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Beyond Market Turbulence
As a follow-up to my last comment, David Parkinson of the Globe & Mail reports, Despite the turbulence, strategists stay bullish:
The sight of slumping stock prices hasn’t shaken most market strategists’ confidence that the bull market still has further to fly. But they warn investors to buckle up – we could be in for plenty of turbulence.
In the wake of a selloff that has knocked the U.S. benchmark S&P 500 stock index into official “correction” territory (a drop of more than 10 per cent) in the space of a month while lopping 7 per cent off Canada’s S&P/TSX composite, strategists on Wall and Bay streets are reminding clients that the size of this correction is nothing out of the ordinary in a post-recession bull market. What’s more, they insist that the selling is being driven by fear rather than fundamentals – meaning that markets with solid growth prospects are merely getting cheaper and creating buying opportunities.
“It is difficult to be very bearish of corporate assets when growth is reasonably strong, inflation is low, margins are expanding, monetary policies are easy, and valuations are undemanding,” said economist Larry Hatheway of UBS Ltd. in London.
“In the first four months of this year, investors had become increasingly complacent to risk,” he said. “This was a market vulnerable to correction – all that was missing was a catalyst.”
However, that catalyst – a major sovereign-debt scare out of Europe – has re-awakened investors’ hyper-sensitivity to risk, a lingering effect of the credit crisis of 2008-09. The depth and speed of this risk adjustment does suggest that even if stocks can track generally higher in the coming months, they may do so in a very moody, volatile way.
“People are now a lot faster on the trigger in reducing risk. This increased volatility could be a byproduct of a new way of managing portfolios,” said Stéfane Marion, chief strategist at National Bank Financial in Montreal.
“But we have to keep things in perspective. We haven’t yet seen the collateral damage [from the European debt woes] that would upset global growth.
“In a world where credit markets remain functional, I don’t think the amount of selling we’ve seen can be justified,” he said. “The valuations we have right now are very reasonable.”
George Vasic, chief strategist for UBS Securities Canada Inc., noted in a research report that over the past 50 years, post-bear-market rallies on the Toronto Stock Exchange have all been met with corrections on the scale of what we’ve seen recently; the average pullback has been 13 per cent. Similarly, Pierre Lapointe, global macro strategist at Brockhouse & Cooper Inc. in Montreal, said the S&P 500 has routinely rallied in the year after the end of a recession, yet those rallies have all included a considerable correction within them, averaging 17 per cent.
“The next few months will remain volatile, but history tells us that the year that follows a recession is usually very profitable for equities,” said Mr. Lapointe, who reiterated his overweight recommendation on global equities.
David Bianco, chief U.S. equity strategist at Bank of America-Merrill Lynch in New York, is among several strategists who issued research notes in the past few days reiterating their earnings and stock-index targets over the next 12 to 18 months. His 12-month target for the S&P 500 remains at 1,350, a whopping 25 per cent above Tuesday’s closing levels.
He said the current S&P 500 levels imply a price-to-earnings multiple of about 12 times, far below the historical norm of 15 times. At normal P/Es, current levels are pricing in S&P 500 earnings of just $72 (U.S.) a share for 2011 – almost 20 per cent below Mr. Bianco’s “base-case” forecast, and toward the low end of his worst-case projections in the case of another global recession.
“Times like this make it clear that the risk equity premium is no free lunch, and volatility is gut-wrenching, even for the most long-term investors,” he said. “[But] we believe the best way to feel better during a correction is to buy some shares.”
I think volatility is here to stay. Itchy traders selling at the first sign of weakness, memories of 2008, and way too much risk management stifling the large portfolios, forcing managers to cut positions when the VIX rises, are all wreaking havoc on markets. Add to this market disinformation usually spread by large investment houses or their large hedge fund clients looking to capitalize on volatility, and you come away thinking that maybe the month of May was a harbinger of things to come.
But the reality is that US fundamentals have turned the corner. Allan Robinson of the Globe & Mail reports, U.S. consumers could give global stocks a lift:
The bull market needs some fuel and that will come once the U.S. jobs picture improves, incomes start to rise and consumer spending revives, strategists say.
“History tells us that a peak in the U.S. unemployment rate has the potential to sustain the equity rally – globally,” said Pierre Lapointe, a global macro strategist with Brockhouse Cooper. “We have calculated that every time the unemployment rate peaks after a business cycle, the post-recession global rally gets a second wind.”
