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Russell Napier's Latest View On Equities, Credit, And The General Economy; Sees 30% Upside In Stocks
CLSA's Russell Napier is one of the more respected strategists out there. Which is why his latest outlook on various asset classes is required reading, even if we very much disagree with some of his "facts." In essence Napier is betting on a smooth inflation premise, which will result in a surge in stocks by 30%+ over the next 18 months, and a crash in bonds. As justification for the validity of his observations, Napier refers to CLSA's M3 proxy which he notes is starting to rise, and makes reference to such shadow economy indicators as ABS whose issuance he believes is picking up, indicating a return to a normally functioning credit market. Napier also cites the often misunderstood concept of capital on the sidelines, which for Russell means only one thing: "corporates are not using [cash] to repay debt so it will be used to the benefit of the economy or asset prices." So far this premise has been proven completely wrong, as corporations more than anything demonstrate a capital prudence in light of a regulatory environment which is very uncertain, and instead of exposing themselves to counterparty banking, companies are now their own banking centers. We don't see this trend changing any time soon, especially when one considers imminent changes to the tax code, which will make hoarding of cash even more difficult. Lastly, with gross profit margins (as Hussman pointed out) having just one way to go, and the result being a substantial drop in cash generation, companies will likely store as much cash as they can get their hands on. Nonetheless, Napier does bring up some useful observations, especially as pertain to rates. Full presentation inside.
One specific item that Napier is patently wrong on is his belief that the shadow banking system is renormalizing. A month ago we demonstrated that in Q1 the shadow banking system collapsed by a record $1.3 trillion.
Back then we said:
The decline in shadow banking liabilities (defined as
the total shares outstanding in money market mutual funds, the total
liabilities of GSEs, total pool securities in the GSE mortgage pool, the
total liabilities of ABS issuers, the total amount of securities loaned
by funding corporations, the total liabilities of Repo markets, and
total outstanding Open Market Paper: all of these can be found in the
Z.1) between December 2009 and March 2010 amounted to $1.33 trillion!
This was nowhere near even remotely offset by the $250 billion increase
in liabilities of Commercial Banks. The full detail of the collapse in
the shadow banking system is presented in the charts below.
And here are the visuals:
And the sequential change - this needs no further explanation:
Lastly, we completely disagree with the assumption that "corporate are cheap even with a double dip" - as Rosenberg has shown, a realistic estimation of EPS, coupled with a decline in GDP, would put 2011 S&P EPS in the 60-70 ballpark. The associated multiple for an economic contraction is about 11-13x, and lower, meaning that in a double dip, stocks have about 30% downside risk from here. Of course, all this assumes that the Fed will continue retaining control over capital markets. Should interest rates explode, it is game over for every asset class as that would be the dreaded gray swan.
So despite the acts of factual (c)omission, here are Napier's most recent thoughts: they serve as a good framework to see what equity bulls take for gospel, regardless of how many holes the argument ends up having.
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Hard to think of shorts when consumer names like Harley Davidson and Whole Foods are getting stronger, not weaker:
Unless the middle-class turned into the upper-middle class, I find it hard to believe people are buying up more Harleys (unless they're on sale, which you can easily find) and making more trips to Whole Foods during times like these.
Can we say consumption addiction?
Wow Robo, your financial acumen is so great that I am sure you would have made a killing in 1999...only to lose it all and then some by 2001. The entire market is behaving like a bubble and the needles keep moving in closer, we just don't know which needle will pop it first.
Again, let's look beyond today shall we....is it this hog? Looks more like an about to get stuck pick, actually.
http://stockcharts.com/h-sc/ui?s=HOG&p=D&b=5&g=0&id=p21428326423
Whoa there Robot!! You must have a GS algo program running thru you! Pull that chart chart out past 5 MINUTES and you will see HOG running into some serious resistance at 29. Smart money is leaving the ship!!
Seriously Robo, because if this WFMI chart gets you excited I am not sure you can look at those racy pictures you post without dropping dead of a heart attack.
http://stockcharts.com/h-sc/ui?s=WFMI&p=D&b=5&g=0&id=p41114303209
put the peddle to the medal baby...we are gonna burn the shorts....
I hate the government!
You would think the bump in H-D is directly related to their Union caving into to managements demands in regard to a reduction in labor costs that would keep the plant in Wisconsin open. I guarantee it isn't because more people are running out and buying Harleys. I work in this industry and sales continue to suck.
And Under Armor making new highs...
The consumer cannot be stopped from buying $70 - $125 workout outfits.
LOL....
I honestly cant believe people are wiling to spend 120$ on a jacket that u can get for 50$ or 50$ for a t-shirt you can get for 15$, this is madnes I tell you, madness!
I purchase Hanes T's for screen printing. My wholesale price is $ 2.10 each ...Lol'
come on! I expected at least one photo of a hottie in a wet UA workout outfit.
Seriously. What gives?
How about showing some semi's or steel stocks today. I can always find a sector that is doing well, and make an argument for the bullish side...
