Biderman on the markets.
here is no way sustainable economic growth is at all possible in the United States, Europe and Japan over the near term under current government policies of providing citizens with all sorts of economically unfeasible cradle-to-grave entitlement programs. And without sustainable growth there is no way stock prices will remain as high as they are for very much longer.
Smaller spreads was supposed to make things better, but it took regulators some 10 years to understand that by decreasing the spread, the market would get less efficient, at least if you trade more than 100 shares. We have always argued that by decreasing the spread, many functions of the “natural” market maker would dissapear, as there is no spread to motivate the trader being in the market, providing the nescessary liquidity. We are not arguing for the old times to return. Technological advances are great, but only if the market benefits. The development over the past years, with Broken Markets, is now slowly being acknowledged by the regulators. Irrespective of what the academics tell you, liquidity is not better, trading impact is higher etc. One of our suggestions is starting off by applying a spread in relations to the company market cap. There are many more suggestions, but first let’s see if the SEC finally starts realising the market is broken. From WSJ.
For some stock prices, the new math might look a lot like the old math: Regulators are thinking about bringing back the fraction.
The move would at least partly undo an 11-year-old rule that replaced fractions of a dollar in stock prices, like 1/8 and 1/16, with pennies. The idea of that change was to trim investors’ trading costs: One-cent increments can lead to narrower gaps between the prices at which brokers buy and sell shares—potentially reducing their opportunity to shave off profits.
Market commentary by Hussman Funds.
For anyone who works to infer information from a broad range of evidence, one of the important aspects of the job is to think carefully about the structure of the data – what is sometimes called the “data-generating process.” Data doesn’t just drop from the sky or out of a computer. It is generated by some process, and for any sort of data, it is critical to understand how that process works.
For example, one of the moments of market excitement last week was the reported jump in new housing starts for September. But later in the week, investors learned that there was a slump in existing home sales as well. If we just take those two data points at face value, it’s not clear exactly what we should conclude about housing. But the story is clearer once we consider the process that generates that data.
One part of the process is purely statistical. The housing data that is reported each month actually uses monthly data at an annual rate, so the jump from 758,000 to 852,000 housing starts at an annual rate actually works out to a statement that “During September, in an economy of about 130 million homes, about 100 million which are single detached units, a total of 9,500 more homes were started than in August – a fluctuation that is actually in the range of month-to-month statistical noise, but does bring recent activity to a recovery high.” Now, in prior recessions, the absolute low was about 900,000 starts on an annual basis, rising toward 2 million annual starts over the course of the recovery. The historical peak occurred in 1972 near 2.5 million starts, but the period leading up to 2006 was the longest sustained increase without a major drop. In the recent instance, housing starts bottomed at 478,000 in early 2009, so we’ve clearly seen a recovery in starts. But the present level is still so low that it has previously been observed only briefly at the troughs of prior recessions.
Guest post by Peter Tchir.
CDS Lagging for First Time in Awhile
Yesterday in particular was a huge outperformance for CDS. Spanish bonds were more than 30 bps tighter across the board. That lead to a major squeeze in all the CDS indices.
Yet this morning, SNR FINS in Europe is 5 wider, MAIN is 3 wider, and even IG19 is back to 91 from a low of 89.25 yesterday. IG19 is back to about 4 bps rich to fair value, another sign that yesterday’s capitulation lower was driven by pain and fast money rather than specific credit selection.
On the bond side, Spain has been able to eke out small gains so far, but Italian bonds are definitely weak, particularly the front end.
What will the “bailout” rate be?
It seems a certainty that Spain will ask for and receive a bailout package. The “conditionality” will be a key issue. How onerous will the terms meet and what will the ongoing tests be? If the tests are strict and quarterly, Spain may not receive much money at all. I think the terms will be far less draconian than for Greece but tough enough that the market will be uncertain about the longevity of the program.
Asides from the conditionality, what will the rate be? Amazingly, there seems to be very little conjecture on that. Knowing that Spain will get a credit line and that the ECB will initiate OMT is great, but at some point the rate matters. It certainly matters for Spanish bonds.
Some 25 years ago, Wall Street saw its biggest one-day percentage slide ever sparking familiar worries about small investors and depressions. The long-term damage wasn’t as severe as the 1929 crash, but the 1980’s bubble pop was spectacular by any measure. Here’s a look at 10 other great market crashes and some of their unusual consequences. Courtesy Market Watch. Full article here.
