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Guest Post: There's Nothing Good Here
Submitted by Chris Pavese of Broyhill Asset Management
There's Nothing Good Here
The Investment Team at Broyhill huddles
up at 6.30AM every Monday Morning, to review market action, various
measures of sentiment, and portfolio positioning, to name a few. For
the two hours leading up to our Morning Macro Call, we scan dozens of
charts, pour over piles of data and review all of the models critical
to our investment strategy. Notes from our meetings are distributed
internally and reviewed in aggregate at our Monthly Macro Meeting.
We’ve noted a significant shift in the
investment landscape over the course of the past few weeks, so we
thought we’d share this morning’s Views from the Blue Ridge:
There’s Nothing Good Here
As we entered 2010, our work suggested
the continuation of the reflation trade during the first half of the
year alongside of rising coincident indicators and increasing
inflationary pressures. While risk assets are clearly overpriced,
we’ve moved slowly to reduce exposure until now, as we did not
anticipate a sharp correction until leading economic indicators clearly
rolled over.
That was our read of the tea leaves
heading into the new year. Our investment posture, however, does not
rely upon market forecasts or predictions. Instead, we take our
evidence as it comes and make adjustments accordingly, rather than
stubbornly holding on to an outdated hypothesis. As John Maynard
Keynes stated, “When the fact changes, I change my mind. What do you
do, sir?”
Suffice it to say, that the facts have changed. We’ve provided a brief summary of John Hussman’s recent Market Comments below, which we feel best illustrate this shift in investment climate:
Despite the
recent decline, the Market Climate remains characterized by overvalued,
(intermediate-term) overbought, overbullish and rising-yield
conditions. Having broken an uptrend that has been largely intact since
March, as well as a sideways range of support established over the past
few months, the natural tendency of the market after such a break is to
recover back to the point of prior support, so we should not be
surprised if the S&P 500 enjoys a sharp recovery rally modestly
above the 1100 level, even if the recent correction has further to go.
If we observe a “recovery rally” of poor quality from the current
short-term oversold conditions, we would be inclined to move to
aggressively toward our “Safe Portfolio.” Importantly, recent market
action has historically been associated with a moderate continuation of
upward stock market progress and a tendency to make successive but very
marginal new highs, typically followed by abrupt and often severe
market losses within a time window of about 10-12 weeks.
The uptrend since the March low can be
seen on the weekly chart below. Of equal importance is that the
market’s Price Momentum is very overbought and rolling over through its
10 EMA.
Source: DecisionPoint.com
The market’s “sideways range of support” is also shown on the daily
chart below. You can clearly see the break below 1100, which should
now become resistance.
Source: DecisionPoint.com
Internal weakness is also confirmed by the following charts with
comments in blue from the January 29, 2010 Weekly Chart Blog at The Chart Store:
A. Percent of stocks above their 200 DMA rolling over;
Source: TheChartStore.com
B. MACD has stalled and clearly rolled over;
Source: TheChartStore.com
C. Unfortunately, we are a long way from support
Source: TheChartStore.com
Portfolio risk is elevated as the
“market call” drives all asset prices. Coincidentally, deterioration
can be seen across asset classes year-to-date:
A. Credit spreads
ticked up from extremely low levels given the macroeconomic risks
dominating the investment landscape today;
Source: TheChartStore.com
Source: TheChartStore.com
B. Dollar strength
may be interpreted as a resurgence of deflationary pressures. Similar
“Red-Flag Reversal” (MACD crossover) was last seen in early 2008;
Source: TheChartStore.com
C. Dollar strength predominantly expressed through a weakening Euro; More on this and other sovereign risks in the Broyhill Letter;
Source: TheChartStore.com
The Tape moved from bullish to
neutral – has cracks, but isn’t broken yet. Given the massive
underlying risks from a macro perspective, it is prudent to leave the
last ten percent for the next guy.
Short-term timing model is also neutral
now. Watch closely for a “sell” signal, as this would mark the first
from the March lows. Percent of stocks above their 10-Week MA and
40-Week MA shows weakness across our Global Composite. Percent of new
highs versus new lows is approaching it’s first ‘lower-low’ in almost a
year. This is a major reversal of a rising trend in new highs since the
October 2008 “panic lows.”
Money supply growth is declining,
perhaps as deflationary forces are taking hold again. Last year’s
surge in the monetary base drove the broad based reflation in risk
assets. Investors should ask themselves, what will support stocks
going forward?
Source: Business Insider - Clusterstock
Growing red flags in the commodity space.
Commodity Model moved to neutral for
the first time since the rally started. Internal model has clearly
rolled with external model starting to turn down as well. Equity
weakness in the materials sector is also pointing toward risks to
commodity prices. We are still long commodities b/c inflation is still
rising and historically, commodities have done best at this point in
the cycle. But when CPI rolls, run for the exits!! We are rigorously
revisiting all of our exposures here and reviewing our thesis given
underling weakness in the face of what should be cyclical strength. Is
the market already looking forward to a declining CPI in the H2-10 and
the return of deflation?
