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Ripe for a Sustainable Bullish Turn?
It was a hot and beautiful day in Montreal. I met up with my former supervisor at the Caisse, Mario Therrien, who last year was appointed Senior Vice-President, Fund Management, with the Private Equity group.
It
had been almost seven years since I last saw him, and I was glad to
hook up with him again to talk markets, alpha, hedge funds and private
equity. Mario is a smart guy who reads a lot on markets and politics. He
understands alpha and he's very well connected with key players around
the world. Talking markets with him is always fun.
Mario also
offered me one of the most exciting jobs I've ever had. I was
responsible for a portfolio of directional hedge funds (L/S Equity,
global macros and CTAs) and learned a lot conducting investment,
operational and risk management due diligence. But what I truly loved
was sitting down one on one with top hedge fund managers and picking the
minds on everything from which sectors they're investing in, to where
they think bond yields are heading, to which trends they're following.
The
toughest part of that job was the grueling travel schedule, not having
full control of the portfolio, having to trust your managers when things
were shaky, and knowing when to pull the plug when performance was
simply not up to par. But it was an incredible experience and if I had
to do all over again, I wouldn't think twice about it. Of course, with
my MS progressing, crazy travel schedules are not easy. That part of it I
don't miss.
Anyways, Mario gave me a lot of food for thought. We
talked about how crazy things got in the last few years, the "new
normal" and how the landscape has changed for hedge funds, private
equity funds and pension funds.
On pension funds, I told him the Fed has no choice but to bail them out
and he told me that the "trend towards immunization among G7 pension
funds" has contributed to lowering bond yields to historic lows.
"Pension funds are lowering their beta, cutting exposures to equities,
shifting assets into bonds, liquid hedge funds, and some private equity."
[Note: I agree with Mario,
illiquid, hard to understand hedge fund strategies, including black box,
super funky quant strategies, are out. Investors are increasingly
demanding that managers explain the rationale behind positions, and
they're not going to pay 2 & 20 for leveraged beta.]
Why are pensions immunizing their portfolios? According to Mario, "Most
mature pension plans are suffering severe pension shortfalls. They
simply can't afford to be ravaged by another bear market which will
force them to increase contribution rates. A lot of pension funds are
now focusing more on protecting downside risk."
Post 2008, the mindset has
changed and big players are focusing more on risk management, especially
managing liquidity risk. Michael Sabia, the Caisse's President &
CEO, talked a lot about risk management on numerous occasions and the
Caisse devoted an entire section on it in its 2009 Annual Report.
Unfortunately, Mr. Sabia and his senior managers still have to deal with petty Quebec politics. The Caisse recently had to categorically deny misleading allegations by one of Quebec's powerful public sector unions who questioned the Caisse's mid-year stellar results.
But
one thing that worries me is that all this focus on risk management,
immunization, is leading pension funds to not take enough risk, and many
of them will be caught off guard. Remember, when everyone is hunkering
down, worried about the next Black Swan, then you have the potential for
a sharp rally.
I am wondering if this is happening right now.
Too many pension funds and other institutional investors underweight
equities might suffer another bout of severe performance anxiety
and are then going to scramble chasing stocks higher. I spent the last
couple of weeks going over what the top hedge funds were buying and
selling in Q2, and something tells me they're well positioned for any
sharp, bullish reversal.
On this last point, read Chris Ciovacco's latest market comment, Markets Appear Ripe for a Sustainable Bullish Turn. I quote the following (but read his entire comment carefully):
Early
September is very important for the financial markets; especially for
the bulls. Numerous elements are in place for a rally to take hold now.
The markets have been weak and the bears have been in control. If the
bulls cannot make a stand soon, it will be a bad sign for risk assets.
The good news for the bulls is several factors, across numerous markets
and asset classes, are pointing to a possible rally in risk assets:
- Bearish sentiment is high at the moment. Sentiment, especially as it approaches extremes, can serve as a contrary indicator.
- The
Fed has signaled they are willing to print more money if needed.
Right, wrong, or indifferent, the markets are anticipating more quantitative easing
from the Fed. The Fed's next meeting is only three weeks away.
