Less overbought, less overbullish, but still facing a crash. This weeks commentary by Hussman funds.
Over the past two weeks, the S&P 500 has lost months of upside progress in a handful of sessions. This is the very characteristic initial outcome of the overvalued, overbought, overbullish syndrome that has been in place until recently (the decline has cleared the overbought component). The good news here is that we now estimate the 10-year prospective total return on the S&P 500 to be about 5.2% annually as a result of the recent decline. As a rule of thumb, a 1% market decline in a short period of time tends to increase the prospective 10-year return, not surprisingly, by about 0.1%. However, that approximation is less accurate over large movements or over extended periods of time, where growth in fundamentals and compounding effects become important.
The bad news here is that given the sharp deterioration in market internals, and the likelihood of an emerging recession, we have no basis to expect market losses to be contained to such minimal levels. It is important to recognize that the scope of our concerns is on the order of 25-35% market losses over 12-16 months, and those concerns aren’t meaningfully resolved by a 5% decline over the course of a few sessions. A good week in the market is unlikely to change our assessment unless it produces a material improvement in our measures of market internals. The fast, furious, prone-to-failure rallies that often result from short-term oversold conditions aren’t generally enough, and usually reflect short-covering rather than sustainable investment demand. Improved valuations are often supportive of that sort of sustainable demand, but that would require a much larger decline than we’ve seen thus far.
In an expected move, Moodys downgrades 16 Spanish banks. The Trader has been writing about the rotten Spanish banking sector for a year at this stage. The rating agencies are realizing the shape of the Spanish banks now. Whatever you think, cheap Spanish properties are slowly hitting the market. By Moody´s.
Madrid, May 17, 2012 — Moody’s Investors Service has today downgraded by one to three notches the long-term debt and deposit ratings for 16 Spanish banks and Santander UK PLC, a UK-domiciled subsidiary of Banco Santander (Spain) SA. The rating downgrades primarily reflect the concurrent downgrades of most of these banks’ standalone credit assessments, and in five cases also Moody’s assessment that the Spanish government’s ability to provide support to the banks has reduced.
Moody’s Investors Service has today downgraded by one to three notches the long-term debt and deposit ratings for 16 Spanish banks and Santander UK PLC, a UK-domiciled subsidiary of Banco Santander (Spain) SA. The rating downgrades primarily reflect the concurrent downgrades of most of these banks’ standalone credit assessments, and in five cases also Moody’s assessment that the Spanish government’s ability to provide support to the banks has reduced.
The debt and deposit ratings declined by one notch for five banks, by two notches for three banks and by three notches for nine banks. The short-term ratings for 13 banks have also been downgraded between one and two notches, triggered by the long-term ratings changes.
JPMorgan Chase is investigating whether London-based traders hid the extent of losses on credit derivatives positions, according to people familiar with an internal probe following last week’s revelation of $2bn losses. The investigation comes as Jamie Dimon, chief executive, took to US television to say he was “dead wrong” to have dismissed questions over the risk-taking of his chief investment office. The futures of the trading unit – a subset of the CIO that incurred the losses – and people who work there are under question, with departures possible in the next 24 hours, people familiar with the matter said.http://www.ft.com/intl/cms/s/0/adc55f24-9d06-11e1-9327-00144feabdc0.html?ftcamp=published_links%2Frss%2Fhome_uk%2Ffeed%2F%2Fproduct#axzz1uofkmjQk
Eurozone central bankers have talked publicly for the first time of managing a possible Greek exit from Europe’s monetary union as stalemate in Athens talks on a coalition government raises the prospect that Greece will renege on the terms of its international bailout. The comments by members of the European Central Bank’s governing council indicate that the risk of eurozone fragmentation is being taken increasingly seriously by the region’s policymakers. http://www.ft.com/intl/cms/s/0/680d8532-9d11-11e1-9327-00144feabdc0.html#axzz1uofkmjQk
Angela Merkel’s centre-right Christian Democratic Union suffered a bruising defeat on Sunday night in the election of a new parliament in North Rhine-Westphalia, Germany’s most populous state, when the centre-left opposition of Social Democrats and Greens won a clear majority. The vote for the CDU slumped to just 26 per cent, according to the first exit polls, by far its worst result in the state in the post-war period, and a serious setback for the German chancellor. http://www.ft.com/intl/cms/s/0/8edb6b32-9d18-11e1-9327-00144feabdc0.html#axzz1uofkmjQk
All you need to read and some more below.
