SOME NOT SO DEEP THOUGHTS….
Here we go again. It’s all about Europe. And now we’re all in wait and see mode on Greece and whether they’ll default and defect and possibly trigger the Lehman 2.0 scenario that so many have been worried about for years now. In many ways this market has a 2008 feel to it. I wouldn’t say it’s quite the same because the global economy had been on a 5 year credit binge just waiting for a negative catalyst that came in the form of house price declines. Today’s environment is a little different. Back then we were Mike Tyson walking around sticking our chin out and taunting the idea of recession and a knock out punch. Today, we’re Mike Tyson fumbling around looking for his mouthpiece after the Buster Douglas knockout blow. We’re barely on one knee. So kick us over if you want – we won’t fall very far. In the case of some European nations we’re not even talking about being on one knee. Spain and Greece for instance, are flat on their backs, barely breathing. They didn’t get hit by Buster Douglas. They were hit by a Mack truck that kicked it in reverse and came back to run them over just for good measure. So my decoupling call for Europe is still on. I just don’t see how they pull out of this tailspin without some sort of unified action….The USA is recovering, but still weak.
I still don’t think the USA is on the verge of a renewed recession, but I know the risks are rising. My worst fear is that all this chatter of a “fiscal cliff” is paralyzing corporate America to the point where business investment is going to come to a halt from its current crawl. The one really positive sign in recent quarters has been the continued recovery in business investment paired with the government budget deficit. This is all part of the balance sheet recession healing process. But we’re at serious risk of this process coming to a stop. And recent rhetoric out of Congress regarding the debt ceiling isn’t helping matters. So I admit that the risks of recession are certainly rising, but the data isn’t there yet to convince me that my long-standing “no recession” call needs to be changed.
As for the markets – it’s a mess out there. Messier than I thought they’d be. And that’s coming from a guy who was building a short position all the way up to SP 1420. But I was a buyer in small bits on Thursday. My indicators aren’t raging bullish, but I do think we’re beginning to see some fear levels and market action that is generally consistent with a market that is a bit overdone on the downside. We’re seeing lots of extremes in different markets with the Euro tanking, Treasuries spiking and equities getting bludgeoned in a matter of weeks. The bears are betting on a worst case scenario and if Europe stays true to their actions of the last few years the bears will once again find themselves on the wrong side of the trade resulting in a rip your face off style move against them. I wouldn’t get wildly bullish here because the worst case scenario is certainly not off the table. But from a risk management perspective I certainly feel better about owning equities 8% cheaper than they were just a few weeks ago….
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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26 Comments
I don’t see the bull market in Treasuries ending for a while. Capital is fleeing back to the US and banks need to do something with all those deposits. Buying Treasuries seems like a good option in the current environment.
I think the European stock market in general (e.g. the MSCI index) is cheap right now. I’ve been buying this week.
Your algo was early to the short side even though it ended up being right with the short call and the cash call. But do you think it will be early on the long side here as well?
Well, if you think I can call market turns to the day I am afraid you’ve come to the wrong place! It’s all about money/risk management to me. When my signals say risks are high I allocate, position size and manage positions accordingly. It’s not about timing, it’s about managing the positions and the risks. So yeah, my timing will always be wrong to some degree. That’s totally expected in the approach I use….
European equities are very cheap at the moment. I just started to buy today after a new low and will continue to build up that position.
You can really get fire sale prices on some of the biggest global companies just because they are (or rather used to be) European and quote on the European stock market.
It seems that it doesn’t matter that they are truly global companies and make a big portion of their profits outside of Europe as long as their shares quotes somewhere in Europe and are in European bank’s portfolios.
European stocks fell sharply in the last month, while the US stock market was still hovering and seemingly ignored reality. While the US is now finally coming back to this reality of unemployment and very weak growth quite rapidly, Europe has already reached major support levels on the main indexes.
The biggest fear in Europe at the moment is the very weak US stock markets that could drive the European stocks even deeper.
Having a too big to fail and too big to bail out bank like JPM posting some 2 billion+ trading losses and a CEO pretending that it’s not a big deal, really scares the s**t out of many investors. We remember all the last time big banks started to report losses in the US despite very, very lose accounting rules… it didn’t end up good for Main Street and their 401K.
I agree. Europe is now approaching CAPE ratios where on a 5 year horizon it has been rewarding to buy regardless of the economic outlook.
I’m building Euro Equity exposure and have been slowly. I particularly like the conglomerates – they are at huge discounts to NAV which is predominatly large caps on PE ratios of 8-11x.
http://kelpie-capital.com/2011/12/12/europe-be-greedy-when-others-are-fearful/
http://kelpie-capital.com/2012/04/16/british-empire-investment-trust-btem-l/
Certainly no promises on timing though!
I’m net long.
I trust my NG longs, my gas equities, my IBEX martingale strategy (I’ll be buying even if it drops 20% more from here), etc.
That said on any significant bounce I’m going to sell financial calls and will look to unload, short PM’s/gold miners, etc. I want the euro to bounce so I can short it.
Good trading environment, bad buy&hold environment.
Fiscal cliff talk scares the shit out of me too, but I think there is a lot of pretending, looking forward to the dantesque comedy by TPTB.
Thanks for sharing this thought.
Agree. I think the market will rebound here, then down again to test the recent low.
