She’ll Be Right

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It’s the end of the week. Emotions are mixed. Half of us wants to throw our lot in with the “She’ll be right” gang, point out that unemployment in Australia has declined to just 5.1%, cite the positive IMF growth forecasts (4.6% for the globe, 9.2% for Chindia, and 3% for Australia) and go have a beer to celebrate how lucky this country is and continues to be.

But the other half just can’t resist watching the slow-motion decomposition that is the Euro and wonder if Europe’s banks are stuffed full of government debt that could make subprime debt look gold-plated. And to be fair, the IMF is also worried that a sovereign debt crisis in Europe is still a threat.

In its updated forecast for everything, the agency said a European debt crisis, “Could lead to additional increases in funding costs and weaker bank balance sheets and hence to tighter lending conditions, declining business and consumer confidence and abrupt changes in relative exchange rates.”

That doesn’t sound good.

Yesterday we promised to be more offensive. That is, we said that despite an outlook for the world that was full of de-leveraging and falling asset prices, there is a time and a place to go on the attack. But is now that time and is here that place? And how would you attack anyway?

Well, there is certainly a place (albeit small) for speculation in any well-diversified portfolio. But it’s important to remember that Black Swans – statistically improbable according to conventional models, but with very large consequences – don’t always have to be bad things. A big oil find by a small exploration company is a low-probability, high-magnitude event.

The same is true with a breakthrough drug by a small bio-tech company. These events don’t have to happen often. They just have to happen once. And if you have a small-portfolio of businesses that are exposed to these kinds of events, you are taking an essentially offensive position. You needn’t bunker down in your cave, at least all the time.

This kind of disposition is another way of telling Mr. Market, “Frankly don’t care what you’re doing…I’m going to own a portfolio of disruptive technologies and businesses with potential for big returns. And also, relax and quit being so manic.”

This, for the record, is our strategy as a financial publisher. We have no idea what will happen as the world wakes up from a hangover from one large leveraged boom, although we know what SHOULD happen. But we have tried to build a team of analysts – Alex, Kris, Murray, and Greg – who have their own ideas, their own expertise, and their own plan. We don’t know who’s right and they don’t always agree. But they always make us think.

By the way, if you replied to our Super request yesterday, thank you very much! The inbox had several dozen thoughtful letters and offers. It’s going to take us a few days to review them. So please be patient. But thanks again. It will be good to have someone on-board who can write about Superannuation.

We’ll be back on Monday with more from the world of finance. But that will it for today. Friday is the day we write a weekly e-mail update for subscribers to Australian Wealth Gameplan. And with mixed signals about whether China’s property sector is headed toward collapse or just slower growth, there’s a fair bit of work to do! Until next week.

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. Dan, i can’t say that any part of me is worried about European debt let alone 50% of me.

    Whether intentional or not the bad news is just pure market manipulation via the media, and it is always followed by REALLY good news a mere days or up to a week later.

    E.G. Data released to say that US housing had fallen off the face of the earth last month and trending down, unemployment grows and company profits are down. This week there are massive gains as unemployment lowers and company profit statements are higher than expected.

    Economies do not fluctuate so wildly, you can’t be going down the drain today and three weeks from now have signs of recovery. The market and economies are fine, they are just being manipulated by short sellers who profit on the way down and then jump on for the ride up when everyone realises there is nothing wrong, or certainly haven’t got any worse.

    Global business has brought global communities and global governments who are all reliant on each other, this system will never fail.

    12 months from now the poorly named “GREAT DEPRESSION II” will be a distant blip on the map for the average joe, investors on wall street will remember it as a Golden era of unprecedented power and wealth through manipulation. Large global companies will also look back at this time with fondness, they were able to cut wages, increase hours worked, reduce staff and increase their profits markedly all under the guise of a GFC that never really happened.

    We are all stooges!!!

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  2. Realist, look at the S&P 500 volumes on the days with big gains many times made in just a few hours towards days end. These are melt ups on no volume on those supposed good news reports. Mutuals are still net sellers.

    And if DR USA could get some numbers on how big a % of daily trading the top 10 traded stocks were on average each year for the past 20 years it would likely track the debt curve.

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  3. This is an interesting theory http://www.zerohedge.com/article/guest-post-fed-funding-treasury-through-banks

    Last week Bloomberg also said that US banks had bought about $45B in muni debt (I think it might have been this calendar year) and that was their largest sectoral growth.

    I don’t see where this game goes beyond extend and pretend. Real economy consumer credit, small business credit etc is going nowhere, fiscal programmes didn’t do anything in the real economy except bring forward demand and shrink auto inventory. Tax receipts are smashed. VAT’s will cause further pain in the services economy.

