Todd Harrison Refuses To Drink The Kool-Aid With "Ten Reasons Why This Is Not A Bull Market"
Minyanville's Todd Harrison is the latest to jump on the bandwagon for whom a "sideways or slightly down market" is not a victory for the bulls. In fact, Todd is outright bearish, and harkens to his prophetic call from September 2008 (oddly, a time when CNBC programming was far more balanced yet when everyone still thought the worst was behind us and Dick Bove had just issued a buy rating on Lehman, not to mention that every phone call from David Einhorn was being tapped under the guidance of the powers that be). Harrison prefaces: "Kevin Cassidy, a senior credit analyst at Moody’s, recently referenced the $700 billion in risky high-yield corporate debt on the horizon and offered, “An avalanche is brewing in 2012 and beyond if companies don’t get out in front of this.” Minyanville
offered a similar assessment entering September 2008 as $871 billion of
corporate debt was set to mature into year-end. We opined there were
two plausible scenarios; a credit cancer that would chew through the
financial body, or a car crash that would crack the system under the
weight of an indebted world." Todd was spot on back then. Will he be right again?
1. Questions remain on a Greek aid package in front of €20 billion in debt
that comes due in April and May. This dynamic is not bound by borders;
should an accord be reached, as expected, the approach will be tested
when the next “lifeguard” begins to drown. See A Five-Step Guide to Contagion.
2. New health care legislation could add hundreds of billions of
dollars to already yawning budget deficits. That chasm can only close
through upward taxation or austerity initiatives; neither is pro-growth
and both drain consumption. This, of course, comes at a time when the
“interconnectedness” of governments and markets has never been higher.
State budgets are cracking and a recent report from the Pew Center
estimates unfunded pension liabilities are an eye-popping $452 billion.
While I expect a Federal bailout package, as discussed in January, it’s akin to moving money from one pocket to the other. For more, read Ten Themes for 2010.
Social mood is tenuous at best and deteriorating at worst. As The Great
Divide continues to evolve -- Red States vs. Blue States, Main Street
vs. Wall Street, Have’s vs. Have Not’s -- societal acrimony has evolved
into social unrest in some parts of the world, and economic hardship is
pointing an unfortunate needle towards geopolitical conflict.
5. Complacency abounds, as measured by traditional volatility measures such as the VXO.
While we’ve witnessed prolonged periods of subdued volatility
(2004-2006) and healthy debates rage regarding the indicative validity
of this measure, risk premiums are at levels last seen in June 2008 --
a few short months before the financial crisis arrived.
7. While the “stated’ unemployment rate hovers just below 10%,
almost one-in-five Americans is underemployed; that means they’re not
working, stopped looking, working below their abilities or working
part-time because they can’t find full-time employment.
8. From an economic perspective, interest rates
have one way to go, price-to-earnings multiples never troughed, and
debt-to-GDP ratios will approach or exceed 100% in all G7 countries by
2014, with the exception of Germany and Canada, according to John
Lipsky at the IMF.
9. The Congressional Oversight Panel
warns that commercial real estate losses at banks alone could reach
$300 billion starting in 2011. Almost half of those loans are
concentrated at smaller institutions with total assets under $10
billion, and those are the same banks that account for almost half of all small business loans. See also What to Expect from the Commercial Real Estate Crisis.
It’s easy to forget about the housing crisis; in terms of “what matters
now,” this concern almost feels passé. We must remember that massive
amounts of residential mortgage backed securities are mis-marked at
best and toxic at worst, sitting on the balance sheets of private and
public institutions and by extension in bank accounts across America.
This is in addition to the manifestation of under-water mortgages
(negative equity) and foreclosure trends throughout the land.
Harrison's conclusion and near-term views:
Do I think the system is broken beyond repair? No, I believe there will be massive opportunities once we’ve taken the medicine of debt destruction so long as calmer heads prevail. Also read The Great Expression.
That could take another five to seven years but it’s difficult to foretell; a lot depends on how we navigate a multi-linear dynamic that includes currency readjustments, the evolution of credit, $500 trillion of global derivatives, two-sided regulatory reform, the shifting social mood, geopolitical fragility, and trade relations.
Is it possible we “echo” higher before that comeuppance arrives? Sure; these aren’t natural markets anymore and we must respect both sides of the financial equation. Given the path we take trumps the destination we arrive at, there’s only one way we can reconcile these seemingly disparate data points: Carefully, and one step at a time.
If you asked me for my near-term opinion, I would offer that the tape tops out before quarter-end under S&P 1200, consistent with the path of maximum frustration as fund managers reach for performance. Remember, when S&P 1150
was surmounted, a lot of shorts covered, removing a natural layer of
forward demand. From there, we’ll monitor the second quarter flows,
which should help shape the tape into the beginning of April.
We certainly agree with Harrison's observations. And a quick note: it is not our desire to see the market crash. Far from it. We just know too well that castles can not be built in the air. And that for a true economic recovery to commence, with or without the participation of the market, everything that has been done so far since the days of September 2008 has to be undone. Alas, with each passing day, this is becoming more and more impossible, while the day of correction is getting closer and closer: there is only so far any physical system can move away from a state of equilibrium before it resets. As the recent swap spread inversion demonstrated, unpredictable events will pop up increasing more often as the Fed's central planning doctrine become the de facto norm for market control. And one of these days, the next "side effect" will be one which even a supercluster of SPARC computers mutually front running each other will be unable to resolve.
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