UA: Can we say blow off top boys and girls? Robo! Take profits brofus!!
No kidding...the last think I would want to be is long a questionable business model that has climbed the stairway to heaven on no volume on the day it gets to the "top"...that last sep is a bitch and could definitely take you on the fast track to hell. Based on its long term chart, if UA doesn't keep making new highs for no reason it's got now where to go but down.
http://stockcharts.com/h-sc/ui?s=UA&p=W&b=5&g=0&id=p56433090033
It's hysterical that it hasn't been this high since the fall of 2008. lol
If experts disagree when provided the same amount of information and data...then what makes them experts?
+1
oh yes, its the old "equity earnings yield vs treasury bond yield" argument.
OK, let's dismantle this.
1. Bond duration is 7 years. Equity duration is 50 years. They are not comparable in duration so they are not comaprable
2. The "earnings" is based on a forecast cyclical peak, not a normalized revenue and normalized margin. Unless you normalize the earnings then you get garbage.
My conclusion: This guy is a douche bag and should get a job at CNBS
Interest rates cannot rise appreciably anytime soon. A rise in interest rates would pressure housing prices further. This would cause more bank and consumer pain, and likely increase strategic defaults. Interest payments on Fed/Private debt would also rise. One objective of ZIRP is to reflate housing prices. But, with low demand/high supply, they cannot raise rates. ZIRP is a trap.
That would all be true if the future holds such a thing as a private mortgage market. Problem is, it is already dead, murdered by Fannie & Freddie, banksters extraordinaire.
The housing market is now utterly and completely a subsidiary of USA Inc. All future mortgage interest rates will be set by HUD, as they will be the ones tasked with doling out all of the government owned houses. (google S.1619 Livable Communities Act of 2009)
Just how much do you think congress critters care about ROI in dollar terms, when it is votes that are their premier currency? Hell, I fully expect to see negative rates for people within certain politically connected special interest groups.
Other than the mortgage market (and other favorite fedgov lending programs), interest rates will have to rise at some point, or there will simply be no more private debt market.
Of course, we could have both though. First kill the private market. Then choke off credit to the masses with higher rates, totally obliterating those holding large credit card balances with their new variable rates.
I fear you may be right.
Well the settles it I am going all in! I will be selling every real asset and buying stocks, where is that profit with cramer ad?
moves like this make me think of shorts...with bathing suits underneath, alternatively (for I have become Janus faced indeed) greenbacks and gold...strike me as items of concern--like we've just been handed the inverse of the 90's. in this context "an active treasury complex" seems, well...to be expected. So in this Hollywood Set don't we have to have an "Enter the Sandman" moment? It just doesn't seem right without him.
As long as the fed continues to print, the markets will keep going up... for every dollar, they can print a 90 more. The pace at which they have to print will have to keep going up as well. Until, confidence crisis hits.... this ride is climbing... This has got to be the tallest roller coaster in the world they are building.
The 'consumer' is, for all intents and purposes', a fool.
We have Bernanke and Geitner to thank for this. Long live QE. May there be a QE infinity. All hale our lord and savior Ben Bernanke.
Once again, people just looking at one side of the equation and seeing what they want to see. Most likely viewing things through the same lens as previous recessions/recoveries, and in the context of normal business and economic cycles. There is nothing "normal" against any modern reference here to describe corporate behavior - same reasons why most economists have missed the boat regarding consumer behavior. Going into the near future we have toxic mix of desparation and uncertainty that is going to have people and businesses paralyzed or making poor decisions.
and the result being a substantial drop in cash generation, companies will likely store as much cash as they can get their hands on.
Indeed! In other matters, the only suckers in the bond deals that have been finding demand of late are the buyers! These corps. are locking cash in for the long haul at rates small/medium business can only dream about. Props today go to Tony J. and Stevie S. for their $400 million for "general corporate purposes". All of the corporations raising cash are not doing so for growth!
There is no power great enough to stop this disintigration.
I go to this site sometimes to remind me of the systematic issues cascading, muni defaults, forced austerity, etc.
http://www.illinoisisbroke.com/newsitem.aspx?id=421 - some Illinois muni's having trouble making payroll soon...
Typical perma-bull who has no idea of the 'systemic' change that is occuring in developed countries....
30% upside would be about record Dow levels? Are you kidding me?
Possible. Plus much more. (as we go the way of Zimbabwe though).
POMO has passed its practicality point, I am short, will stay short and short some more, as "market" goes higher, I liquidate remaining longs and then, when ALL IS OVER I retire!!!
Japan and Ben haven't received the memo.
So how about that spike in GSE in the first graph...yeah nothing to see here.
DOW 13,724........right
I can dream anything up. The bottom line is the market has become a rigged game with large player who drive stocks up and down with no regards to any common metric and without any real regulatory body.
This is what makes a market, I guess.... I'm bearish on equities, however, I've been trading them in and out from both sides.... I'm looking for a sharp run up to establish a hard short position. I always like to try to sell to the last buyer.
Just from a general sense, there's nothing to get bullish about except for the last rush of suckers....