Basically, investors bet on a recovery. “Investors realize if the jobs market gets better that means consumers will start spending again and that means profits down the road,” Mr. Lapointe said.
What is the market looking for now?
After three solid months of increased spending, economists are looking for consumers to take a breather and investors may need to be patient. Personal spending data scheduled for release Friday is forecast to have increased 0.3 per cent during April, compared with a lofty 0.6 per cent rise in March, according to a survey of economists by Bloomberg.
On the plus side, personal income is expected to have crept higher rising 0.4 per cent in April, compared with 0.3 per cent in March.
Another positive for U.S. consumers is that they have had no reason to be worried about rising prices. The personal consumption expenditures inflation data, known as the PCE deflator, measure price changes for a broad range of goods and services, excluding food and energy. The deflator also due out Friday is forecast to have declined to a 47-year low of 1.1 per cent in April, well below the U.S. Federal Reserve Board’s long-run forecast of 1.7 per cent to 2 per cent, according to BMO Nesbitt Burns Inc.
“The sharp turnaround in the labour market in recent months suggests that incomes will soon start to rise more significantly,” said Paul Dales, the U.S. economist for Capital Economics Ltd. “This will allow households to raise their savings rate without too much of a slowdown in consumption growth,” he said.
How will the market react?
So far stock markets have not reflected that bullish scenario. Investors have been preoccupied with sovereign risks concerns, which has driven stock markets lower. Last week the VIX, a measure of equity volatility, soared to 45.79 but this week it plunged to about 30.
“Only on five occasions in the past 25 years has the VIX reached such heights,” said Carmine Grigoli, chief investment strategist with Mizuho Securities USA Inc. Such elevated readings suggest emotional selling and on average the stock market has jumped 26 per cent in the following year.
And Brockhouse Cooper’s Mr. Lapointe said that on average six months after U.S. unemployment levels peak (in October, 2009) global markets increased 9.4 per cent, compared with the recent 1.1-per-cent decline. “One year after the unemployment rate peak, global equities were up 17 per cent on average,” he said.
It's easy to get all flustered in these markets. With volatility on the rise, more uncertainty over Europe's future, stocks coming off one of the worst months, it's no wonder everyone is pessimistic and bearish.
But if you look beyond the turbulence, and focus on the improving fundamentals, then a different picture emerges. To be sure, the big beta moves of 2009 are over, but going forward, there will be money to be made if you pick your stocks and sectors right. That much I'm sure of.
Below, William Greiner, chief investment officer at Scout Investment Advisors, talks with Bloomberg's Matt Miller and Carol Massar about the outlook for U.S. inflation. Greiner also discusses the outlook for U.S. stocks, corporate earnings and Europe's financial crisis.
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Dude, I still can't believe Crystal Bowersox didn't win American Idol this season!
i don't watch american idol, but i just now saw her people get ready video. outstanding talent.
Yo, listen. Listen up.
Check it out, check it out.
I just wasn't feeling it, dawg.
It was a little pitchy at the beginning.
Yo, did you know I was the bassist for Journey?
i love it. too funny.
Well, this is about Bernanke. This is about Bernanke. He has to be on that call. Forget the investors. The investors are gonna do- If Bernanke listens- Bernanke needs to open the discount window. That's how bad things are out there. Bernanke needs to focus on this. Alan Greenspan told everyone to take a teaser rate, then raised the rate 17 times? And Bernanke is being an academic. It is no time to be an academic. It is time to get on the Bear Stearns call. Listen. Open the darn Fed window. He has NO IDEA how bad it is out there. He has NO IDEA! He has NO IDEA! I have talked to the heads of almost every single one of these firms in the last 72 hours and he has NO IDEA what it’s like out there! NONE! And Bill Poole has NO IDEA what it’s like out there. My people have been in this game for 25 years, and they are losing their jobs and these firms are gonna go out of business and HE’S NUTS! THEY’RE NUTS! THEY KNOW NOTHING!
I have not seen it like this since I went 5-bid for half a million shares of Citigroup and I got hit in 1990. This is a different kind of market. And the Fed is ASLEEP! Well, Bill Poole is a shame. He’s SHAMEFUL! He ought to go and read the Accredited Home document, at least I read the darn thing.
