Bear Market

It is always amazing to observe how people become less risk averse after risk has markedly increased and more risk averse after it has markedly decreased. The stock market is held to be 'safe' after it has risen for many weeks or months, while it is considered 'risky' after it has declined. The bigger the rally, the safer the waters are deemed to be, and the opposite holds for declines. One term that is associated in peoples' minds with rising prices is 'certainty'. For some reason, rising prices are held to indicate a more 'certain' future, which one can look forward to with more 'confidence'. 'Uncertainty' by contrast is associated with downside volatility in stocks. In reality, the future is always uncertain. Most people seem to regard accidental participation in a bull market cycle with as a kind of guarantee of a bright future, when all that really happened is that they got temporarily lucky. Perma-bullish analysts like Laszlo Birinyi or Abby Joseph Cohen can be sure that they will be right 66% of the time by simply staying bullish no matter what happens. This utter disregard of the risk-reward equation can occasionally lead to costly experiences for their followers when the markets decline.

While Nomura's Bob Janjuah remains 100% correct in his diagnosis and prognosis of the current 'grossest misallocation and mispricing of capital in the history of mankind', his tactical short was stopped out last week. The modest loss on the position though provided clarity on the importance of the 1450 level for the S&P 500 and he remains confident that on a multi-month timeframe he expects 800 to be hit with only a muted 10% possible upside in global equities due to underlying growth, debt and policy-maker concerns. Critically, he suggests it is premature to go aggressively short risk at this precise moment, urges traders to stay nimble, and warns "...risk assets are in a bubble which of course can extend, but which can reverse sharply and suddenly. Up here, 'valuation metrics' are not going to help much... this bubble could extend for maybe a few months and by up to 10%, ...but that we could see global equity markets 10/15% lower in virtually a 'heartbeat'."

If you wanted to sum up the just-concluded Casey Research/Sprott Inc. Summit titled Navigating the Politicized Economy, you could say "The situation is hopeless but not serious." More than 20 speakers – many of them world-renowned financial experts and best-selling authors – gathered in Carlsbad, CA, from September 7 to 9 to ascertain exactly how hopeless, and what investors can do to protect themselves.

It is often said a picture paints a thousand words; in the case of this chart, it paints more. Day in and day out, there is one inimitable indicator that if looked at will tell you everything you need to know about the day's market performance - volume. The last few weeks - post-Draghi, Post-Knight, stunned many with just how low volume can get; and implicitly just how much the battle-bots remain in charge. Clarifying this picture of low volume strength and high volume weakness, John Lohman has created the following chart - summarized thus: YTD, low volume days have seen the S&P 500 rise around 15% in aggregate, while high volume days have seen the S&P lose around 5% in aggregate. The linear nature of the low-volume move is simply remarkable - perhaps September will bring some real volume back, and now we know what that means for market direction.

Russia continues to accumulate gold in its large foreign exchange reserves. The reserves include monetary gold, special drawing rights, reserve position at the IMF and foreign exchange. Russia’s central bank increased its gold holdings to 30.1 million troy ounces as of August  1st, from 29.5 million troy ounces a month earlier, according to a statement published on its website today. The gold reserves were valued at $48.7 billion at the end of last month, Bank of Russia said in a statement. Russia's gold and foreign exchange reserves rose to $510.0 billion in the week to August 10 from $507.4 billion a week earlier, central bank data showed last Thursday.  Russia's gold and foreign exchange reserves were $498.6 billion at the end of 2011. This means that Russia now nearly has some 10% of its foreign exchange reserves in gold bullion. 

The Financial Times published an interesting article on Wednesday by a Tokyo-based analyst with Arcus Research, Peter Tasker, entitled of 'Cash out of gold and send kids to college'. The article is interesting as it is an articulate synopsis of those who are either negative on and or bearish on gold. It clearly shows the continuing failure to understand the importance of gold as a diversification and as financial insurance. Tasker incorrectly states that gold is "just another financial asset, as vulnerable to the shifts of investor sentiment as an emerging market." He conveniently ignores over 2,000 years of history showing how gold is a store of value. He also ignores recent academic research showing gold to be a hedging instrument and a safe haven asset. Another fact unacknowledged is how gold has clearly been a store of value since the current financial and economic crisis began in 2007. Since then gold has protected people from depreciating financial assets (such as equities and noncore bonds) and from depreciating fiat currencies such as the dollar, the pound and more recently the euro. 

While we have looked in the past at the incredible dominance of FOMC days when it comes to stock market performance, recent intraday performance of the major equity indices has had a somewhat repetitive and rhythmic structure. We know volumes surge, pause, and surge; Tradestation has dug one step deeper into the actual performance structure intraday and found some fascinating trends. From the extremely clear final-hour ramp to the oscillating bull-bear opening moves (and the European close positive bias) across almost 30 years of price behavior in bull and bear markets. The afternoons dominate market performance in bull markets and the morning session dominates the weakness in bear markets - so fade the opening rally, buy the dip, cover half into Europe, hope into the close appears the 'empirical route of least resistance' - for now. And this tidbit, if stocks close higher on average into the 3 p.m. hour, their probability of moving higher into the 4 p.m. close is 70%.

