Login

Archive for the ‘Market Talk’ Category

« Older Entries

Great commentary on market liquidity

Monday, November 28th, 2011

As you know, we strongly espouse the analysis of ‘liquidity’ into one’s asset allocation modelling. This is a fairly unique approach of our software. At a recent presentation in London, Mark Carney (current governor of Bank of Canada) gave some remarks on liquidity. As a brief bio, he is a former Harvard student, former Goldman banker and currently ranked by the Financial Times as a ‘top figure in the financial world’.

His wiki entry: http://en.wikipedia.org/wiki/Mark_Carney

Global liquidity is an amorphous concept. The Usual Suspect for any event or dynamic too complicated to explain, global liquidity is the Keyser Söze of international finance. It has no agreed definition and, as a consequence, there has been no coherent policy approach to tame its more violent tendencies.

However here we have a quote which clearly emphasizes why smart money should continue to focus on liquidity’s impact on portfolio construction:

With increasing financial integration, the impact of global liquidity on domestic financial and economic conditions is growing.3 The recent Irish experience demonstrates how it can amplify the cyclical dynamics of domestic credit and asset prices.

The link to the full talk is: http://www.bankofcanada.ca/2011/11/speeches/global-liquidity/

Posted in Business Cycle, Market Talk, Our Approach | No Comments »

What does Monti mean for the Markets?

Wednesday, November 16th, 2011

Speaking with top hedge fund managers, policy makers and bankers gives one a different perspective. We recently had the chance to discuss market views with a highly influential person in the European crisis. The view was that the “Italian crisis” was truly one of leadership – though that has been used all too frequently in recent months. This official believed that Italy, due to its massive wealth and deep capital markets, could survive the recent spike in borrowing costs and risk aversion. In other words, that it would not go down the path of Greece, Ireland and Portugal.

Then Berlusconi steps down, in comes Mr Monti. He is often called a technocrat. What is a technocrat? According to dictionary.com, it is defined as one who is a technical expert, especially one in a managerial or administrative position. Many ‘smart money’ managers we have spoken to recently have felt very passionately that Monti is without the support of the populace and that this will be another failed attempt by European policymakers.

Interestingly, today Mr Antonio Borges of the IMF (director of Europe) stepped down. Markets have sold off aggressively in the past week. Markets sold off pretty aggressively after the announcement.

Since October however, markets are largely unchanged with the S&P hovering between 1220 and 1280. This goes to show that markets are largely discounting very little from the day to day noise and widely fluctuating markets with no clear trend are very possible. It is for this reason that we adhere to our approach of sticking to the fundamentals, keeping an eye on sentiment and technicals, and letting the data speak for itself.

This is not a time for trading in and out of positions, but it is definitely a time when a tactical asset allocation is key.

Posted in Asset Allocation, Market Talk, Our Approach | No Comments »

Move to the sidelines?

Friday, September 9th, 2011

With recent economic data continuing to disappoint (12 month GDP growth to 2Q 11 was 1.6%), it is useful to get some macro perspective. The world is still awash with liquidity, but in light of the escalating European sovereign debt and banking sector crises, weaker than expected US economic data and deteriorating credit market conditions, is it time to ‘move to the sideline’? When it comes ot the fundamentals of sound investing, it is crucial to see beyond short term volatility and focus on long term value.

Our approach has always espoused a ‘lets look at what the data is telling us’ approach. Our models are seeing a spike in fear, but plenty of value in risk assets. Most likely the future will be brighter  than fearful investors anticipate. The arbitrage between fear and fundamentals is a rare opportunity for far sighted investors.

Some bullet points:

* rising threat of recession implies a fair distribution across a range of outcomes (sub par recovery, economic mush, and finally out right recession). We like the value that is present in the markets, but until the dust settles, many will want to edge towards caution.  Focus on the data.

* government bonds will continue to have a tailwind from investor risk aversion and ZIRPs across the world. Value is poor (look at what our models are saying comparing global bond yields with global earnings yield). Yields could rebound quickly if there is any improvement in the economic data.