You can’t get a darn loan if you’re rich like me.
Nice of you to stop by Jimbo!
I just have to wonder what drugs somebody could be on to honestly believe the fundamentals of western economies are sound...really. The West is bankrupt - period. Especially the US, which is the largest debtor in history. That's where I would want to put my money, in a black hole of debt. Central banks permitting credit expansion to go on unchecked led to malinvestment and the lengthening of the productive process beyond what the supply of real savings could support. What do we have today? The same exact thing. What fundamentals are you talking about. From March 2009 to May 2010 food/energy costs rose 18.7% - but sure, there's no inflation. Even if you use pre-Clinton CPI measures it's at least 5% per annum (still manipulated). U6 (real) unemployment at about 17% with plenty of room to climb higher.
The delusional belief that the fundamentals are improving is a total lack of understanding of the trade cycle and capital theory. I'm sorry, but a country like the US entirely dependent on credit that has a ridiculously low savings rate that was negative for quite some time should not have low interest rates. High demand + low supply = higher prices. A central bank cannot just abolish scarcity by printing money. Prices have not readjusted to allow the productive processes to realign to where they will be most profitable. This will lead to, like it has every single time throughout history, economic downturn (or rather a greater downturn than what already exists). Unless the author has another theory of how interest rates, prices, and thus the entire structure of production can be manipulated without consequence I'm going to have to maintain my present belief that things will get far worse.
The big-B moves are not over, just take them to the downside, where everything is going.
And hmm...yes i dont doubt there will be money to be made in the right sectors. Which ones again? Im not sure, surely you must mean a defensive or high yielding play right? Or maybe a regional CAD bank?
Oh WAIT...YOU MEAN SOLARS!!1!11!!1
Best tip yet man. I really hope you put your money where your mouth is, that way you should be posting here in a few months on how you were wrong and need some $ to be sent over just so you can pay the bills for your internet connection to keep posting this bs.
Poor Leo, what he's failing to figure out is that no matter how great something is, if people can't afford it it's no more than a mental exercise... Now then, where did I park my flying car?
Guys give it a rest already. You're all seeing nothing but trouble ahead and I say BULLSHIT! There are serious challenges ahead but there are plenty of reasons to remain hopeful. The world isn't black & white. Lots of grey out there so keep an open mind, analyze trends more carefully, and you'll see the light at the end of the tunnel. On a more cheerful note....
Leo,
Where exactly are these so-called improvements? You call bullshit on the pessimism, but why don't you refute it with some examples?
I challenge you to pick FIVE of the 25 questions from the above post, and answer them. Pick any five you want.
That may be a little more credible than the boobies.
Oh, Leo! There they are. Finally, some nekkid wimin. Sure, easy for you. Just post some skin and all is forgiven...NOT! So what's with the fuzzy spots all over the important parts? Can you clear up this video a little?
I just junked you and will keep junking you until you stop spamming me.
Br
Blurred-out nips. Yeah, that about sums it up.
Leo: If you spent 44 minutes watching this...
You have too much time on your hands...
Amerika is taking a big step down... unemployment, foreclosures, Fannie and Freddie coming to a head... What kind of home prices will you have if the US government which is 95% of the mortgage market craps its pants? Then where will TBTF balance sheets be?
M3 shrinking, manufacturing up but inventories not moving out... increased spending all transfer payments...
I don't know what Canadians smoke up there, but I know BC has the same median income vs. median home prices as Cali BEFORE the Bernank-ster Bubble Bust... I wouldn't wish that on my enemies...
You guys are going to take a little correction...
So how is that Goldman Bank of Canada Governor working out for you?
Canadians are screwed too..........their Central banks sold off 38 Billion in Gold.................
There goes de ass-ets.
44 minutes? LOL, try using fast forward and save yourself some time.
Leo - keep posting the challenges! It would be all good if for some rreason you were right about all this.
Talk to more people in small business in the US - you'll get the real story on what is going on. The answer is no growth in final demand, no bank financing available, none desired since there's no reason to invest right now, and govt policies that seem hell bent on destroying our currency and insane govt giveaways that masquerade the systemic boils that lurk beneath and must be lanced and disinfected if we are to move forward. We should have bankrupted all the TBTFs in 2008, and moved forward from there. Extend and pretend, FASB rule changes, marking to fantasy and ZIRP will all be revealed as dangerous policies before long.