He misses the point that theyre trying to implode it all, its a race to the bottom with controls in place to hopefully keep the peasants from rioting, BEFORE theyre ready for them to riot. IE, deep inside their deep underground bunkers. Anyone wanting to jump in for this guys 30% run up in stocks, go for it, I wouldnt touch any of it knowing what the endgame is.
Hey I believe that fairies fly out of my butt when you pull my finger, Russell
this kind of stank just stinks
How much this guy's OWN MONEY is on the line? Right, jack shit. He needs to get money from his 'clients' to gamble for a fee.
Doesn't 30% sound GREAT? Make that check out to....
Until all dentist realize this boom bust will continue, no? To me, a non-financial professional, the only catalyst to buy stocks is a bust with big headlines. Until then, this website is a fine reading but I'll keep my money away.
30% upside...wowza someone is not expecting QE2 lite...but rather QE2 Strategic Nuke...
Straight up sideways in a 3 point SPY range for 6 hours.
The old POMO ramp and camp from last year is back!
Two choices: Melt-up or melt-down.
He chooses inflationary melt-up for good reason.
Someone has to be right.
Robo like always I Agree opposite of flash crash coming , this time will not be investigation and cancelled trades when market explode 700 pt up
Time to buy TBF or TBT?
Mr. Napier did hit the nail on the head in 1 of his handwritten notes (bottom of page 4), and I quote:
"Companies not hurt by this recession, people hurt by this recession."
And all it is to him is an opportunity to make money. It's as if he has come to be one with the machines trading this market.........soul less.
May I quote something else?
"I'd love to spit some beechnut in that dude's eye as I shoot him with my ole' 45."
If one think (and hope) that Gold and Silver are going (way) up, then stocks should also go up, along with commodities. The only thing going down is fiat money.
So much for the deflationary case. That is surely not going to happen. No way.
Sit back and watch all real assets go up.
I hate to say it but this guy may be right. It is quite impressive how Asia has kept feeding the large multinationals. I have no idea of the percentage on National vs International companies that are publicly traded, but I bet you a nickle that there is a huge divergence between the two's stock prices over that last 24 months.
The people and companies that are struggling through this crisis are US based, non technology, & health care related industries and the FED and White House took care of the financial industry by saving their asses.
The stock market (DJI) is not a reflection of the majority of the US. Just look at the DOW 30. I classify 8 out of 30 as US concentrated corporations. I'm sure the S&P 500 would be close to the same.
The time (in my humble opinion) to be weary is when Asia runs out of steam. Which they have too soon. I mean come on, I read that the average annual salary in China is +-$3,000.00. How in the heck does one live on $3,000.00 a year and have any discretionary funds left over? You know it has to be a lot less in the less developing Asian countries. It just doesn't add up.
With that said I, like many others, fell that the equity market is far less free today than it was say 5 to 10 years ago and it wasn't a free market then. Japan baby, Japan, that's what we are becomming. That's the message I got form Pimco's chief today.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aOtUkglk4iaQ&refe...
The central thesis of his piece is this: "A great bear market in bonds is coming, but in its early stages will not stop equities from rising 30%"
These CLSA folks are counting on money to flow out of US bonds into US stocks initially in a gentle harmless flow, just like we saw in reverse over the last 19 weeks. It would be interesting to have Rosenberg or Hussman do a piece on what happens, based on past history, when bond bubbles burst - will we see a sanguine, grandmotherly surge of optimism as bonds are sold and equities bought over 18 months as Napier claims, or do we get a massive collapse of most asset classes (except PM and some commodities), as most here believe.
Surprised to see Napier jump the shark.
I really liked his book "Anatomy of the Bear" in which he relates in considerable detail specific turning points from major bear markets. None of that here.
Lotta good guys sound like capitulating here. OK but for fuck's sake dont go long!!
ZH and every perma-bear posting today, i have a question:
How does it feel to be part of the herd?
In a previous report, ZH notes retail has sold for 19 weeks - in a row! If that isn't a contrary indicator, I don't know what is.
I'm short bonds, and long (commodity) stocks- mostly agriculture, because, well, it's a BULL MARKET!
good for you prince poppycock
after you finish with geithner, how about giving some to brian sack
Always a bull market somewhere.
CRB food index up 20% since 6/09, 30% since 4/07, 128% since 2000.
The $1.33 trillion drop is quite close to the drop in Z1 D.3, which shows a drop of about $1.1 trillion.
Total non financial sector credit is up 3.1% YoY, financial sector credit is down 12% YoY.
typical idiot ,,, who knows nada
#1 comment
NIPA shows earnigns jsut 10% below peak.. hey stupid if you believe NIPA data,
you complete bonehead..
if earnigns jsut 10% below,, but 'corp taxes paid' AKA real money still +50% below peak ???
#2 GDP nominal higher prev peaks..
again from NIPA.. hey stupid if its true why 'fed income taxes' AKA real money still +25% below peak...
anyway,, summing up..
stupid arrongant asshole who dont have a clue..
alx
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