* further unwinding in commodity prices is likely in the near run, but favorable structural supply and demand dynamics point to higher prices in 12 months.

 

Posted in Market Talk | No Comments »

Bulls versus Bears – who will win in this market turbulence?

Friday, August 12th, 2011

Mr Market is sending a confusing message, rallying substantially and then selling off aggressively. Let’s take a look at some links to discuss some important qualitative factors on where this market is going. On the bullish side: insiders are buying, corporates are sitting on very high levels of cash, and intelligent billionaire investors are buying on the way down.  On the negatives, there are a bunch of eery similarities to 2008: a ban on short selling in some European countries, rumours spreading regarding liquidity hoarding in the banking sector, and fears of a fire breakout.  Lastly we present a thought provoking analysis (highly bearish) from Bob Prechter.

Reasons to be optimistic:

  1. Insiders buying most since March 2009: http://tinyurl.com/44o3fwr
  2. Companies are sitting on trillions of cash: http://tinyurl.com/3vl8kvr
  3. Warren Buffet  http://tinyurl.com/3f4ku32
  4. Wilbur Ross  http://tinyurl.com/3zos4bl

Negatives:

  1. Ban on short selling: http://tinyurl.com/3m2ttpv
  2. Bank rumours: http://tinyurl.com/3fj8tob
  3. Where there’s smoke, there’s fire: http://tinyurl.com/3pncjtu
  4. Third wave of Bob Prechter : http://tinyurl.com/3jlonns

 

Posted in Market Talk | No Comments »

Is the stock market headed for a major downturn?

Thursday, August 4th, 2011

It is amazing when markets – in the short term – prove themselves to be driven more by mass psychology than by fundamentals. In the short term, market turns are noise driven. Whether based on the autocorrelation effect (selling begets more selling) or by panic mongering media one should never take heed of short term selloffs as sign of a pending crash, nor should they take heed of rallying markets as sign of a new bullmarket.

Instead those entrusted with managing money (whether for clients or their own families) should focus on fundamentals, and not let movements dictate positioning. At Covert Analytics we always advise money managers go down the following checklist (answers are of course provided by our software :-) )

1) What is the support for risk assets? Our GRASP (global risk asset support or pressure) model, points to still strong support for risk assets, with monetary policy loose, the money supply still growing and volatility still relatively low. One recent question mark was the S&P dropping below the 200 day moving average. Await till month end or before a material drop below, before acknowledging a new bear market.

~ still supportive of risk assets

2) Are valuations supportive of equities over bonds? Equities (cyclical risk) versus Bonds (no cyclical risk) is the age old question. Equity yields are surging far ahead of interest rates, particularly in the US with the US 10 year hitting 2.5%.

~ fundamentals favor equities

3) What are technicals telling you? Currently risk assets have experienced a tremendous short term selloff. As Barry Ritholtz points out, the 7 day RSI is even below the Feb / March 2009 bottom !  See link (http://www.ritholtz.com/blog/2011/08/rsi-at-extreme/).

~  risk assets are oversold

Each selloff has its unique features. This one is no different, what with the debt ceiling issue in the US and renewed Eurozone fears. However our base case scenario is that the debt ceiling will be resolved (actually it is a non event issue with the US Treasury taking in revenues of 200 billion monthly) and that the Eurozone crisis is not a 2011 event.

Punchline: listen to Covert Analytics … our feeling is that this year is strikingly similar to last year (when the S&P bottomed in late August) and had a tremendous end of year rally.

 

Posted in Business Cycle, Market Talk, Stocks | No Comments »

Looking for a Similar Environment

Wednesday, September 29th, 2010

The ‘mid cycle slowdown’ of 2004 was very similar to the current environment.  After a year of ultra-accommodative monetary policy, investors continued to question the recovery, and markets were range bound the majority of the year.  The chart below shows an overlap of these two periods.  Note that the y-axis is not normalized.  The S&P 500 started at almost exactly the same level (in 2004, SPX was near 1,110 versus 1,130 in 2010).  Investors and news media continued to doubt whether the recovery was sustainable and talk of a double dip recession was prevalent.  In 2004, equity markets finished the year above 1,200.  Let’s hope for that this time around.

