It is assumed without question that the stock market is some quasi-sacrosanct barometer of the U.S. economy. But who even cares if the market crashes? Only the top 10% who own it. Yes, millions of (generally government) workers have an indirect stake in stocks and bonds via their state/union pension funds, but it's still informative to look at the distribution of who actually has a stake in the market's rise and fall.
Listening to David Greenlaw and/or Jim Caron as they strike out again, and again, and again, with delusions of economic grandure over US GDP and some historic 2s10s bull steepener which is never, ever coming, one would be left with the impression that Morgan Stanley has inherited the title of most permabullish sell side advisory from Deutsche Bank's economics department. Nothing could be further from the truth. Like any other bank, MS has perfectly hedged its rosy outlook by spoonfeeding its retail clients with the rosy view, while whispering the apocalypse case to its institutional clients (judging by last week's pummeling in MS stock, there is not that many of them left). Below we present the view of MS' equity strategy team under Adam Parker, who gives not only a distribution range for his year end S&P target (1004-1425), but a matrix specifying the probability outcome of either case. Bottom line, "while there is 18% upside to the year-end bull case and 16% downside to the year-end bear case, we assign a higher probability to our bear case than bull case, preventing us from becoming increasingly optimistic." When even Morgan Stanley tells you (or rather the whale clients who are now more than happy to sell into every low volume, retail driven rally) there is little to smile about, it is high time to look for the exits.
Now that even the likes of Joe LaSagna are starting to throw out the R-word about as casually as they did a 4% 2011 GDP target as recently as 2 months ago, it is becoming increasingly clear that the market is pricing in the fact that post a few more historical BEA revisions, the prior two real GDP reads will end up having been, shockingly enough, negative, i.e., your garden variety recession. So where does that put us on a market performance continuum, for those wishing to extrapolate how much further stocks and, yes, bonds (because credit is and always has been a far better indicator of objective market reality) have to drop before we hit the proverbial floor. Well, according to Morgan Stanley, quite a bit lower: "Despite the recent decline in risk assets, we do not believe that recession is in the price. Exhibits 3 and 4 show the typical declines in developed market risk assets in recession. Compared to corrections in past recessions, S&P prices and corporate credit spreads would have more to go, though spreads are starting from a higher level than typically precedes recessions." What is startling is that should central planners lose all control (and with central bank intervention upon intervention, one can argue that should all artificial props be removed, the market really ought to plunge in a Great Depression-style tailspin), the drop from the April 29 peak to the bottom will be roughly 4 times greater... which means the S&P would hit the proverbial "S&P 400" which is the long-term target of the likes of some more popular skeptics such as Albert Edwards and Russell Napier. As for credit: watch out below.
While it is true that following an epically volatile week , the S&P closed down only 2.2% (down 11% MTD and 6% YTD), the traditionally homogeneous distribution in domestic and global beta is starting to get unhinged. Stated otherwise, if one were to gauge by the S&P alone, one would massively underestimate the divergence between different sectors and countries. Therefore, we have summarized last week's performance in just two charts, which show the substantial dispersion in performance, and just how much more painful the week has been for those long financials and/or Korea. As central planners briefly lost control of the markets, is relatively value, gasp, coming back, if only for a short time?
I am beginning to feel a bit like one of the French unfortunates stumbling through the fog in the Ardennes, circa 1914. Except that, instead of Germans full of deadly intent coming at me in the gloomy forest, it is a flock of black swans. As it was for the French in the Ardennes, the number of problems – then Germans, now black swans – is becoming overwhelming. Consider just a little of what we as investors, and as individuals looking forward to retirement in accommodations more commodious than a shipping box, must contend with...