The S&P 500 has made little headway for two years running and as Gluskin Sheff's David Rosenberg points out, it first crossed 1380 on July 1, 1999 and since then has run around like a headless chicken (while other asset classes have not). Meanwhile, Europe's bottomless pit of debt deleveraging (which is as much a problem for the US and China but less ion focus for now) makes the entire discourse of some new and aggressive intervention by the ECB even more ridiculous (and all so deja vu); and the US is facing up to an entirely topless earnings season as revenues are coming in at only 1.2% above last year as it appears Q2 EPS is on track for a 0.2% YoY dip - with guidance falling fast. But apart from all that, Rosie sees the only source of real buying support for the stock market is the stranded short-seller forced to cover in the face of CB-jawboning as there is little sign of long-term believers stepping into the void.

The secular bear market that the US has been caught in for a better part of the last decade will end. Eventually. The only question is when. Last week we reported that the bulk of market gains year to date, has been driven exclusively by PE multiple expansion, which is to be expected: EPS forecasts for the end of 2012 are now the lowest they have been since the beginning of the year. Yet while such sharp, sudden and short and bear-market rallies, exclusively on the back of the global central banks, are to be expected, the bigger question is how much more of a secular decline in PE multiples is to be expected before the bear market ends and a new bull market can begin. As the following chart from Crestmont Research shows there is quite a bit more to go, even with Fed assistance (or rather, because of it, and its forced rejection of reaching a fair clearing price sooner rather than later), before the bear market is officially over. Just over 50% more. To the downside.

From Albert Edwards: "I want to share with you news that the S&P is on the verge of an “ultimate” death cross (see chart below). This is where a 50-month moving average (currently at 1152) falls below the 200-month average (currently 1145). The Trend blogspot (link) tries to make some sense of this very rare event. They note that the averages came close to crossing in 1978 towards the end of the 1965-82 secular bear market, but just held. By contrast Japan suffered a monthly death cross in 1998 and 14 years later we are still in the firm embrace of the bear. Watch this space."

On occasion of the publication of his new gold report (read here), Ronald Stoeferle talked with financial journalist Lars Schall about fundamental gold topics such as: "financial repression"; market interventions; the oil-gold ratio;  the renaissance of gold in finance;  "Exeter’s Pyramid"; and what the true "value" of gold could actually look like. Via Matterhorn Asset Management.

Ultimately, the surge in demand for gold reflects one thing alone: distrust of the increasingly messy, interconnected, over-leveraged and fraudulent financial system. Whether it is China — fearful of dollar debasement — loading up on bullion, or retail investors in the United States or Europe — fearful of another MF Global (or PFG, or Lehman Brothers) — stacking Krugerrands in their basement, demand for gold reflects distrust in finance, distrust in the financial establishment, distrust in banks, distrust in regulators, distrust in government and distrust in the financial media. And it is that distrust — not (by any stretch of the imagination) central bank interventionism — that is the force moving demand for gold. There will be no bear market for physical gold until trust in the financial system and regulators is fixed, until markets trade fundamentals instead of the possibility of the NEW QE, until governments represent the interests of their people instead of the interests of tiny financial elites.

Whether gold-bug, permabull, or deflationst; BofAML provides a little something for everyone in the most complete picture guide to 'financial markets since 1800'. A collection of almost 100 charts on asset price returns, correlations, volatility, valuations and many other market and macro factors for the US, UK, Europe, Japan, and Emerging Markets.

“History does not repeat itself but it does rhyme.”
-Mark Twain

From bull market gods and goddesses of the 1980s and 1990s, stock analysts now preside over a much more modest kingdom.  Nic Colas, of ConvergEx notes that the world has moved on to new golden calves, from currencies (with great leverage) to exchange traded funds (with generally less volatility) to macro analysts (the current Zeuses and Heras).  This even extends to the world of the retail investor – there are far more Google searches in the U.S. for "Storage auctions" (246,000/month) than for "stock research" (just 33,000/month), and the rate of decline resembles a fast-decaying radioactive particle. With asset price correlations near 90% for a wide range of investment choices, the on-off switch to market direction sits in Washington, Frankfurt, Beijing, and other centers of political and central bank power. Nic believes stock research will make a comeback for both technological (systemically delivering information to algorithmic traders) and cyclical reasons - as old-school stock research, with sector analysts, is ultimately tied to the fortunes of the equity market. And for analysts and stock market investors, that inflection point cannot come too soon.

In a detailed discussion with Bloomberg TV's Tom Keene, Gluskin Sheff's David Rosenberg addresses everything from Europe's "inability to grow its way out of the problem" amid its 'existential moment', Asian 'trade shock' and commodity contagion, and US housing, saving, and fiscal uncertainty. He believes we are far from a bottom in housing, despite all the rapacious calls for it from everyone, as the over-supply overhang remains far too high. "The last six quarters of US GDP growth are running below two percent" he notes that given the past sixty years of experience this is stall speed, and inevitably you slip into recession". He is back to his new normal of 'frugality' and bearishness on the possibilities of any solution for Europe but, most disconcertingly he advises Keene that "when you model fiscal uncertainty into any sort of economic scenario in the U.S., what it means is that businesses raise their liquidity ratios and households build up their savings rates. This comes out of spending growth. And that's the problem - you've got the fiscal uncertainty coupled with a US export 'trade shock'."