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Monday, 1 June 2009
‘The trend is your friend - until it bends’
Cast a stone at random into a crowd of stock market enthusiasts and chances are it would land on someone who might confess to being somewhat bewildered by the strength and endurance of the present rally.
Cast a stone at random into a crowd of stock market enthusiasts and chances are it would land on someone who might confess to being somewhat bewildered by the strength and endurance of the present rally.
The large bounce in US stocks since early May might initially have been triggered by a massive short-squeeze (at least according to Bank of America-Merrill Lynch which said so in a May 1 report) but the elements of fear, greed, liquidity and momentum have since combined to produce an undeniably potent cocktail which has sent prices rising ever-higher - aided, of course, by all the right noises from politicians and officialdom.
However, although market behaviour suggests a firm and widespread conviction in the recovery story, the truth is that plenty of scepticism lurks beneath the surface and many observers publicly or privately believe that the party may very well end soon, possibly as abruptly as it began.
Although we have said since early April in this column that momentum and liquidity are clearly in favour of playing this as a V-shaped recovery, we have also said that it would be prudent to bear in mind the flip side, or the likelihood that all we are witnessing is a temporary (albeit large) blip brought on by massive pump-priming but one that may well peter out, possibly even before the end of the year. Our guess is that although everyone is aware of this danger privately, a poll of expert observers would probably only yield half who would publicly subscribe to this view.
A fine example of this was BT’s Investment Roundtable, published on May 28 titled ‘Bear market rally or real rebound?’ which featured four participants - two bullish and two bearish.
First among the bulls was Templeton Asset Management’s Mark Mobius, who said growth has already begun and will continue as long as governments continue to stimulate their economy and increase the money supply. ‘The market is looking into 2010 and it apparently likes what it sees (earnings-wise),’ said Mr. Mobius. ‘Of course, there will be overshooting and corrections along the way...the prospects for new credit creation are very high in view of the increased money supply and lower interest rates. Banks will be hard-pressed to continue conservative lending policies.’ In short, it’ll be business as usual by next year once banks start lending again and all will be right with the world.
In contrast, Private Capital fund manager William Thompson said the omens for a quick recovery are ‘not good’ because sustainable economic recovery in the wake of a banking crisis takes longer than a standard cyclical adjustment.
‘Japan stuttered along for a dozen years before it ‘enjoyed’ five years of substandard growth. In a sense, it never fully recovered to its pre-crisis conditions,’ he said. For the US, Mr. Thompson said the huge amounts of bailout money being pumped in has stabilised things but deleveraging has some way to go. ‘We may see a positive quarter or two by end-2009 or early 2010 but that should not be confused with renewed sustainable growth. We are all Japanese now!’.
Jesper Koll of Tantallon Research said corporate earnings will explode next year because wages are being cut, supply chains are being streamlined and commodity prices are falling. However, although bullish, he added: ‘This recent rally in my view, is not a bear market rally but the beginning of a new reality - markets will be highly volatile and much more range-bound rather than trending upwards.’
Finally, Prof Eisuke Sakakibara, formerly Japan’s vice-finance minister and now of Waseda University, said after two quarters of very steep economic declines, it’s only natural to see a rebound. ‘Stocks have rallied but this is what could be called a bear market rally...people try to cling to any sort of good numbers and there are some good numbers here and there after a very sharp decline.’
Calling this a ‘balance sheet recession’, Prof Sakakibara said ‘this is exactly what happened in Japan in the 1990s and it is now happening in the US’.
If we were to summarise all these views, we’d arrive at the somewhat simplistic ‘the trend is your friend - until it bends’. For now, liquidity and momentum justify buying the dips but signals to sell into strength appear to be growing.
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‘The trend is your friend - until it bends’
By R SIVANITHY
1 June 2009
Cast a stone at random into a crowd of stock market enthusiasts and chances are it would land on someone who might confess to being somewhat bewildered by the strength and endurance of the present rally.
The large bounce in US stocks since early May might initially have been triggered by a massive short-squeeze (at least according to Bank of America-Merrill Lynch which said so in a May 1 report) but the elements of fear, greed, liquidity and momentum have since combined to produce an undeniably potent cocktail which has sent prices rising ever-higher - aided, of course, by all the right noises from politicians and officialdom.
However, although market behaviour suggests a firm and widespread conviction in the recovery story, the truth is that plenty of scepticism lurks beneath the surface and many observers publicly or privately believe that the party may very well end soon, possibly as abruptly as it began.
Although we have said since early April in this column that momentum and liquidity are clearly in favour of playing this as a V-shaped recovery, we have also said that it would be prudent to bear in mind the flip side, or the likelihood that all we are witnessing is a temporary (albeit large) blip brought on by massive pump-priming but one that may well peter out, possibly even before the end of the year. Our guess is that although everyone is aware of this danger privately, a poll of expert observers would probably only yield half who would publicly subscribe to this view.
A fine example of this was BT’s Investment Roundtable, published on May 28 titled ‘Bear market rally or real rebound?’ which featured four participants - two bullish and two bearish.
First among the bulls was Templeton Asset Management’s Mark Mobius, who said growth has already begun and will continue as long as governments continue to stimulate their economy and increase the money supply. ‘The market is looking into 2010 and it apparently likes what it sees (earnings-wise),’ said Mr. Mobius. ‘Of course, there will be overshooting and corrections along the way...the prospects for new credit creation are very high in view of the increased money supply and lower interest rates. Banks will be hard-pressed to continue conservative lending policies.’ In short, it’ll be business as usual by next year once banks start lending again and all will be right with the world.
In contrast, Private Capital fund manager William Thompson said the omens for a quick recovery are ‘not good’ because sustainable economic recovery in the wake of a banking crisis takes longer than a standard cyclical adjustment.
‘Japan stuttered along for a dozen years before it ‘enjoyed’ five years of substandard growth. In a sense, it never fully recovered to its pre-crisis conditions,’ he said. For the US, Mr. Thompson said the huge amounts of bailout money being pumped in has stabilised things but deleveraging has some way to go. ‘We may see a positive quarter or two by end-2009 or early 2010 but that should not be confused with renewed sustainable growth. We are all Japanese now!’.
Jesper Koll of Tantallon Research said corporate earnings will explode next year because wages are being cut, supply chains are being streamlined and commodity prices are falling. However, although bullish, he added: ‘This recent rally in my view, is not a bear market rally but the beginning of a new reality - markets will be highly volatile and much more range-bound rather than trending upwards.’
Finally, Prof Eisuke Sakakibara, formerly Japan’s vice-finance minister and now of Waseda University, said after two quarters of very steep economic declines, it’s only natural to see a rebound. ‘Stocks have rallied but this is what could be called a bear market rally...people try to cling to any sort of good numbers and there are some good numbers here and there after a very sharp decline.’
Calling this a ‘balance sheet recession’, Prof Sakakibara said ‘this is exactly what happened in Japan in the 1990s and it is now happening in the US’.
If we were to summarise all these views, we’d arrive at the somewhat simplistic ‘the trend is your friend - until it bends’. For now, liquidity and momentum justify buying the dips but signals to sell into strength appear to be growing.
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