Equity sentiment has gone from euphoric to optimistic levels, while the supply/demand story is ending.
At the same time, pessimism in treasury
markets remains rampant, with over 80% of those surveyed looking for
yields greater than 4% in 2010. We were looking for 4.25% before
buying the long bond, but we may not get there, if sovereign risks
overshadow improving coincident indicators.
The Dow has continued to fail at the downtrend which started back in 2007 . . .
At the same time the S&P is reversing course . . .
Watch the Yen/Euro Cross for an
indication of investor’s willingness to assume risk. This picture is
not pretty today. “There’s nothing good here,” except for the
potential for a short-term bounce from oversold levels.
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The RBA's decision to keep rates on hold smells of poo & it's leaving an eerie backdrop for today's market action in the US. I'm watching gold closely for any signs of a head fake as all the sudden King Dollar might be swinging the next punch.
Australia has the most overpriced real estate in the world and household debt beyond compare. It has obviously benefited from the China syndrome, and now the China "hoarding" of commodities. Down there, they actually think this is a real resurgence in global demand, and it feels like it as people are getting jobs again, unemploymnet is low, wages are high etc.
Hanging by a thread however, I keep telling them. Get out of real estate NOW if you are in Oz. Diversify your currency at this level too.
good luck with telling them, read comments on US real estate blogs in 2005...."this time is different", "my region doesn't suck like yours" ...basically its people believing a general anti-gravity machine has been invented because they have seen some people flying in planes, and then they proceed to jump off cliff, knowing, firmly, that gravity is not a concern any longer...we may have means to overcome gravity at times, but it takes engineering, fuel, materials etc and its a constant battle to stay in air for short periods of time...not to mention terrorists...but must of us, day to day, are going to be earth bound...
From Sunshine Coast, QLD, Australia - I am surrounded by people who are geared to the eyeballs in real estate. At least 5 of our middle class friends owe 1-2 million dollars on multiple properties and are one salary or business hiccup away from default. It's still possible to get dodgy loans. I fear for my friends, who look at me as if I'm mad when I tell them to get out now. No one under 45 hasn't experienced a real recession here - 18 years of growth to date. Even my husband is wavering as we read media report after media report of 2009 housing prices rises of 10% to 17% in capital cities here. It takes a lot of faith when all around are living in la-la land. It's hard too, when our gold shares are taking such a battering at the moment. Thank god for Zerohedge, Jim Sinclair, Steve Keen (Australia's 'Mr Doom and Gloom' who gets trotted out for 'balance' in the media)and Karl Denninger who's good at presenting the maths in plain language.
So which stocks should I short?
Seriously... this looks like nothing but bad news.
The answer is yes. Why so picky?
Put options on GS. $150 of goodness on the way down.
Yes. I am the happy owner of many GS puts so Caveat Emptor
Short the ones that are most overbought.
You're welcome.
Better yet, watch CNBC and short any stock that Cramer tells you to BUY BUY BUY!
Does he even use the bear button? I watch him once in a while, just silently hoping for him to use the bear button on something, but EVERY stock that people call in on gets "I like this stock a lot. MOOOO!"
Stupid Cramer.
Silly, Silly Master Bates. The bear button was replaced with a second BULL button. This way he can double-fist slam them.
I wonder how much coke Cramer had to do to become and maintain his delusions.
Thank you.
Regarding commodities, what I think we are seeing in Copper is the unwind of the under-the-table carry trade in Chinese bank lending. Chinese monetary expansion in 2009 was massive, with the highest stimulus-to-GDP ratio in the world, and some of the money was bound to leak out to the rest of the world. Commodities were the mechanism for the leakage as Yuan is not convertible.
Chinese would borrow Yuan, buy copper, split the purchase price with the exporter and bank or invest the excess. This led to the massive rise in Copper and other commodities being stockpiled in China, well above any reasonable domestic demand.
Now the PBOC has clamped down on bank lending, is scrutinising overheated sectors like commodities for its inflation-busting strategy, and the unwind is going to be ugly. Some Chinese banks are actually calling loans, and refusing to roll over 3 month lending. If those holding stockpiles of copper are forced to liquidate into global markets, the crash in commodities could be very painful.
Think of it as the Yuan-Copper-Dollar Carry-Trade Unwind Scenario. (c) Anonymous 2010
Maybe it simply was Chinese business or speculators borrowing easy money, and since the yuan was tied to dollar, they engaged in simple speculation on various commodities, rather than intending to use the commodities. That may explain why the LME shows such big growth in stockpiles thruout 2009.
Look to the ''pizza spike''. That'd be the spike before say... the Iran trigger etc... Check the sector, check your 6, duck and cover may call out the obvious short before the storm, like the 911 airline short eh?