Markets look forward. A rally in risk assets for a few weeks is not out
of the question.
- Currency and
interest rate markets are acknowledging the possibility of the Fed
cranking up the printing presses. In recent weeks, the U.S. dollar and
the 10-Year Treasury have been firmly in the bears' camp, but they are
sitting near logical points of reversal. Recent rallies in the
10-Year Treasury have been showing signs of fatigue, which also points
to a possible reversal in interest rates.
- Better
than expected manufacturing data from China and better than expected
growth in Australia have been reflected in the copper market.
Emerging market stocks closed yesterday at a logical point of reversal;
this morning's news from China and Australia could spark a rally.
- Despite
weeks of disappointing news on economic progress in the United States,
the S&P 500 and Dow have yet to revisit their June lows, which is
hard to believe given the recent lack of interest from buyers. When
markets do something you do not expect, it is time to pay attention.
- Monday's
sell-off appeared to be a win for the bears, but unlike recent down
days for stocks, total market volume contracted relative to the volume
during Friday's Fed-induced and broad-based rally. The S&P 500 and
Dow have both held at logical reversal points.Since
a picture is worth a thousand words, we can show most of these
concepts on the charts below. When you examine the charts, ask
yourself, "Based on the actions in the past from market participants,
is it logical for this market to reverse near current levels?" If the
answer is yes, then the next thing to look for is some confirmation
from the markets, which can come in the form of market breadth
(advancing issues vs. declining issues), volume, and whether or not a
broad cross section of markets are moving in the same direction
(stocks, commodities, interest rates, currencies, etc). This analysis
was completed after Tuesday's close (8/31); so none of Wednesday's (9/1)
gains are reflected.
Finally, let me thank Mario again for lunch and his book recommendation, Steve Drobny's The Invisible Hands: Hedge Funds Off the Record. My recommendations to him and my readers are Yves Smith's ECONNED and Graham Turner's No Way to Run an Economy.
Both books are excellent and well worth reading and they remind us that
financial and economic risks don't just happen by accident - more often
than not, they're the product of defunct economic theories.
»
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Leo, you said that the FED has no other option than to bail pension funds.
Sooner or later the FED will have no other option than bail everything. Countries, funds, banks, people.
Then the system will colapse.
This is the ultimate kill for the keynesian theory of economics. The debt-based system will fail. I could give you a million reasons why, but you already have more than necessary in ZH.
Yeah, but Sheep, Leo creates an opportunity for really smart guys like us to take his work apart. But it's more satisfying to do it in detailed specific terms; just trashing him in general doesn't have much of a pay off. Personally, I like to show off my brilliance, and I'm going to one of these days.
Leo's articles have no place on Zerohedge, theyre complete rubbish and the excuse that he's 'balance' is just stupid.
Leo's are more right than the David Rosenberg predictions you see every day, where the S&P will go to 450.
I read Leo's post and I see very sophomoric market timing analysis and I see the hope of QE and that the Fed will have no choice but to bail out pensions, etc. In other words, Leo is arguing the same old story, that rampant easing and stimulus will somehow induce a recovery.
This is my problem - that we continue with the line of flawed ideology then Leo is running with here. What is actually happening is simple - more bailouts and more easing will only prop up the bankers - the pensions them selves will actually never pay out what they are supposed to. They will all get crammed down in the end, but not before yet another round of treasure is put into the bankers hands in the name of bailing them out.
Meanwhile, the bailout culture will continue to destroy the bind between creditor and debtor, thereby guaranteeing that credit will not recover for years and years.
Might there be another DOW upturn? Sure. It will only matter to bankers and robo-traders, not Main Street, except for the fact that the Mighty DOW will continue to fool people about the true state of things while the foundations are eroded even further and more treasure is stolen from our children (and our parents, Leo's concern for pensions notwithstanding).
ex VRWC
I tend to agree with Leo on this one.
Global investable assets are now back upwards to the 100 trillion mark, with pension assets increasing from 20 to 23 trillion in the past 12 months. Much of the rebound is coming from richer BRIC people. That money has to go somewhere.....Simple supply and demand as the global supply of money to invest is chasing safer assets. That banks are artificially pumping markets is of no worries to the asset manager, quite the opposite. I am extremely bearish on the economy but quite bullish on the markets and the value of USD to other currencies. The economy and the markets haven't been connected for a long time.