Let us take a look at the indicators.  It seems that a comparison of the environments was mixed comparing 2004 and 2010

- M2 is up 2.7% yoy, versus 3.3% in August 2004
- Crude is now at $78 versus $50 back in 2004
- Fed Funds Rate is anchored at 0.25% versus “on the rise” at the same time in 2004, having been bumped from 1% to 1.75% by Sept 2004.

From a technical perspective, you can see in the chart below that the S&P 500 traded above its May – early Sept trading range with 1,125 as the top of the range. In recent weeks though it has failed to break above 1,150.

 

Posted in Business Cycle, Market Talk | No Comments »

Reminder on how to approach markets

Thursday, May 20th, 2010

Markets are sending clear signals …

 

Friday May 7 – day after Flash crash trade, SPX opens at 1126 and closes at 1,110

Monday May 10 – market opens at 1,160

Thursday May 13 – market trades at its intra-week high of 1,175, closes down 1.4% that day from the peak

Friday May 14 – market sells off again, with heavy selling pressure at the open

Monday May 17 – big selloff intraday with a huge recovery rally

Tuesday May 17 – the week’s bear market begins, with a strong open and a  decline of 2.5% that day …

Thursday May 19 – already down to 1,086 (almost at the “Flash Crash” lows). Market is down 7.5% since the peak on the 13th

Markets are in untested waters. I would like to give a great quote from Larry Hite, one of the premier systematic investors of our times:

“Two basic rules: 1) if you don’t bet, you can’t win, and 2) if you lose all your chips, you can’t bet.”

Keep that principle in mind. Why do we say untested waters? Because sovereign risk is an ugly situation for markets to face, because it isnt about corporate profitability, it isnt about market sentiment, it is about global macro panic. It is about the potential for a new global crisis …

Trade safely,

The Covert Analytics Team

 

Tags: , , ,
Posted in Asset Allocation, Market Talk | No Comments »

Keeping an eye on the indicators

Tuesday, May 18th, 2010

As we mentioned back here in our post on the direction of the stock market over the upcoming months, it is important to track the indicators.  Long story short, they have turned a bit ugly.  To paraphrase one of the true brightest and best:

“Put your ears to the railroad tracks. Prices move first, and fundamentals come second.”

This tells you that though reports are confirming that fundamentals are sound …

  • M&A, Capex, share buybacks, dividend increases have been running at historically low levels and are just beginning to rise
  • Corporates are lean, and richer in cash than they have been in decades
  • Profit margins are approaching all time highs, only a year after the “Great Recession”

… the market is sending a different signal:

  • Dr Copper and Dr Crude are both down about 17% (through today, May 18)
  • S&P was spooked into its largest intra day loss since 1987, and is now down about 7% from April 26
  • Yield curve (10s / 3Ms) has flattened by about 50 bps from nearly 380 bps to 330.

Where to from here? The Greek drama reflects a broader sovereign crisis that took us by surprise with respect to how quickly it cascaded into a crisis.  Greece was one of the weaker guys in the pack, but its amazing to us how Ireland has a deficit of -14.7%, compared with Greece’s deficit of -12.2% and little mention is made in the press of their situation. True, the total indebtedness of Greece is higher, at 124.9% of GDP compared with Ireland’s 82.9%.

And thats not all.  A massive oil spill, looming uncertainty over financial reform, civil lawsuits against the investment banks, etc.

Difficult times indeed. However we think the market is going to trade lower over the next few months. This is not to say the rally has been officially delayed, but these are major headwinds that have reminded the market that volatility is always around the corner. It is very easy to say that this has spooked a bunch of investors who have been cautiously adding to their exposure and are now reminded of the awful 2nd half of 2008.