Like I said, the pump don't work because the vandals (TBTFs and their oligarchic supporters in CONgress) took the handle. And anger grows in the heartland. Trust me on that.
Leo,
I'll meet you at the Chez Parée at midnight for some of Montreal's finest. Then we can fly out of Dorval to Vegas on the 6:10 AM flight. I'll pack a three day bag, do you think that will be enough?
Yeah, the crude washing ashore in my state is kind of redish brown. Can't say what the the color of the 3 plumes of the submarine "oil lake" are, but I have a feeling we will know in a few months. The economy sucks unless you're Lloyd Blankfein or Jamie Dimon and now Hayword and Suttles of BP have driven the GOM ecology down to the level of Benron's economy. This crap is so bad, not even half naked hot ladies can make me happy.
And "you" see nothing but blue skies, lollipops and rainbows, glossing over the tremendous, earth-shaking and inevitable trainwreck ahead as "just a fleshwound."
Leo, I suggest you change your name here to "Pollyanna".
But why am I even addressing a fictional person, whose posts are inserted here just to generate controversy and raise the ire of those who know better than to accept such absurdly rose-colored bullshit?
Nah, mor like blue skies, lollipops and BOOBIES!
Leo,please explain how this dollar rally isn't going to kill(giant) corp. profits next quarter.
Markar you don't know Jack.As long as analysts are pricing in $1.41 USD per Euro for 2011, everything will be fine. After all profits are made on estimates and not in the real world.Even if we actually worried about actual profits we will be fine.
Technology S and P companies have a net profit margin of around 20% , so for the companies that get 50% of their revenue in the Euro zone, the 15% drop in Euro will only make their total foreign profits fall by 75% and overall profits by 37.5%, but this will be more than compensated by a 300% increase in P/E ratios.
This also applied to the inexorable rise in the market in total disconnect to the fundamentals. Maybe the fear came from acknowledging this.
Hayek
That correlation does not mean causation is immaterial to Leo.
I just loved this part:
“History tells us that a peak in the U.S. unemployment rate has the potential to sustain the equity rally – globally,” said Pierre Lapointe, a global macro strategist with Brockhouse Cooper. “We have calculated that every time the unemployment rate peaks after a business cycle, the post-recession global rally gets a second wind.”
As if what happened in 1921, for example with the U.S. economy in a totally different circumstance relative to the rest of the world, is an irrefutable causal connection.
After years spent telling us, 'This time is different', they now want us to believe, 'It's always the same'.
Because Bullshit and Lies are all they have.
Oh good grief. This article makes my brain hurt. Wrong on so many levels.
True enough. Sometimes the level of absurdity, and the errors of logic overwhelm. At least we can look forward to Leo's posting of some nekkid wimin! Have I mentioned this enough yet? Bring 'em on, Leo. We wait with bated breath for your master stroke... or something akin to that. Maybe I have the bated and master reversed.
just like the fed .. they have a spackel and paint business,, they use paper .. to plug the holes and cover up the problems
"A little putty, little paint, make is something that it ain't".
Hey Leo,
I was bankrupt and almost lost my home, in fact I was about to lose everything, but fortunately my neighbor invested 100k in my " so called business" and I strutted my stuff around the neighborhood and pretended like I was the king of the hill again. Now 5 months has passed and the Sheriff is back serving me foreclosure papers and I have to leave the house everyday at 5 am to avoid the neighbor because I don't have any money left to make the interest payment on his great investment. Could you lend me some money to get through the next six months? I really would like to throw a party for the neighborhood and maybe even upgrade the Benz? I'll pay you back, really I will, I have a new plan for the Biz I would like to present to you , It is good...No really, this time I'm gonna hit the jackpot... Oh by the way if you were wondering, I have a spackel and paint business.
This is one of those articles you could legitimately critique from any number of directions. I think I'll cut out Bianco's forecast and tape it to one of the walls in my office to read again in February 2011.
Many, many generalizations based solely on the pattern of prior recessions, each of which had some reason for serving as fertile soil for further growth, especially aided by Fed easy money, "credit bubble" policies. This sort of thinking is just Greenspan speak circa 2001.