Of late market watchers in the U.S. are wondering if the QE3 stimulus will have a comparable effect on markets as the first two rounds of easing. And of course we in the US are nearing the end of the third quarter with earnings season just over the horizon. Around the world the ongoing euro zone financial crisis remains in the center circle of the world’s financial circus. But what caught my eye this afternoon in doing my weekly world market updatewas the ghastly performance of Shanghai Composite.
My friend and occasional guest contributor Chris Kimble came up with the notion of an Eiffel Tower formation as an emblematic way to discuss asset bubbles, which was featured in a guest commentaryfrom last summer. The behavior of the Shanghai index over a two-year period beginning in late 2006 is a classic example, as the first two charts illustrate.
Hussman of Hussman Funds notes some rather interesting signals in his latest weekly market update.
As of Friday, our estimates of prospective return/risk for the S&P 500 have dropped to the single lowest point we’ve observed in a century of data. There is no way to view this as something other than a warning, but it’s also a warning that I don’t want to overstate. This is an extreme data point, but there has been no abrupt change; no sudden event; no major catalyst. We are no more defensive today than we were a week ago, because conditions have been in the most negative 0.5% of the data for months. This is just the most negative return/risk estimate we’ve seen. It is what it is.
Since we estimate prospective return/risk on a blended horizon of 2-weeks to 18 months, we are not making a statement about the very long-term, but only about intermediate-term horizons (prospective long-termreturns have certainly been worse at some points, such as 2000). As always, our estimates represent theaverage historical outcome that is associated with a given set of conditions, and they don’t ensure that any particular instance will match that average. So while present conditions have been followed by extraordinarily poor market outcomes on average, there’s no assurance that this instance can’t diverge from typical outcomes. Investors should ignore my concerns here if they believe that the proper way to invest is to bet that this time is different.
Guest post by Doug Short.
Here is a follow-up on my monthly valuation updates. When I started including the Crestmont P/E updates in my monthly valuation reporting, I developed a scatter graph to illustrate the correlation between the Crestmont P/E and inflation.
My monthly valuation updates of the P/E10 ratio (Is the Stock Market Cheap?) have not included a comparable scatter graph, so I spent some time today crafting the first chart below. I’ve included some key highlights: 1) the extreme overvaluation of the Tech Bubble, 2) the valuations since the start of last recession, 3) the average P/E10 and 4) where we are today.
With the markets at delicate levels, one shouldn’t get too optimistic. Many of the under performers reversed early this summer, and have put on a stellar performance since the lows we saw earlier. Spain’s Ibex has been ove of the “leaders”. With IBEX; MIB and a few others hitting resistance levels, make sure to watch these indices, as they risk leading us lower short term. We agree with Biderman, don’t lose money while you wait for the market correction.
Today, my overall market strategy is to not lose money while waiting for the stock market to plunge. I have been providing unique investment research to professional investors since 1990 and what is more I am proud of my results. Originally a short seller, I started Liquidity TrimTabs in 1995 when I realized my shorts were no longer working because lots of corporate buying plus huge mutual fund inflows had been booming stock prices. Then at the end of 1999 I said stocks had to crash because there was not enough cash to buy all the new shares from IPOs and option conversions that would come to market in 2000. I was a few months early. In the summer of 2002 we called the ultimate market and economic bottom. From 2004 through October 2007 we were almost continuously bullish.
I read report after report that pointed out the Bear Case. The Demise of Europe, Hard Landing in China, and Fiscal Cliff dominated the analysis, roughly in that order.
I agree with a lot of the Bear case. I can see it. I can argue it, heck, since much of it is focused on the bond market, I think I could argue it better than most. The problem with the bear case isn’t that it isn’t compelling, just that it hasn’t worked.
So what is wrong with the Bear Case?
For one, the bear case, in many instances is done with as much “fluff” as cheerleading bull arguments.
If Spain rolls 1 billion of debt, no new debt was created. Sometimes, the “debt on debt” argument is devolving into a rant. If a country can replace 4% average coupon debt with 2% average coupon, that is useful. It decreases current deficit. It reduces how much money has to be borrowed to pay interest. I’m not convinced this will happen, and I am concerned that the focus is on the short end, but average coupon does matter, access to cheap debt to roll old debt does matter. So this is one area where the bears are potentially too pessimistic.