Bad news is all out there now, home sales up, market's going much higher!!
I join the thought for a bullish turn. Bend Over Benny and Big O are going to stimulus bomb the economy with unspent funds. This will do damage after elections, which is all that matters.
I appreciate the divergence of opinions on this site Leo. Even if many people don't. I agree that we could get a decent bounce in risk assets, my problem is with the "sustainable" part in your posts heading. Given all macro indicators to the contrary, I think that any rally is going to be short-lived. There just doesn't seem to be anything that would indicate the possibility of long-term growth, and without it I think it's unrealistic to assume you can get an unfettered rally for any prolonged period of time.
I concur with most of this, they will buy the market up to the Fed meeting and probably sell the news. QE isn't going to be as spectacular this time around. But seriously Re-Fi mortgage traffic in SoCal is taking off. That means the consumer stocks should do pretty well, this is an election year, and Santa Obama is going to deliver. The Grinch-publicans are trying to shove coal into everyone's stocking. AND a hell of a lot of people are getting on SSN, which means more stimulus money into the economy. Its all good, at least for a while.
Leo,
It is my belief that we are way past bears/bulls controlling anything. There is one thing, and one thing only that would sustain a rally. That is by far the retail investor. Now everyone says retail will return when there is "faith" in the "markets", but first and foremost retail needs income to invest. For now with new orders falling, we will needs less workers, which leads to less being invested. Neither the bears nor the bulls control anything in this market. They are both at the whims of the retail, which lost faith in the system (and rightfully so). We need a major credit contraction to take place, without us trying to fight it as there are too many "synthetic" bets out there, which are truely creating money out of thin air. Once our credit comes back to sustainable levels, then, and only then, will the retail return. The sad part is, once the bond bubble bursts, I fear the investing overall will disappear in all aspects. People will only save under the mattress.
This business is all about time, and timeframes. I'm likely trading setups in longer timeframes than Leo, so I would not follow his strategy. However, if I were shorter-term, I would agree with some of his perspectives.
The market (so-called these days) will validate.
If Earl takes an unexpected left turn at Manhattan, will that be good or bad for stocks?
Earl needs to stay out in the suburbs, you know about Broken Window Economics? Earl will break thousands. Ka Ching!!
Very bad. Sell, sell, sell. But wait til Cramer concurs.
But maybe, just maybe, Wall Street will be flushed of all it's toxins ready to start anew...Especially if Earl does a quick house call in Washington first...
Wishful thinking....I know...
Leo,
If a child is raised to believe in Santa Claus and he tells a friend that he is real, is it a lie?
My 6 year old neighbor asked me last December 23rd where I was headed.
I told him I was going to the store to pick up some last minute stocking stuffers for my wife without even thinking about it since I have no offspring.
He said "Why? Santa will bring them for her unless she was bad. Has she been bad?"
Easy to forget who needs to hear which *lies* when you don't have to *lie* all the time.
http://www.youtube.com/watch?v=sxBl9BXLom4
Fair value? ...equities are signalling a rebound, nothing else is; railroad activity- that's been good. Otherwise, we're looking at a collapse in public spending as well as Consumer spending. ...that's the Macro-truth. Equities look oversold, but only compared to prices we've seen over the last year, when we've been pretending there's no piper to be paid- the range is (mainly) behind us. Technical analysis on this needs a long time-frame, after all this these are the stormy 'months'. ..I don't think the immunization is purely due to 'equity price concerns, more so dollar concerns: China's supporting the Euro -in direct contrast to supporting the dollar. And the US economy is performing better than expected, pulling the dollar up...the rise in equities has pretty clearly defined the sensitivity of that see-saw ( USDSEK)..UCIT vehicles may be priced in dollars, I don't know. There's uncertainity going forward which the FED is using as a tool, fair enough. But it's a tool that can only cloud perception, the fact is there is either too much money in the system, or the interest rates are too high. China would probably refrain from exposing itself to European Bonds, partly because there isn't much leverage in it. A fall in the stockmarket would be such a drain, if that's not going to happen, then it has to be a fall in interest rates- and the only space left there are credit card and mortgage finance. ...that's a crushing defeat for the system of financial enslavement upon which almost any politcial system is maintained... that's your second coming - although, personally, I find it slightly anachronistic to suggest that Jesus ever left. The stakes here are high: and this isn't the difficult part, keeping peace among the people, that will be difficult.