Angela Merkel’s euro crisis strategy is unpopular and she has lost a number of allies.Worse yet, French presidential candidate François Hollande has pledged a change of course from the strict austerity measures she supports.
But in the end, the Paris-Berlin alliance will likely survive and austerity will continue, albeit with a few growth initiatives thrown in.
Full article click here.
Thank you very much for inviting me to speak here at the New York Federal Reserve Bank.
Intellectual discourse is, of course, extraordinarily valuable in reaching truth. In this sense, I welcome the opportunity to discuss my views on the economy and monetary policy and how they may differ with those of you here at the Fed.
That said, I suspect my views are so different from those of you here today that my comments will be a complete failure in convincing you to do what I believe should be done, which is to close down the entire Federal Reserve System.
My views, I suspect, differ from beginning to end. From the proper methodology to be used in the science of economics, to the manner in which the macroeconomy functions, to the role of the Federal Reserve, and to the accomplishments of the Federal Reserve, I stand here confused as to how you see the world so differently than I do.
I simply do not understand most of the thinking that goes on here at the Fed, and I do not understand how this thinking can go on when in my view it smacks up against reality.
Please allow me to begin with methodology. I hold the view developed by such great economic thinkers as Ludwig von Mises, Friedrich Hayek, and Murray Rothbard that there are no constants in the science of economics similar to those in the physical sciences.
Still rather bearish, Hussman delivers some good points below. From Hussman funds.
Over the past 13 years, and including the recent market advance, the S&P 500 has underperformed even the minuscule return on risk-free Treasury bills, while experiencing two market plunges in excess of 50%. I am concerned that we are about to continue this journey. At present, we estimate that the S&P 500 will likely underperform Treasury bills (essentially achieving zero total returns) over the coming 5 year period, with a probable intervening loss in the range of 30-40% peak-to-trough.
Why? First, with respect to 5-year prospective returns, it’s important to recognize that returns at that horizon are primarily driven by valuations – not the “Fed Model” kind, but the normalized earnings and discounted cash flow kind. Stocks remain strenuously overvalued here, and only appear “fairly priced” relative to recent and near-term earnings estimates because corporate profit margins are more than 50% above their long-term norm. Meanwhile, corporate profits as a share of GDP are about 70% above the long-term average. As I detailed in Too Little To Lock In, these abnormally high margins are tightly related (via accounting identity) to massive fiscal deficits and depressed household savings rates, neither which are sustainable.
Our projection for 10-year S&P 500 total returns – nominal – is about 4.4% annually, which is far better than the 2000 peak, far inferior to the 2009 trough, and save for the period before the 1929 crash, worse than any prospective return observed prior to the late-1990′s bubble – even in periods having similarly depressed interest rates.
Grant Williams on firewalls, central banks and much more in the latest things that makes you go hmmm
“But what about the Maginot Line?” I hear you cry… Well, the German army found a slightly simpler solution to that particular ‘impregnable defense’; they attacked France through Luxem- bourg and then Belgium, completely bypassing the main part of the Maginot Line – thus render- ing it virtually useless.
That’s the problem with firewalls, you see; they ALWAYS seem as though they provide a solution to the problem they are built to mitigate but they rarely do.
Since 2008, the Central Banks of the world along with their respective govern- ments have been moving heaven and earth to put in place the kind of firewalls that will protect the world from a ‘collapse of the system’ – even though we literally have no idea just what that ‘collapse’ would look like or entail.
Quantitative Easing, TARP, HAMP, LTRO I & II, Ba- sel III and all sorts of other schemes have been dreamt up by those in power in order to protect the world from something that is, essentially, unavoidable; the after-effects of two decades spent bingeing on debt and free money. And what has been the single most often-used solu- tion employed in the treatment of this particular problem? Yes, more free money.
Let’s be clear, printing money out of thin air CANNOT fix this. If it COULD, then why not just give everybody in the world $10,000,000 in cold, hard cash and we can all go about our business? The question is redundant. The answer obvious. But that hasn’t stopped the Keynesian geniuses at the wheel from persisting down this particular road for several years now in the misguided be- lief that just a LITTLE more free cash will finally get things flowing again.