At the risk of being drafted as a Republican presidential candidate, I will now lay out how we are flip flopping around on our outlook like a fish out of water. In case you cannot tell by now, our conviction level in a specific narrative as to why markets are unfolding as they are...
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Most U.S. portfolio managers seem to view the EU sovereign debt crisis as they would a pesky mosquito that refuses to fly away. If only the mosquito would leave, the asset managers could concentrate on the U.S. where the economy is said to be showing so much improvement and stocks are incorrectly perceived...
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We have two bits of commentary from Kyle Bass today. First he gave his usual straight forward views to CNBC this morning. Second his latest letter. Unfortunately I cannot find a version of the letter that can be printed or downloaded, so you will need to read it online.
From the Interview
“If you get out a blank piece of paper and have a look at it, that’s the plan they’re working from right now. Everything is an agreement in principle. There are no details. It’s very difficult to arrange such a disparate group of people, and get them all to cede their fiscal sovereignty to call it a central taxing authority, and in the absence of that, it won’t work.
…I think that if you look at this last agreement, from the last summit, it’s somewhat of a doomsday machine. What they’re talking about, are the ECB and governments guaranteeing the debts of the banks which in turn buy the debts of their country that’s making that guarantee, pledging it at that central bank and getting more money to go buy more debt of those countries.
It’s somewhat sophomoric if you ask me. It is a circular reference that I don’t think institutional investors around the world are going to buy, they might hoodwink some retail investors into buying these things. When you look at the periphery today, there are no buyers of peripheral bonds.”
Some of the best commentary I have read on the Euro, and from several different directions, from Gavekal. Truly a must read.
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Despite markets having more moves than a MLB shortstop hitting .200, not all that much has changed in the past three weeks. We are still awaiting the latest iteration of a "plan" out of Europe, coincident economic data for the US remains ok, though leading indicators continue to forecast that a recession is already...
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An emergency ejection of liquidity to prevent immediate Armageddon is not even a first step toward solving Europe's deep-seated problems. It's more or less the equivalent of the proverbial doctor telling a patient to "take two aspirin and see me in the morning". It treats the symptoms, but not the disease. ...
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Investors should recognize that Euroland’s problems are global and secular in nature, reflecting worldwide delevering and growth dynamics that began in 2008. It will be years before Euroland, the United States, Japan and developed nations in total can constructively escape from their straitjacket of high debt and low growth.
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Legendary value investor Seth Klarman sat down with Charlie Rose have a marvelous interview discussing Klarman’s involvement with Facing History, his cult investment classic, “Margin of Safety” and his approach to investing. Buying the book is prohibitively expensive ($1200.00 on Amazon) but you can e-mail me and I will gladly send you a pdf copy for free.
An Interview with Seth Klarman and Charlie Rose from Facing History and Ourselves on Vimeo.
JJ Abodeeley says we are likely embarking on an era where high quality stocks will significantly outperform low quality stocks as we work our way through what will be the third, and perhaps final, painful market decline of the secular bear market and continue that outperformance as the seedlings of the new secular bull...
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Germany is roundly seen as the obstacle to saving the Euro by refusing to allow massive bond purchases and refusing to consider Eurobonds. The real obstacles however are poor options, not Germany.
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The European sovereign debt crisis is rapidly approaching what could be a significant tipping point as it threatens to spread to the heart of Europe. In recent days Italian 10-year bond yields have soared to 7.22% and today Spain was forced to pay 6.975% at its auction. Even French 10-year yields have climbed to...
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When the year started I suggested to a number of people with a willingness to step outside of the box that a local, young, unproven investment manager was worth considering. Not merely because he was talented or that the funds strategy was fundamentally sound, but because he had a particularly attractive opportunity set in...
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From Naufall Sanaullah of Shadow Capitalism we get a nice overview of the world economy and markets.
There are no good options for Europe. Today John Hussman and I look at what is at stake and how it is likely to play out. The point is that there are no "good" options from Germany's point of view. However, a tanking economy may be a small price to pay compared to endless...
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David Rosenberg of Gluskin Sheff joined Consuelo Mack this weekend to discuss the economy.
Rosenberg says we are 4 years into a depression that will likely last almost a decade. He says the economy is likely contract in 2012. He believes investors should stress income at a reasonable price and corporate bonds.
Via Barry Ritholtz we get one of my favorite market analysts’, Ed Easterling, 12 Rules of Market Cycles:
1. Secular cycles are driven by the inflation rate (deflation, price stability, and higher inflation)
2. Secular bulls occur when P/E starts low and ends high over an extended period
3. Secular bears occur when P/E starts high and ends low over an extended period
4. Cyclical bulls and bears are interim periods of directional swings within secular periods
5. Cyclical cycles are driven by market psychology, illiquidity, or other generally temporary condition(s)
6. Time is irrelevant to the length of secular stock market cycles
7. Secular bulls require a doubling or tripling of P/E
8. Secular bears occur as P/E stalls and falls by one-third to two-thirds or more
9. When real economic growth is near 3%, there is a natural floor for P/E between 5 and 10, a natural ceiling around the mid-20s, and a typical average in the mid-teens
10. If economic growth shifts upward or downward for the foreseeable future, the natural range moves upward or downward, respectively
11. Inflation drives P/Es location within the range; economic growth drives the level of the range
12. The stock market is not consistently predictable over months, quarters, or periods of a few years; the stock market is, however, quite predictable over periods approaching a decade or longer based upon starting P/E
That pretty much nails it. I highly recommend that you read the analysis below from July of 2012 which shows exactly why so many have been so wrong about how cheap the market is over the last eight years or so. Click the image to read, or print the article.
Europe remains the focus of markets, and rightly so. But the picture is not as clear as one would like. Different analysts point to different problems – if only this one problem could be solved, then all this would go away, they tend to say. Sadly, it is not one problem but three that...
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We regularly hear/see market players comment that the bond market is smarter than the stock market. Is that really true this time?
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When the Greek crisis started to emerge in early 2010 we recognized the possibility of contagion and the potential threat to the global economic and financial system, although it was generally dismissed as a manageable problem by the investment community.
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Recent economic data has been better, but we continue to see indications that leading indicators are pointing to a potential recession. Lakshman Achuthan insists the recent data has no bearing on their recession call. Ed Harrison pinpoints the issue (Ed is a must read by the way)
Note Achuthan’s derision for the precision of economic modelling. He thinks the consensus has it wrong because of this focus. When Achuthan talks about forward-looking indicator ‘contagion’ it sounds to me like he is speaking to a fat tail amplifier type of effect, meaning that a confluence of multiple downward-pointing indicators amplifies the trajectory in that direction. Models do not capture this.
They certainly do not. The video Ed is referring to is below, and highly recommended, but let’s look at the history of consensus model driven forecasting. From James Montier of GMO:
Pretty much useless. The economics profession as a whole never sees a recession, there will always be a soft landing. The data is no better for interest rates, inflation, anything! So, we don’t forecast either except in extremis or about general economic environments. e do however asses whether risks are higher than normal, and let us just say that a recession here seems more likely than in 2007, and we thought it was pretty likely then. It should be shallower, but I thought that then as well (which is why our base case in 2007 was for the declines to be in the 35-45% range from the peak.) Then the risks were skewed to the downside and I said so vociferously. I am less pessimistic this time. I think the base case is much less likely here in the US to be exceeded by a large margin. However, our base case for declines from the April peak if we actually enter a recession are in that same range as 2007 despite the market being somewhat cheaper. Read more »
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