MACRO MINUTE…
Sorry for the lack of updates this morning. The website sits at the bottom of my work/life hierarchy (which, trust me, is not very high, exciting or complex). Also, I won’t have time to do Q&A this week, so sorry about that. I’ll be back on track next week though so keep those dating and romance questions in the front of your minds. Anyhow, lots going on this morning….
- In Europe, nothing is really new. There is still massive uncertainty in every aspect and the worry is that it will take something big to happen before policymakers come to their senses and actually sit down at a negotiating table forcing concessions and real resolution. The risk of an outlier event here is uncomfortably high and the markets will remain volatile and uncertain until there is certainty through policy. That’s just the way it is. This problem is not going to solve itself….
- The US economy is still muddling through. This morning’s labor report was not good. Although we’re still gaining jobs the growth is meager at best. The big worry for me is that all this uncertainty about Europe and China and the fiscal cliff is actually resulting in businesses pulling in in anticipation. The better news here was the ISM report which came in at 53.5. Yes, it was below expectations just slightly, but that’s a solid expansion figure. So, we’re growing, but sluggishly. Econoday highlighted one very positive point in the ISM report:”In surprising good news, the ISM’s new order index is up nearly 2 points to 60.1 for the strongest rate of monthly growth since April last year. New orders are life’s blood and will trigger wider activity in the months ahead. For May, production growth slowed but remains healthy while employment growth in the factory sector, as it was in today’s employment report, is steady and healthy. Inventories are coming down even as new orders pick up, a combination that points to the need for inventory building which is a solid positive.”
- China’s PMI came in at 50 which was down to a 2012 low. It’s becoming clear that the depression in Europe is spilling over into China to some degree. This crisis is a like the plague. It doesn’t go away, there is no cure and we can’t stop it from spreading. Of course, we know the cure, but we just won’t use it.
- Equities are getting smashed and are now up just 2.2% YTD. That’s a tremendous change from just a few months ago when some of us were saying the rally was way ahead of itself. It reminded me of a comment someone made on the site about there being no negative catalysts (this was the beginning of April with the S&P near 1400). I responded saying the market was “risky”:
“I guess my point is, by the time you know what the catalyst for a sell-off is, you’ll be selling after everyone else has also.”
- Lastly, the 10 year Treasuries are at an astounding 1.47%. I am still sticking to my recent position change – buying the equity market 10% lower is always more attractive than buying it 10% higher. I wouldn’t be piling (remember, always BUILD positions) because the risk of European politicians letting Lehman 2.0 occur is high, but we should get resolution to some things as we move into June and Europe stops being the daily headline and catalyst for uncertainty. But be prepared to potentially buy lower. This is an ugly market.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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24 Comments
What do you make of the prices paid falling so rapidly in the ISM? Huge decline. Looks like thanks to fear, deflation is creeping back in to the picture here. Too many traders mistake spot level in the S&P as when Ben can act. I think it is only a small shot they act at June meeting, but I wouldn’t rule out the ECB, US FED, Japan, Brits and Swiss Feds all acting in unison. Tough for Ben to do anything before Thursday when he has to testify in front of Congress…
With no support for the US markets (S&P500) till the 1180 range, it would seem to be more of a gambling move to start buying here. Betting on somebody else’s money (QE) to drive valuations seems like an even bigger “bet”. I think the old adage of not “catching a falling knife” seems highly appropriate here. You’re right, this is an ugly market, but since there a politicians driving the bus, it is likely to get even uglier. Just my 2 cents. Everybody have a great weekend!
cheers
JB
Your 2 cents are worth a lot more than 2 cents.
Cullen, there aren’t many true contrarians out there and most investors have the view that if they don’t see any risk, the market should move higher. The problem is that the only times that you can’t see any risk, the market is ALWAYS high already. As I like to say, “the risk is in the price”.
I was an enthusiastic buyer last summer when investors were worried about an imminent worry of a break-up. By late February, it appeared that many convinced that the LTRO had solved something other than a liquidity problem, and I started getting defensive then when there was certainly an absence of “bad news”. Stocks moved a little higher into March, but have obviously given it all back and much more.