Many European indexes are sht term oversold and bullish divergent, Eur-Usd seems to lack conviction at new lows…It seems there could be a set up for a short squeeze on pre G8 declarations.
From Trichet to Draghi = from passive to activist. If you don’t fight the Fed, you would do well not to stick your chin in the air at the ECB. They don’t quite have the one-punch knockout power of Bernanke, but you would do well not to take them too lightly.
So what I’m getting from all this banter is that the economy isn’t based on the health of the economy, but, rather, on how much various governments will kick in with tax-raised or created money. Is this an accurate assessment?
A rigorous poll of the investment community was conducted this morning regarding the Greek situation. Here are the results:
2% believe Greece will stay
2% believe Greece will leave the Euro
96% are wondering what’s for lunch?
Hey, it’s Friday before the long weekend around here, and we’ve got an early close. What did the pollsters expect?
Getting back to Mike Tyson, how dominant was that guy during the 80′s. Growing up during that time period was awesome for boxing, you could watch almost all of the fights on HBO. We didn’t have HBO but my dad and I still managed to watch all those fights. It was a shame to watch him spiral downward, could of been the greatest.
I am going to start legging into longs when the 10yr hits a new high – low on interest rates. I kind of feel the 10yr will breach 1.50 before its all said and done.
I still remember the Tyson fights like they were yesterday. Good good times.
Tyson was entertaining, but for pure boxing brilliance Mayweather stands head-and-shoulders above anything Iron Mike ever dreamed of becoming. Living in CA, do you ever attend any of the big fights?
I wish. Most of the fights out here are in Vegas and that’s a town I can’t visit for an extended period of time without suffering near fatal results….
Ha, I just had my first Vegas experience two weeks ago (presented a paper at an academic conference). That’s a city a man can lose himself in…quickly, and with great remorse.
Good article and some very pertinent comments – for traders. And I guess if one is not a regular trader this is not the site to read.
Yes USTs were an obvious buy when the TLT hit $110 recently (now $124), but really folks – do any of you truly think that years down the road when today’s TLT purchase is still yielding 2.8% and a good blue chip dividend payer that today is yielding 3+% and is increasing its dividend an average of 10%/year – that USTs will still be the darlings they are today.
I will keep my investments on the side of Capitalism and as far from the government as possible. Folks seem to have forgotten what happened to all the buyers of Treasuries in the 50′s, 60″ and early 70′s as real inflation returned.
And ultimately, as recent elections have proved, the lowest common denominator rules. Inflation will return as surly as the sun rises.
No one has mentioned Facebook in the last 30 seconds so I think the world might be ending…
> My worst fear is that all this chatter of a “fiscal cliff” is paralyzing corporate America to the point where business investment is going to come to a halt from its current crawl
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I know that is what repiblicans are telling us – that uncertainty and taxes are paralyzing the business. I am not buying it. The business has to invest 3-5-7 years in advance, there is always a lot of uncertainty about the evolution of markets in that time. At least, with taxes you only pay if you have profit. But when you invested several billions and ir doesn’t work out 5 years from now, that is bad.
Our company is investing like crazy in the projects several years out. That is all I can say. Of course, they want to pay less taxes but it is not a defining factor.
Perhaps these short-term obstacles are important for more short-term oriented businesses like retail but this is not the case for heavey investment businesses.
JPM bet on a Euro recovery and you have seen what happened to the “Best” risk managers. The globalized economy is suffering from massive debt based consumption (as opposed to debt based investment/growth positions). The debt is coming home to roost and the pain is transmitted through the markets.
even after PSI Greece it’s still considerably larger than Lehman. Ok this time everyone is overweight cash, long VIX and Puts not to mention short EUR. Now we all think that the firewall for Greece will be tested sooner than later. I say the ECB will take a few swings over the next days, I am in for a bouce with a tight stop loss.
Currently I am considering buying gold (miners) and perhaps even silver (miners) but this is NOT a “”buy and hold”" strategy.
My favourite indicators give mixed signals. One seems to indicate that our Benny Bernanke is busy implementing QE 3.
I know that Mr. market is always right
Why in the world would you buy miners and not the metal itself?
Price of gold is closely correlated to short term interest rates and we all know that that is not likely to change anytime soon. Plus, gold is hitting major support levels. One of the best and clearest entry points i have seen in my career.
I know Europe is in the spotlight but we need to keep a close eye on China. As you correctly point out, there’s probably not “far to fall” for Europe/USA as they are already down and also the problems are so well understood that investors are hedged. China is different – they have a long, long way to fall and nobody is hedged – only the “crackpots” like Jim Chanos and Hugh Hendry. There’s the potential for what Neils Jensen was discussing the other day – a “correlated error”.
The signs are that China could really be slowing – if it gains traction it may have a bigger global impact on markets than most presently believe…
This bull still has legs. For the third year we are talking about the same issue. Namely, greece, china and the budget deficit. Yet the market, and corp profits have marched on.
1998 had the russian default and LTCM within a couple of months. The market tanked then went on to finish the year up. The global economy can absorb whatever happens to greece or china. the ensuing selloff will be a great opp to buy.
hoo-rah — lets get ready for ANOTHER DOW 13,000 party — the Bull is sliding sideways as the meager 2% inflation and stagnate wages marches on …