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Monday, 5 January 2009
Look to Sell into Strength or Risk Being Bear-Trapped - Again
For most of 2008, the advice given in this column was to selectively buy the dips but to always sell into strength because all bounces would eventually turn out to be bear traps.
Look to Sell into Strength or Risk Being Bear-Trapped - Again
By R SIVANITHY 5 January 2009
For most of 2008, the advice given in this column was to selectively buy the dips but to always sell into strength because all bounces would eventually turn out to be bear traps.
As 2009 kicks off, we see no reason to change this - as the economic data worsens and it becomes clear that the recession could be worse than expected and last probably for most of this year. Investors will find it increasingly difficult to justify continued buying, especially as earnings head south and profit warnings become the norm.
One reason for this assertion is that 2008 demonstrated very graphically the folly in believing that the market discounts information efficiently. It does not. Every time there was a bounce there was no shortage of calls that the ‘worst is over’, only for this to be later proven wrong.
The main problem, of course, is asymmetrical bias introduced by analysts, most of whom always want to call a ‘buy’ because of momentum, fear of losing out, and a need to keep clients invested in order to generate business.
There’s also bias introduced by the US government with its bailout packages that are funded by the printing presses. Goldman Sachs estimates that the Fed’s balance sheet will be US$4 trillion-US$5 trillion when this is over, double the present figure.
So it is that a year after the market started correcting, it’s very likely that urgings to buy will soon be issued based on the argument that after so long, the worst must surely be discounted because market inefficiency cannot last this long.
This is highly unlikely, with the present bounce being yet another bear market rally since it has come despite the Singapore government downgrading 2009’s growth forecast to possibly as low as -2 per cent. There’s also news that local property prices are in free fall (possibly as much as -30 to -35 per cent in the high end) and as US manufacturing chalked up its worst performance in 30 years.
On the latter point, it’s also worth noting that the US Institute of Supply Management’s estimate of national manufacturing conditions at 32.4 was way below the consensus estimate of 35.4, suggesting that the pace of contraction is accelerating and that analysts are still under- appreciating the risks to the US economy.
Unlike some of its competitors, research outfit Ideaglobal, however, has been consistently spot-on in its assessment of economic conditions, and over the weekend it pointed to a deterioration in most of the underlying components of the US manufacturing numbers as probably marking the next leg down for months to come.
‘In our estimation, the data confirms that weakness in the domestic side of the ledger is complementing deteriorating global conditions. The weakness in new orders, alongside weakness in production, is another indication of the soft demand for new goods on the back of a deteriorating labour market ...’ said Ideaglobal.
In its US Economics Analyst report dated Dec 31, Goldman Sachs said it expects the massive fiscal and monetary stimulus to end the technical recession some time in the second half of 2009.
‘This should set the stage for a very sluggish recovery that keeps the unemployment rate on an upward trajectory and the federal funds rate near zero per cent through late 2010. But the uncertainty is large. In the housing and credit markets, our main questions are how far home prices will fall, what this means for credit losses and how far banks will reduce their leverage. Downside risks predominate in all of these areas.’
Most interestingly, Goldman said even if policymakers manage to stabilise economic activity in 2009-10, the risk of unwanted deflation is likely to be substantial thereafter.
Of course, the present play on the major indices could continue for a while longer. Much of the Straits Times Index’s (STI) rise over the past week, however, has come from gains in a few large caps, in particular UOB whose gains illustrate perfectly the current disconnect between market sentiment and economic/earnings reality.
This disconnect, however, shouldn’t last too long, so those who bought a fortnight ago when this column highlighted a possible window-dressing play on the STI should soon sell into strength - or risk being caught in yet another bear trap.
1 comment:
Look to Sell into Strength or Risk Being Bear-Trapped - Again
By R SIVANITHY
5 January 2009
For most of 2008, the advice given in this column was to selectively buy the dips but to always sell into strength because all bounces would eventually turn out to be bear traps.
As 2009 kicks off, we see no reason to change this - as the economic data worsens and it becomes clear that the recession could be worse than expected and last probably for most of this year. Investors will find it increasingly difficult to justify continued buying, especially as earnings head south and profit warnings become the norm.
One reason for this assertion is that 2008 demonstrated very graphically the folly in believing that the market discounts information efficiently. It does not. Every time there was a bounce there was no shortage of calls that the ‘worst is over’, only for this to be later proven wrong.
The main problem, of course, is asymmetrical bias introduced by analysts, most of whom always want to call a ‘buy’ because of momentum, fear of losing out, and a need to keep clients invested in order to generate business.
There’s also bias introduced by the US government with its bailout packages that are funded by the printing presses. Goldman Sachs estimates that the Fed’s balance sheet will be US$4 trillion-US$5 trillion when this is over, double the present figure.
So it is that a year after the market started correcting, it’s very likely that urgings to buy will soon be issued based on the argument that after so long, the worst must surely be discounted because market inefficiency cannot last this long.
This is highly unlikely, with the present bounce being yet another bear market rally since it has come despite the Singapore government downgrading 2009’s growth forecast to possibly as low as -2 per cent. There’s also news that local property prices are in free fall (possibly as much as -30 to -35 per cent in the high end) and as US manufacturing chalked up its worst performance in 30 years.
On the latter point, it’s also worth noting that the US Institute of Supply Management’s estimate of national manufacturing conditions at 32.4 was way below the consensus estimate of 35.4, suggesting that the pace of contraction is accelerating and that analysts are still under- appreciating the risks to the US economy.
Unlike some of its competitors, research outfit Ideaglobal, however, has been consistently spot-on in its assessment of economic conditions, and over the weekend it pointed to a deterioration in most of the underlying components of the US manufacturing numbers as probably marking the next leg down for months to come.
‘In our estimation, the data confirms that weakness in the domestic side of the ledger is complementing deteriorating global conditions. The weakness in new orders, alongside weakness in production, is another indication of the soft demand for new goods on the back of a deteriorating labour market ...’ said Ideaglobal.
In its US Economics Analyst report dated Dec 31, Goldman Sachs said it expects the massive fiscal and monetary stimulus to end the technical recession some time in the second half of 2009.
‘This should set the stage for a very sluggish recovery that keeps the unemployment rate on an upward trajectory and the federal funds rate near zero per cent through late 2010. But the uncertainty is large. In the housing and credit markets, our main questions are how far home prices will fall, what this means for credit losses and how far banks will reduce their leverage. Downside risks predominate in all of these areas.’
Most interestingly, Goldman said even if policymakers manage to stabilise economic activity in 2009-10, the risk of unwanted deflation is likely to be substantial thereafter.
Of course, the present play on the major indices could continue for a while longer. Much of the Straits Times Index’s (STI) rise over the past week, however, has come from gains in a few large caps, in particular UOB whose gains illustrate perfectly the current disconnect between market sentiment and economic/earnings reality.
This disconnect, however, shouldn’t last too long, so those who bought a fortnight ago when this column highlighted a possible window-dressing play on the STI should soon sell into strength - or risk being caught in yet another bear trap.
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