20 SMA and 2 Standard Dev. Bollinger is what to look at. The markets popped that and rode it down for a bit. Most bots are shooting at the 20 day-not the 40-50.
As John Maynard Keynes stated, “When the fact changes, I change my mind. What do you do, sir?”
well i continue to monitize the debt .. pour more debt. into failed policys ,, and will make a mockery of economic law. By continueing a flawed policy lol
Funds flee Greece as Germany warns of "fatal" eurozone crisis
Germany has triggered a near-panic flight from southern European debt markets by warning that there will be no EU bail-outs, even though it fears the region's economic crisis has turned dangerous and could prove "fatal" for the entire eurozone.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/709581...
And then there's Iran...
http://www.wired.com/dangerroom/2010/01/petraeus-missile-shooting-ships-on-station-in-the-gulf/
Haven't heard much at all about Iran lately. It's been vewy vewy quiet. I'll have to check that out. Thanks.
Excellent analysis thank you. With the fiancial situation of the US given what it is, and, given the new budget projecting upwards of 2 trillion in new debt, I find it impossible not to worry about the future strength of the US dollar.
I recognize that other currencies backed by other countries have some of the same problems, Japan comes to mind. High debt, burst bubbles, deflationary collapse, too big to fail, aging demographics, etc.
That being the case, with all the money that has been and will be created to service current and future debt, I can't get away from the notion that the prices of precious metals, an historical store of value, won't continue to outperform against all currencies.
The world seems set up for a series of private and public debt crisises, and currency crisises, over the next several years. To the extent that each of these crises triggers strength in the US dollar I would look to that as strength to be sold to get into commodities in general, precious metals in particular, or better currencies such as the Aussie, or the Swiss Franc.
Sounds like this excellent source of data will be useful to you:
http://www.firb.gov.au/content/Publications/AnnualReports/2007-2008/_dow...
Take note that it is a rather lengthy document, but you might want to turn your attention to pages 26-31 and 39. In brief, over the 2007/08 period roughly a quarter of FDIs in Australia were in real estate, and US interests make up a quarter of that (not taking into account mortgage-related services, if any). Sounds like high correlation risk.
Oh, and never trust the Swiss.
The whole Australian economy is ONLY built on commodity exports and real estate of which the latter as of this week now officially the most expensive real estate in the world to own. In essence the whole economy is just one big government sponsored real estate PONZI scheme. So if china being the main commodity purchaser ever decides to slow down purchases then watch out below as the whole scam comes tumbling down.
For those interested in a preview of this looks like then look no further than Jan/Feb 2009 when no one was purchasing her commodity exports the whole country came to a stand still and almost fell over. The Australian governments answer to re-inflating the whole system was to announce that it would double the countries population base via an open immigration policy and also double the first home buyers government grant as well as another 100+ billion in government spending all in an effort to keep housing prices from collapsing. Unfortunately for Australia almost all of it's citizens wealth is tide to the over-inflated housing market so this house of cards is looking top heavy from where i'm standing folks. If this happens then the Australian currency will come tumbling down as well and I mean in a big way folks.
Welcome to hyper-deflation.
Hold on to your cash, put your shorts on, get a few gold and silver coins ...
Then sit back and watch the great unravelling as the money supply disappears.
But ummm... inflation!!!!! I heard it on a goldline commercial. Gold, bitchez!
Just kidding. I wholeheartedly concur with your analysis.
Hyper-inflation should be good for the most levered equities... REITs, Autos, levered industrials.
Actually hyper-inflation should be decent for most stocks. If the iPhone is selling for $1,000 then AAPL is doing $20B/q in cash-flow.
Hmm... I'm buying.
These people(Isn't Broyhill the inventor of the barca-lounger?) make a compelling crayon case for a top. One huge point missing - filling the October '08 gap. It's going to happen, its above the recent top in many issues/indexes, and it will stop out all the shorts - again.
"has cracks"
For all the great detailed analysis in this posting, all Mr Pavese really needs to do is drive down Morganton Blvd. in Lenoir and see if any furniture plants have reopened. When they do, it's time to get heavily in the market. Until then, hedge your bets.
I don't disagree with the growing consensus that various worldwide crisis (currency/debt) will lead to a strengthening of the dollar. I do believe that the dollar will see a strong fairly long term rally in the next couple of years.
However, this is a paper dragon rally. The big players, China, Japan, Russia, Germany, et al, all know that US Currency is backed by nothing but a failing state run by compulsive liars and cattle rustlers. On the down low, everyone involved will be looking to that secret hedge, some form of stability in the midst of the titanic storm waves upon the ocean of world finance.
I have little doubt that that 'secret hedge' will universally be Gold and PM's and whatever other real commodities can be hoarded for a day without all the goddam rain.
-MobBarley
Dollar devaluation
http://www.financialsense.com/editorials/hera/2010/0201.html