Not biting here, Leo. Sorry - this is just plain wrong. I'll buy your market up theory for other reasons if you like: QE, market manipulation, and creeping currency crises, yes even in the US. But robust furndamentals? Where are the jobs coming from? What industry groups are pulling us forward, rather than us stealing from the future to fund "stimulus" now.
The pump don't work cause the vandals took the handle.
So Leo, the following are 25 questions to ask anyone who is delusional enough to believe that this economic recovery is real….
#1) In what universe is an economy with 39.68 million Americans on food stamps considered to be a healthy, recovering economy? In fact, the U.S. Department of Agriculture forecasts that enrollment in the food stamp program will exceed 43 million Americans in 2011. Is a rapidly increasing number of Americans on food stamps a good sign or a bad sign for the economy?
#2) According to RealtyTrac, foreclosure filings were reported on 367,056 properties in the month of March. This was an increase of almost 19 percent from February, and it was the highest monthly total since RealtyTrac began issuing its report back in January 2005. So can you please explain again how the U.S. real estate market is getting better?
#3) The Mortgage Bankers Association just announced that more than 10 percent of U.S. homeowners with a mortgage had missed at least one payment in the January-March period. That was a record high and up from 9.1 percent a year ago. Do you think that is an indication that the U.S. housing market is recovering?
#4) How can the U.S. real estate market be considered healthy when, for the first time in modern history, banks own a greater share of residential housing net worth in the United States than all individual Americans put together?
#5) With the U.S. Congress planning to quadruple oil taxes, what do you think that is going to do to the price of gasoline in the United States and how do you think that will affect the U.S. economy?
#6) Do you think that it is a good sign that Arnold Schwarzenegger, the governor of the state of California, says that “terrible cuts” are urgently needed in order to avoid a complete financial disaster in his state?
#7) But it just isn’t California that is in trouble. Dozens of U.S. states are in such bad financial shape that they are getting ready for their biggest budget cuts in decades. What do you think all of those budget cuts will do to the economy?
#8) In March, the U.S. trade deficit widened to its highest level since December 2008. Month after month after month we buy much more from the rest of the world than they buy from us. Wealth is draining out of the United States at an unprecedented rate. So is the fact that the gigantic U.S. trade deficit is actually getting bigger a good sign or a bad sign for the U.S. economy?
#9) Considering the fact that the U.S. government is projected to have a 1.6 trillion dollar deficit in 2010, and considering the fact that if you went out and spent one dollar every single second it would take you more than 31,000 years to spend a trillion dollars, how can anyone in their right mind claim that the U.S. economy is getting healthier when we are getting into so much debt?
#10) The U.S. Treasury Department recently announced that the U.S. government suffered a wider-than-expected budget deficit of 82.69 billion dollars in April. So is the fact that the red ink of the U.S. government is actually worse than projected a good sign or a bad sign?
#11) According to one new report, the U.S. national debt will reach 100 percent of GDPby the year 2015. So is that a sign of economic recovery or of economic disaster?
#12) Monstrous amounts of oil continue to gush freely into the Gulf of Mexico, and analysts are already projecting that the seafood and tourism industries along the Gulf coast will be devastated for decades by this unprecedented environmental disaster. In light of those facts, how in the world can anyone project that the U.S. economy will soon be stronger than ever?
#13) The FDIC’s list of problem banks recently hit a 17-year high. Do you think that an increasing number of small banks failing is a good sign or a bad sign for the U.S. economy?
#14) The FDIC is backing 8,000 banks that have a total of $13 trillion in assets with a deposit insurance fund that is basically flat broke. So what do you think will happen if a significant number of small banks do start failing?
#15) Existing home sales in the United States jumped 7.6 percent in April. That is the good news. The bad news is that this increase only happened because the deadline to take advantage of the temporary home buyer tax credit (government bribe) was looming. So now that there is no more tax credit for home buyers, what will that do to home sales?
#16) Both Fannie Mae and Freddie Mac recently told the U.S. government that they are going to need even more bailout money. So what does it say about the U.S. economy when the two “pillars” of the U.S. mortgage industry are government-backed financial black holes that the U.S. government has to relentlessly pour money into?
#17) 43 percent of Americans have less than $10,000 saved for retirement. Tens of millions of Americans find themselves just one lawsuit, one really bad traffic accident or one very serious illness away from financial ruin. With so many Americans living on the edge, how can you say that the economy is healthy?
