really dumb” card to defend itself from potential legal action.
Finally, chicken has gone from being a minor food source to a dominant one over the last two centuries, especially the last. How did the chicken achieve such cultural and culinary dominance?