Now the sentiment has shifted towards the opposite end: imagination of everything bad that could happen is now seen as likely. I am concerned about the weak global economy, but today’s the day I start buying some stocks again. Slowly, of course.
Hard to see how current problems (low growth, actual contraction) can be addressed except through major increases in deficit spending in all developed nations. But there does not seem to be any will to do it at present.
Eventually push will come to (social unrest) shove and it will happen. And ultimately it seems it will require major debt repudiation through money printing (deficit spending without offsetting sales of Treasury securities). Watch bond yields to know when this begins.
Current debts will NEVER be retired, they will simply be inflated away.
Equity markets have fear (deflation) written large on all sectors. High inflation is a problem for most economies, but deflation is a catastrophe.
I had a very similar view and hold few long european and US indexes position that I stop and reversed between yesterday and today. It seems we may have breached important technical levels and there could be a substantial downside from these prices.. European leaders are fighting each others and in the last few days confirmed they’re completely unable to act together, there’s total lack of leadership, ECB seems out of the game. Chances of one or more disorderly exits from EZ have increased in a weak global environment and I’m not sure all this is priced already.
The Europeans haven’t acted because there is no emergency. They have a very slow leak of deposits from Greece, Spain, and Portugal, but no crisis. If a real bank run materializes (i.e. the same rate of withdrawals as the Money Market run of 2008) , I think Mario Draghi would act on his own authority, without negotiating with anyone. It would be something decisive like a blanket guarantee of all Euro deposits in the Eurozone. But in the absence of a real emergency, no one has the political authority to do anything.
Andrew P: you may be right, the point is that emergency means higher southern European yields and much lower eqty indexes, which has been quite resilient so far.
“The Europeans haven’t acted because there is no emergency. ”
Andrew, you sum up the danger in a nutshell. Since the politicians can only be compelled to resolve the euro question through the action of the markets, it’s a dynamic which alone guarantees we’re going to face a monumental crisis.
Logically therefore, investing on any kind of assumption that a specific country or sector can bypass the storm is extremely dangerous – as believers in China or US ‘decoupling’ are discovering once again.
We already know that if the euro survives it cannot exist in its current form – yet any alteration to its current form (whether that involves countries exiting or a fiscal union forged in flames) will mean the world’s economies taking heavy collateral damage. Seems to me, therefore, that a bear market in risk assets is inevitable, and may be imminent.
“The worry is that it will take something big to happen before policymakers come to their senses and actually sit down at a negotiating table forcing concessions and real resolution.”
It has nothing to do with policy-makers coming to their senses. You can’t fit a square peg in a round hole. The Euro zone simply doesn’t work. Pettis demolishes all hope here:
http://www.mpettis.com/2012/05/18/europes-depressing-prospects/
They might be able to kick the can a little further with some temporary program like LTRO, but it won’t change where they’re headed.
Again, I have to disagree. A financial calamity that qualifies as a true emergency would give the head of the ECB the political and moral authority to act without consulting national leaders. But a slow grind into Depression and a slow leak of bank deposits does not qualify as an emergency. Things have to progress to a point where true panic sets in. Only then will Mario Draghi slam the hammer down and impose a solution.
It’s unlimited ECB bond buying or break-up. Euro bonds don’t solve the imbalances. Guaranteeing all deposits doesn’t solve the problem. The debts keep building, which is fine if the ECB buys in unlimited amounts. If it doesn’t, then breakup is inevitable.
Yes i remember good old B Ferro when the market was at the high, bragging about how bullish he was…certainly quieter these days…
I made the call last year and those who read my posts know I have not wavered. I continue to believe that the ESDC will be worse than subprime; and that, one day, it will actually be known as the big EURO BUBBLE, the biggest bubble in history.
Bubble in the sense that the synergies people believed the currency union would bring did not exist and now the house of cards is coming down. I also continue to believe the China landing will be sooner and harder than most think.
On the US, we all know the economy is being kept alive on a respirator – i.e., government spending and monetary policy, and those have reach their limits. In other words, we are in an extremely fragile recovery that will easily tilt into recession with no notice, perhaps we are there already.