Remember how two months ago Greece came up with a bulletized list of austerity measures it would immediately if not sooner engage in to demonstrate its responsible adult behavior, funded by over €200 billion in European and American taxpayers funds and two bailouts? Well, since then we have learned that Greek GDP has plunged below even the worst case scenarios, even as the country has missed all deficit cut targets. Today, it is Italy's turn, which however apparently was confused and presented the list of austerity before it got a Greek-style rescue. Which is bad. Because within a few weeks we expect the strike (and riot)-cam to be planted firmly in the Piazza Navona and across the streets ot the Trastevere in capturing the latest round of European indignation, oddly enough not caused by local filming of The Jersey Shore. And now that the strawman is out there, when Italy actually needs the money, which will be soon, and is found to be in compliance with precisely zero of its Reps and Warranties (or kinda like a Bank of America RMBS prospectus) it just may make defrauding the middle that much more difficult.
“Welcome to The Final Stretch, broadcasting live from beautiful Financial Park; home to the exuberant commentary. You join us now as we to go in today’s financial Gymkhana……And They’re Off!!!
There were some who speculated that the east China July 23 bullet train crash was indicative of bigger problems with China's breakneck spree to build infrastructure for the sake of building infrastructure. Sure enough, Xinhua reports that not one, not two, but 54 high speed trains have been recalled over safety concerns. What next: someone inquires into China's GDP numbers and discovers that everything is a complete and utter fabrication? Oh wait, China is the BRIC that will pull the world out of the next recession. We keep forgetting.
RANsquawk Weekly Wrap - Stocks, Bonds, FX -- 12/08/11
Now that Ben Bernanke has made it clear that monetary intervention is on hold (supposedly...at least according to the FOMC minutes; what happens at Jackson Hole is not so clear), that monetary stimulus is on hiatus (if one can call a 2 year ZIRP extension and duration cut hiatus), the economic renaissance ball is deep in the court of fiscal policy. But unlike the Fed, where events by now are so finely and quantitatively nuanced courtesy of the the If=>Then logic of the Fed (no matter how troubled or failed), with the economy now in the hands of politicians, this more than anything could be a reason for everyone to really panic. That said, below is a blueprint of what Congress is "supposed" to doto not throw the economy into a tailspin, and also what it has to do to avoid a repeat of the debt ceiling fiasco once again (which as everyone knows by now buys $2.4 trillion in deficit funding in exchange for $22 billion in deficit cuts).
Another constitutional slap in the face for the constitutional scholar. Just out from Reuters: the 11th Circuit Court of "Appeals court rules that Obama's healthcare law's individual mandate to own health insurance unconstitutional." It has thus found in favor of the 26 states that challeneged a requirement that Americans should purchase health insurance. What next: Obama takes Obamacare to the Supreme Court? And just when the summer seemed like it may finally get boring for a change...
Earlier, we noted a release that the probability of what can soon be the largest US municipal bankruptcy in history, that of Jefferson County, Alabama, is 80%. On this painfully slow day (and in the aftermath of four 400+ DJIA point swings anything would be a snooze), those who wish to follow the hearing in real time can do so here courtesy of Birmingham News. While we have described the nuances in the past, the bottom line revolves around whether the proposed debtor plan which sees a 66 cents on the dollar recovery to the creditor committee led by JPM. If indeed there is only 20% chance of default avoidance, this will likely be the catalyst event that unleashes many other comparable muni Chapter 9 filings, which would now have a case study that not only it can be done, but how it should be done.
Sprott's Eric Sprott and Scott Colbourne will conduct a market outlook call at 12:30pm EDT the topic of which is "Navigating Volatile Markets." Readers who wish to participate on what promises to be a quite an informative call which discusses the best performing asset class to date among many other topics, can do so by registering here.
Markets are currently rallying in reaction to the short-sale bans enacted in Europe. Time will tell if these bans ultimately prove effective seeing as how when the US banned the short-selling of financials in 2008, they proceed to collapse over the next few months. Investors are usually correct in estimating that a trading ban is nothing more than formal confirmation that there is indeed a problem. With banks borrowing more from the ECB in recent days and less from each other, we have yet another sign that European banks are getting nervous of each other’s risk. But at least for today, equities are solidly in the green.