#18) The mayor of Detroit says that the real unemployment rate in his city is somewhere around 50 percent. So can the U.S. really be experiencing an economic recovery when so many are still unemployed in one of America’s biggest cities?
#19) Gallup’s measure of underemployment hit 20.0% on March 15th. That was up from 19.7% two weeks earlier and 19.5% at the start of the year. Do you think that is a good trend or a bad trend?
#20) One new poll shows that 76 percent of Americans believe that the U.S. economy is still in a recession. So are the vast majority of Americans just stupid or could we still actually be in a recession?
#21) The bottom 40 percent of those living in the United States now collectively own less than 1 percent of the nation’s wealth. So is Barack Obama’s mantra that “what is good for Wall Street is good for Main Street” actually true?
#22) Richard Russell, the famous author of the Dow Theory Letters, says that Americans should sell anything they can sell in order to get liquid because of the economic trouble that is coming. Do you think that Richard Russell is delusional or could he possibly have a point?
#23) Defaults on apartment building mortgages held by U.S. banks climbed to a record 4.6 percent in the first quarter of 2010. In fact, that was almost twice the level of a year earlier. Does that look like a good trend to you?
#24) In March, the price of fresh and dried vegetables in the United States soared 49.3% - the most in 16 years. Is it a sign of a healthy economy when food prices are increasing so dramatically?
#25) 1.41 million Americans filed for personal bankruptcy in 2009 – a 32 percent increase over 2008. Not only that, more Americans filed for bankruptcy in March 2010 than during any month since U.S. bankruptcy law was tightened in October 2005. So shouldn’t we at least wait until the number of Americans filing for bankruptcy is not setting new all-time records before we even dare whisper the words “economic recovery”?
Now Go Away and pray the Euro/China thing doesn't get evicted and end up on your door step looking for a place of safety, cause your house can't feed the people it houses NOW
In the words of Nigel Tufnel, "Well, that's just nitpicking, now, isn't it?"
Expecting Leo to respond to that is like watching Ben Stein call, "Bueller?....... Bueller?........"
They don't care. They all have their fortified islands to fly away to with all the loot when TSHTF
Awesome!!!!!!! Ultimate SMACKDOWN, but somehow I bet CNBC could spin everyone of these positively. Wait I am sorry they already have. By the way on the subject of gold Denninger is a DOUCHEBAG!
#26) The Fed balance sheet is polluted with bad assets of the private sector. Plus, people are waking up to this and demanding an audit of the central bank. However, much like a Twilight Zone episode, the central bank pleads that the economy will be destroyed if the media and general populace finds out who has been bailed out.
My feeling is that an audit is sunlight on this corruption.
If you don't think that you or your children should be liable for this corrupt, corporatist government click below.....
http://en.wikipedia.org/wiki/Odious_debt
Yes Maiden Lane I, 2, and 3 is a complete sewer line running from the banks and big business to the cellars of the Fed. Uncover that and its the ball game OVER for the Whores of Broad street
It will never see the light of day- cannot - will not - ever.
#27) Simon Cowell is leaving American Idol. AI will now become unwatchable sending millions of Americans into a deep malaise. Worker productivity will decline as a result, hitting American corporations where it hurts.
#28) Jack Bauer is done saving the world!
@Mental
Damn, bro. This is an exhaustive list of our woes. But years from now we will hear, "Whocoodnode?" Well done. The facts are there for anyone who cares to know.
I'd love to make a hardcopy of your list and use it to smack anyone upside the head who claims that things are going well!
Excellent compilation!
You could print it out and glue it to a 1 X 12 and then lacquer it...that would give you a good whacker.
Mr. Mental
Do not introduce facts to Leo- it just confuses him.
Bring on the nekkid wimin, Leo!
In this argument, I'd rather short long dated treasuries than go long equities.
Once again, Leo, you manage to masterfully focus on and analyze several select trees, while failing to notice or acknowledge the forest of which they are just a small part (and which, curiously, is the same modus operandi of a certain infamous Kitco goldbug-baiter).
So laughably blinkered, short-sighted and outright absurd are all of Leo's posts, that I am coming to the conclusion that "Leo", as an individual, does not in fact exist, but is just a sockpuppet purposely inserted here to generate controversy and debate ---- "rage bait" if you will.