You don’t need to be a rocket scientist to see what the three observations above add up to. However, the perma bulls continue to do their best to cloud the little guy’s thinking with all sorts of metrics on why stocks are so cheap given ZIRP – i.e., they argue that since the risk free rate is at zero, an equity risk premium of around 5% real easily supports current valuations (I wish life was so easy:-)
I remain invested mostly in US bonds and gold and gold miners leap options for a levered play with little capital at risk. I am however, starting to build a 30% equity position via cheap Vanguard ETFS at 1% monthly chunks rain or shinr, so I will be done in thirty months. Last month, I bought VXUS. Today, I bought VTI. I intend to buy around the 15th of the month but the June chunk I bought today. Let’s see what July brings…
My YTD return is still negative. After today, I am down about -0.6% YTD due to my trying to carefully short the market earlier in the year (too early, as usual) and moving back into gold, too early as well.
After today, the S&P500 YTD total return (dividends included) is about 2.7%. Let’s see what June brings…
Good luck in your investments Octavio. I’m building slowly also a position, but in European stocks.
Even if agree (more or less) with your fundamental view and the havoc the currency union and politicians hubris will create won’t be forgotten in a long, long time, it’s at time like this that we have to look for opportunities, even if carefully.
I certainly prefer to buy European stocks at depressed cheap prices even if they could drop further (look at the Japan comparison Cullen just posted and where the eurostoxx is sitting) that stocks which are way more expensive based on Bernanke helicopters and other voodoo.
Hope delta can earns you what theta has lost you on your leaps if it keeps rising.
Ah, the maestro needs some lessons in money printing.
Where is Cullen when you need him?
http://www.cnbc.com/id/47643118
Meanwhile Casanova is making a killing with his short euro and oil position. Life is good!
Short the euro down to parity!
Cullen,
Any thoughts on some of the European equity markets? They’re practically all down substantially more than the US market and many are not from low reached back in ’09. Mebane Faber had a post the other day about the CAPEs of Spain, France, Italy and I think a couple others being around 7-8, where secular bulls have historically began. It may still be early given the mounting uncertainty but worth a look.
The structural issues in Spain, Portugal, and Greece make me reluctant to buy any of their stocks, even at current prices. There is the potential to go a lot lower. Stocks in Germany and France are not really all that depressed – yet.
A slightly off-topic observation but I want to acknowledge Dr Hussman who is regularly mocked. Based on his “syndrome” analysis techniques he has been stating the market conditions in recent months are some of the most negative ever and that a meaningful fall is likely irrespective of economic conditions etc.
Well done John – once again your research have proven prescient and valuable to those who properly understand it…
Cullen,
I’ve been following you for a long time, and as a reader, it would probably be best to withhold the fact that Prag Cap is at the bottom of your work hierarchy. To me, it seems like it has always been a priority for you thanks to your great content. Every post you make is meaningful, and most are thought provoking. And for that, I thank you.
Hi Ryan,
The point I am making is that I have a life and a real job on the side. When I put my attention on the site I try to make every post I write a meaningful and helpful one. Trust me, I would love to run a website full-time and help people understand how to protect their money and enhance their lives through understanding money, but the reality is that, just like everyone out there, I have other things that take precedent so there are days when I just don’t get around to the site as much as I’d like to…..But trust me, I love the site, the interaction, the readers and everything involved in the site. So don’t take my comments the wrong way!
U R doing great. No need to explain/apologize for anything or to anyone. I understand how you feel 100%. it is the normal feeling of responsible people who feel a natural push to achieve.
We get an infinite amount of wisdom for the amount of money we pay at PragCap. You run an honest website and do not push any agenda down people’s throat, unlike most MM talking heads that show up on TV or write to support their book.
For our sake. we need to keep loving this blog and see it as pleasure, not having to meet some publish rate/deadline.
Best,
OR
last paragraph is missing “you” after the word “need”
http://soberlook.com/2012/06/hidden-surprise-in-us-employment-report.html