    I am missing something here. There will be a strategy even if it is stupid one. Let’s hope its not the ground for a currency, trade sanctions, trade interdiction, and war slide.

    And didn’t they stitch the Russians up with a sad deal on the so-called agents (that weren’t even able to be charged with espionage) switched for real heavy lifting ethnic Russian turncoat spies? And the muted Chinese and Russian response to the Cheonan sinking almost certainly an act by the Americans? The Russians and Chinese appear to see the unleashed US dogs of war theory as realpolitic anyway.

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  4. Relying on newspapers, conventional wisdom, and even fundamentals, is a very thin reed to lean on, when trying to anticipate where the market is heading next. For example:

    The first news snippet is from just over a week ago.

    Wall St Week Ahead: Bulls on the run in shortened week

    Ryan Vlastelica and Angela Moon, reuters.com, July 3, 2010:

    Bearish bets in the equity options market, coupled with an increasingly sour view from a technical perspective, suggest stocks will struggle to break from a vicious two-month downtrend next week.

    With few catalysts on tap, it could be difficult for investors to find a reason to buy even as recent declines and a jobs report that didn’t confirm investors’ worst fears present the opportunity for a short-term boost.

    Markets will be closed on Monday for Independence Day, and the holiday is expected to depress volume during the week, making equities more vulnerable to large swings following the worst week for the S&P 500 in two months.

    “Only about 30 percent of stocks are above their 200-day moving averages, so the vast majority are on a downtrend,” said Frank Gretz, a market analyst at Shields & Co in New York.

    “The market needs to prove itself with a rally on strong volume, and that’s going to be hard to get with the holiday and the bad news we’ve seen creating more pessimism.”

    For the week, the Dow fell 4.5 percent, the S&P lost 5 percent and the Nasdaq shed 5.9 percent.

    What actually happened:

    Stocks, Oil Rise on Economy; Canadian Dollar Gains on Jobs

    Michael P. Regan and Stephen Kirkland, bloomberg.com, July 9, 2010:

    Stocks rose, with the MSCI World Index completing its biggest weekly rally in a year, and copper and oil gained on waning concern the global recovery will falter. Canada’s currency surged 0.8 percent versus the dollar after the nation’s jobs growth topped forecasts.

    The MSCI gauge of 24 developed nations climbed 0.6 percent and the Standard & Poor’s 500 Index increased 0.7 percent to 1,077.94 at 4 p.m. in New York, with both extending their advances this week to more than 5 percent. Copper increased to an almost two-week high in New York. Ten-year Treasury yields climbed two basis points to 3.05 percent to cap the biggest weekly gain since April.

    The S&P 500 rallied this week amid optimism that second- quarter earnings will justify the index’s rebound from a 10- month low on July 2. Profits at companies in the index are projected to have increased 34 percent in the April-June period, led by income growth at financial, energy and technology companies. French manufacturing grew in May, spurred by improving global trade and a pickup in output at car plants.

    This week’s rally in stocks “buttressed our belief that the damage has been contained and that the recent reversal of fortune is poised to continue,” Richard Ross, global technical strategist at Auerbach Grayson & Co. in New York, said in a note to clients.

    US stocks cap best week in a year

    Bloomberg News/Reuters, @smh.com.au, July 10, 2010:

    US stocks advanced, sending the Standard & Poor’s 500 Index to the biggest weekly gain in a year, amid optimism about earnings reports and a rally in metals that drove up shares of its producers…

    ”Stocks have more room to go,” said E. William Stone, who oversees $US104 billion as chief investment strategist at PNC Wealth Management in Philadelphia. ”We took the elevator to the ground floor. Hopefully, we can ride this back up with some brighter news on the earnings front. While there are questions about a slowdown and corporate outlooks, we believe we’re not in a double-dip.”

    Stocks have advanced after the S&P 500 retreated 16 per cent between April 23, which it reached a 19-month high, and July 2. The rally was spurred by higher-than-forecast sales at some retailers and a drop in jobless claims…

    Profits for S&P 500 companies are projected to have increased 34 per cent in the April-June period and by the same amount in 2010, according to analysts’ estimates compiled by Bloomberg. Corporate profits may grow 25 per cent in the third quarter, the slowest pace of the year. Per-share earnings rose 52 per cent from January through March.

    ”Investors are in a wait-and-see mode,” said John Praveen, the Newark, New Jersey-based chief investment strategist at Prudential International Investments Advisers LLC, which oversees $US693 billion. ”People are looking for data to show that we’re not having a double dip. Second-quarter earnings will come in much higher than expected. However, investors are looking for corporate outlooks. Investors are trying to gauge if the recent rally is for real.”