"Too many pension funds and other institutional investors underweight equities might suffer another bout of severe performance anxiety and are then going to scramble chasing stocks higher."
True, but on balance, equity funds have record low cash levels according to Ned Davis Research. they haven't had less cash available since 1975 or so. So the supporting flows are likely to be due to allocation changes from more flexible mandates(bonds --> equities) and not "money on the sidelines" necessarily.
Personally, I think we will move up a bit further, relieve the oversold condition completely and then head lower and break 1040 and 1010 as the macro data deteriorates. In my opinion, Nic Lenoir has been spot on lately, and I will take his advice and get short around 1090-1100. Getting short mid-range (1040-1130) makes me uncomfortable. But the next big move is probably to the downside.
Leo -
Heard a pump on Chinese solars yesterday . Checked out the various stocks. Charts say yeah you may have made money if bought at right time . Hope you have . I think the equity markets will really like QEII - whether overt or covert. Hey , more interest free money to throw at stocks . Pension funds have not yet swung 180 from their booya booya days . Starving for yeilds will not be enough for fear of being in the bread line just yet . I am in the camp of commodity hyperinflation , and am investing there bit by bit . Also did not know you had MS . Maybe I'll be nicer considering your good attitude in all that and your being bashed continually here . A coin has two sides doesn't it ?
Leo, please post a picture of yourself when you become wheel chair ridden so that we can make fun of you drooling, just like Stephen Hawkins. I can't wait. TrippleCrippled FUN!!!
Well, you both are absoluteley right. Sometimes I can go too far, but I just tried to edit/delete my post but there was no option for me to do this. It just dissapeared. Advice?
If you are sincere, go to each of the posts in question and apologize there. That way if a reader sees it earlier in the thread, they know what is going on. They may not read the whole thread.
Me, this is such an about face, I don't even believe you yet and I am waiting for some kind of troll headfuck to come out of you because the comments were so outrageous that I can't imagine you really give a shit now.
You cannot edit once someone replies to your post.
So your stuck with your sour comments.
Good of you to apologize though.
Almost makes up for that poo that came out of your piehole.
If that comment was not tongue in cheek, you should be ashamed of yourself. If I am misinterpreting your remarks, I apologize. If I am not, you should act like a human being and apologize to Leo and the ZH community.
Disagreeing with Leo's viewpoints and prognostications is one thing (I often do--although he knows a lot more about the subject than I ever will), however, making fun of his personal tragedy is contemptible. Using the anonymity of the Internet to joke about the illness of someone who posts here to share, gratis, his knowledge and expertise (regardless of what you think of his opinions) is both cowardly and unkind.
Best wishes, Leo, as you fight this battle. Those of us who have faced similar struggles both understand how much courage you exhibit by continuing to be a productive person in the face of overwhelming misfortune and admire your perseverance.
Thanks Invisible Hand, I appreciate kind comments like yours and only ask that people refrain from making fun of my illness. There are limits to the type of abuse one should endure on the internet.
Hey Leo. Is it ALS?
No crosey, it's MS. ALS is a devastating neurological disease where most people die a few years after onset. My MS has progressed over 13 years, but very slowly. I can still walk (with a limp) and count myself lucky.
The one good thing about MS is that you can get medical marijuana if you want!
My dad has beginning stages of MS himself.
I'm sorry to hear that.
You're in my prayers. Thanks for staying classy.
Okay....a prayer said for you, then.
By the way, sorry Leo.
Apology accepted.
You have an illness?
I'm sorry to hear that. I did not know, previous to this discussion.
http://en.wikipedia.org/wiki/Multiple_sclerosis
Mr. Kolivakis, that was an act of pure class. You are a stand up guy, a gentleman and a scholar.