Sincerely,

The Covert Analytics Team

 

Tags: , , , , ,
Posted in Asset Allocation, Business Cycle, Commodities, Market Talk | No Comments »

Quantification Can Create the Illusion of Precision

Thursday, May 6th, 2010

At Covert Analytics our dynamic asset allocation models are based on risk indexes which portfolio managers build to evaluate the risk inherent in a market. But this quantitative indicator may create a false illusion as to the true risk of any market. Today was an example of this.

The past few weeks showed an amazing resurgence in seemingly black-swan type risks. First an Icelandic ash volcano that paralyzed European travel, a massive oil spill in the Gulf of Mexico, the “smartest guys in the room” aka Goldman Sachs getting hit with civil fraud charges by the S.E.C. and now out of nowhere a -9% selloff intraday on the US stock market. It was the biggest intraday selloff in percentage points since 1987.

Today showed us that financial markets are fickle. Sentiment and risk perception often swing abruptly. Greece’s economy is small, at EUR 254 billion, particularly in an economic bloc that is nearly EUR 9 trillion or 35x its size. The Greek problem has the potential to develop into a full blown epidemic, threatening the entire European economy.

The political tension is rising: elections in the UK today with a change in leadership from Labour to Conservatives, Germany’s elections in North Rhine – Westphalia, etc. A Greece bailout is very unpopular, but so is preempting a global financial crisis. Whereas some rumors have indicated that Greece has consulted with Lazard to examine a restructuring, other rumors have hinted at G-7 coordination today (May 7) to contain the crisis.

A simple punchline is that a Greek debt default or restructuring is inevitable. Even in the event of restructuring the result is the same.  Looking back to the 1930s the Creditanstalt bank default occurred in 1931, sparking a global banking crisis, but the great crash of the Great Depression occurred 2 years before in 1929.

Regardless on the view of whether Greece will be bailed out it is difficult to envision an environment where this will be beneficial for the Euro. This is not to say that a breakup of the EUR is in order. But, countries now including the ECB will be inclined to transition into quantitative easing, ie print their currencies.

Own gold as a hedge. Stocks are a good buy given that this event will definitely leave in place accommodative monetary policy. We dont think an all out default of Greece or a disintegration of the Euro bloc will occur. If we are right, stocks will rocket from current levels with renewed stimuli and a refocusing on economic fundamentals.

Tags: ,
Posted in Business Cycle, Market Talk, Monetary Policy | No Comments »

In the market today April 2, 2010 …

Thursday, April 1st, 2010

Nice continued move in the market today. I continue to believe that the economy is in a sweet spot where low rates continue to fuel economic activity, consumers are recovering, and businesses are eager to grow after 2 years in the trenches (doldrums). The S&P has edged up now for five straight weeks. Volume continues to be moderate.  This trend of higher prices on medium to low volume is healthy to me. It tells me that retail investors are not piling back into the market, which would be signs of a overly optimistic retail investor (ie signs of the end of the trend).

In fact, headlines are pointing out that the market is hitting an 18 month high (or about September 2008). Incredible isn’t it? In September 2008 before Lehman went under we were already undergoing a recession in the US, following the collapse of Bear Stearns, and putting up with a hectic seizure of the financial system. Unprecedented in many ways. Anyways, at that point the US market was still only 30% below its peak in November 2007.

Yields on US Treasuries are edging up. The US 10 year yield is hitting nearly 3.9%, which is  a relatively substantial selloff for the US Treasuries. It is likely there is more to come, but this is not the time. I think rates will rally from here and you will see the UST 10 at 3.5% within a few months.

Gold and Crude rallied really strong this week, with GLD hitting over $110 and Crude spiking to $85. Though historically speaking these are not outrageous levels, they are breakouts from recent ranges. This has clearly coincided with a selloff in the US Dollar (the EUR rallied to over $1.35).

Tags: , ,
Posted in Bonds, Commodities, Market Talk, Stocks | No Comments »

« Older Entries