    How do the bulls see the near-future?

    Extreme Pessimism Sets Stage for U.S. Stock Rally: Chart of Day

    David Wilson, bloomberg.com, July 9, 2010:

    Pessimism toward U.S. stocks is almost as prevalent as it was at last year’s lows, according to two gauges of investor sentiment that suggest the market may be due for a rebound.

    The CHART OF THE DAY displays the results of weekly surveys by the National Association of Active Investment Managers and the American Association of Individual Investors since the beginning of 2009…

    This week’s reading for the manager index was 13.47, the lowest since March 2009, when the latest bear market in stocks ended. Survey responses can range between 200, indicating that managers are borrowing to profit from stock-market gains, and minus 200, showing the use of leverage to bet against shares.

    The top panel tracks the active-manager readings, and the bottom panel shows the percentage of bulls among respondents to the survey of individual investors. The latter dropped this week to 20.9 percent, also the lowest level in 16 months.

    “This is a positive development” because it signals that this week’s advance in stocks will last, according to a posting yesterday on the Traders Narrative financial blog. The Standard & Poor’s 500 Index rose 4.7 percent in the past three days after dropping 16 percent from April 26 through July 2.

    Many analysts view investor sentiment as a contrarian indicator. They see extreme pessimism as bullish, based on the assumption that optimism will eventually return and demand for stocks will rise accordingly.

    Article links:

    * “While much of the country remains fixated on the bleak employment picture, hiring is beginning to pick up in the place that led the economy into recession – Wall Street…

    “We are very bullish on the U.S.,” said Tim Bishop, who leads Macquarie’s United States operations.

    “On Thursday, Macquarie added six fixed-income traders in New York, and it plans to announce the hiring of six equity traders on Monday” (Nelson, D. Schwartz, Wall St. Hiring in Anticipation of an Economic Recovery, nytimes.com, July 10, 2010).

    http://www.nytimes.com/2010/07/11/business/11rebound.html?hp

    * “Stock market history never repeats itself exactly, but sometimes the similarities are uncanny. Take a look at the chart below. The longer line tracks the FTSE 100 in 1998 before and after a particularly nasty stock market correction. The shorter line superimposes the recent market slide and lines up the starting points of the two retreats” (Tom Stevenson, Why history takes the side of the optimists , telegraph.co.uk, July 10, 2010).

    http://www.telegraph.co.uk/finance/comment/tom-stevenson/7883226/Why-history-takes-the-side-of-the-optimists.html

    Reply
  5. Then again it is possible that America is having a few quiet doubts about its cannon fodder being up to the task? :

    “Most of today’s youth are not eligible for military service because they are too fat, too weak, not smart enough and prone to drug-use and criminal behavior, according to a panel of senior military officers.”

    http://www.airforcetimes.com/news/2007/06/navy_recruit_crisis_070621w/

    Being raised on a diet of big macs and ‘coke’ just doesn’t produce the stern stuff that fatback and ‘corn’ did maybe? I can’t believe their military actually publish this stuff. Maybe it’s just an attempt to lull their ‘enemies’ into a false sense of security? :)

    Reply
  6. More investors should use technical analysis in my opinion as it’s a leading indicator and tells us where the economy is headed.

    In early 2007 I warned of an impending stockmarket crash and I confirmed an equity bottom by early April 2009.

    The equity global uptrend since March 2009 was a bear market rally contained within a much larger downtrend that started in 2000.

    According to my indicators the March 2009 lows will not hold.

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  7. Watcher, the volumes are way down. This has been the pattern in all the meltups. Low volume and a smaller & smaller no. of stocks dominating trade. Show me the first report that shows mutuals returning to the market as net buyers and I will start buying into optimism that might provide a lead to sagging consumer sentiment and credit.

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  8. Now, however, we learn that bullish sentiment is at an extreme low of 21%, according to the latest numbers from AAII. What this implies is that there are simply too many bears for stocks to collapse at this moment…

    The last time there were so few bulls was in March 2009, when this Mother of All Bear Rallies commenced…

    http://www.rickackerman.com/2010/07/our-man-chuck-turns-bullish-as-all-get-out/

    Reply
  9. Watcher, it must be the leverage ratio that scares the shorts into the short covering on no volume melt up? The ZIRP carry and plunge protection team threat might combine to see margin calls made narrow and early.

    http://www.zerohedge.com/article/entire-market-rally-engineered-stock-volume-fumes

    note too posters comment on 10:1 turning into 40:1 order cancellations on NASDAQ

    Reply

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