What's with the total ignoring of fundamental debt loads. More debt, more debt, blah blah blah.
Is there no end to the insanity?
Without QE the CBOE is pointing to a rally ending Sept 30 - Oct 15.
With QE it could go into Spring 11.
Ripe for a Sustainable Bullish Turn?No. No. No. No. And no. Mark it down. Call me on it when you're through with all of this glass is 3/4 full nonsense.
Leo...
Sit down on a stool and take both hands and put them down your pants. Preferably, your right hand should grab your right nut, and your left hand, the left one. You can try crossing your hands for extra effect.
Now... you need to decide which nut you are going to squeeze first, followed by the next one until both of them are ruptured and gone. The right one - which is multi-trillion dollar deficits... or the left one which is USD implosion? Pick one.
We have almost zero interest debt competing with the stock market, an ongoing flattening of the yield curve, QE2 in lift off mode, and government debt starting to be financed in shorter durations. The Chinese are moving out of USD debt, they are sitting with vacant cities that they've built and a real estate bubble about to explode. The PIIGS roast will be back this fall and Chartists (not only Precter) are predicting the descent of the Dow to below 5000 and the S&P to 450, from sometime this fall until 2012. Gold and Silver have decoupled from historical movement of the USD and crash month (October) is coming shortly. We have also had 5 confirmed Hindenburg Omens in the last 3 weeks (a metric that some of us actually heard of several years ago).
Do you really think pension fund managers are going to stick their necks out for some short-term returns in this environment. It's not a question of having balls... it's a question of making sure they don't have balls in this environment.
But I digress... now back to your situation in hand. Start to squeeze. Either way, it's going to hurt and you'll be better for it when they're gone.
Leo -
I didn't realize that you are suffering from a serious illness. My gory attempt at humor regarding your article was just that - sick humor.
I hope you got a laugh at my words.
With respect,
web bot
Do you really think pension fund managers are going to stick their necks out for some short-term returns in this environment
Are you <bleeeeep> kidding? Do you really, after all this time, believe that fund managers gives a rat's arse about the funds performance and the risks they take with the clients money? It's all about meeting the objectives that will yield the largest bonus. If the fund blows up, so what? Its not the fund managers money that is at stake; its just a job - a better, cushier one will be provided.
There will always be openings for agressive fund managers - as long as they can sell the fund, Its On!
And all the five hindenberg omens did was precede a bull rally.
Much like the much talked about H&S pattern that Cramer was screaming about before the rally.
S&P to 450 is nonsense, and so is Prechter.
We're in a 1994 like situation in the markets now, where things go flat to slightly negative, before the economy can grow again.
All your other scenarios for why the world will end are speculative.
People have been screaming that the sky will fall for three years now.
And yet, the sky remains, and things are getting better.
you know the old adage..
"hire a teenager, while they still know everything.. "
"Fire an old man, before he gets set in his ways and senile, while having an unrealistic view and erectile dysfunction!"
LOL
We've had 29 Panic buying/selling days over the last 90 days. That is nearly 1/3 of everyday. We haven't seen anything like this since.. August 08.. oh and Sept 87. It's not a matter of if but when. I see this rally continuing until the next Phi date on 9.11.10. We test 960 after that.
The sky almost did fall in 2008, Money Markets broke the dollar, LIBOR OIS blew out, WAMU, BoA, and Wachovia all imploded worse than Enron.
Wait until FASB changes the rules on Operating Leases. That will just be the beginning.
Your timeline is the tip of your nose. Good luck if you think we are in a rally. Anyone with any sense can see that this trajectory is unsustainable. What's the plan to balance the budget? How long can this trillion dollar press continue to operate?
Things are getting better... ya, right. Let's come back late October and see where the market is at.
I agree. The rally may be short-lived.
There are two things about the current rally though.
One: it exists, and it's happening right now
Two: you can't take advantage of it by having a clouded, pessimist view consistently.
As far as the future goes, I don't see anything remotely like S&P to 450 in the future.
it just won't happen. If it does, then I'll make money being short while it happens.