2010 will be a difficult year simply because we had a complex recession with misleading and deceptive behaviour from many institutional and market related sources. Political correctness, self-interest, and convenient informal conspiracies have combined over the past decade to induce complacency and to mute criticism of behaviours that were near to fraudulent at worst and criminally careless at best, in relation to this credit crisis and the last tech/ telco crash. These institutions include bankers and brokers, government ministers, long-term fund managers, hedge funds, companies, the accounting profession, ASIC, the ASX, the IMF, and central bankers. Thus the natural tendency of market participants and informed commentators towards scepticism has been in retreat, and, to varying degrees, we have been slapped in the wallet by yet another harsh dose of reality. The commentariat has polarised into rampant bulls on one side of the debate, and negative zealots on the other. The response of the thoughtful should be to develop a strategy around viable data, consonant with an effective review and monitoring process. Only the nimble can outperform the swirling mass of ‘noise’ that hits us on a daily basis.
Because the XAO is 55% above its 2009 lows and only 28% below its 2008 highs, the ‘bargains’ are not in abundance. Therefore –
- Stock selection is vital.
- The earnings season starts end January and many companies have to overcome the dilutive impact of heavily discounted share issues.
- Risk management is essential, look for macro turning points.
- Trade around the edges of value propositions.
- Try to find some takeover or recovery stocks.
- Focus on major resource stocks and fewer speculative stocks.
- Have a small bit of speculative money in established bio-techs and climate related situations.
- Look for industry rationalisation in the media sector.
- Have some dollars in property (oversold) and infrastructure.
- Keep your eye on $USD index (China, USA and India expected to provide 60% of the world growth estimates for 2010).
We expect a few retracements, with the first being in the first quarter, particularly if the S&P 500 heads for around 1150 to 1180. The sooner the correction, the better.
ECINYA Insights ‘2010: Our view of the year ahead’ 12/1/2010
Think, Act, Review
Please re-read our most recent Insight Articles ‘2010: Our view of the year ahead’ and ‘Re-visiting last week’s 2010 overview’. Do not expect simple days ahead. Think, Act, Review.
THE CORRECTION HAS STARTED: Let’s look at the technical context first
The S&P 500 (SP500) reached 1148 on 14/1/10 and the All Ordinaries (XAO) reached 4981 on 11/1/10. These levels are 27% below the peaks of 1565 (SP500) and 6853 (XAO) reached on 9/10/07 and 1/11/07 respectively. They are 70% above the low of 676 (SP500) and 60% above the low of 3111 (XAO) reached on 9/3/09 and 6/3/09 respectively.
Give or take a day the primary trend from the lows is 223 days old and has proceeded as follows:
- First advance 43 days +25.6% XAO, + 37.4% SP500
- First retracement 5 days negative 4.1% XAO, negative 5.1% SP500
- Second advance 20 days, XAO +8.1%, +7.3% SP500
- Second retracement 20 days negative 6.7% XAO, negative 7.1% SP500
- Third advance 74 days +24.2% XAO, +27.1% SP500
- Third retracement 9 days negative 5.6% XAO, negative 4.2% SP500
- Fourth advance 52 days +7.7% XAO, +8.8% SP500
A few observations: If you are an Elliott Wave advocate you would probably ignore the first retracement, but we regard any fall greater than 2% over 2 consecutive days as a potential turning point and we observe momentum on a daily basis. It has been clear for some time that momentum was slow in the period of the fourth advance averaging just 26 basis points daily for the XAO and 38 basis points for the SP500, compared with the third advance when the numbers were 55 basis points daily XAO and 62 basis points daily for the SP500. Also note the harmonic relationship between the SP500 and the XAO. Why is this so? Simple… the USA is China’s largest trading partner and the world’s largest economy. China is our largest trading partner.
Momentum can also be viewed via the charts and we constantly refer to the Williams%R and the Relative Strength Indicator to signify over-bought positions. We use daily, weekly, and monthly measures in this regard.
How long will this correction last and what will be its dimensions? Our guess is that it will be relatively short as this is not the big one that we are expecting in calendar 2010. Looking at the fundamental context, we would put this view on hold if the SP500 moves above 1113, and the XAO moves above 4850. A bigger correction will be data driven, not the cacophony we are currently witnessing. Earnings in earnings-per-share terms is always the most critical data point
CONTEXT, FUNDAMENTAL VIEW
Using our Portfolio Menus, over the past 3 months our Buy/ Accumulate tally has averaged 20 stocks overall, a Buy/ Accumulate ratio of 13%. If the earnings season unfolds satisfactorily we expect this ratio to rise.
This 3-day old retracement is said to have been caused by two factors. Firstly, President Obama announcing that the banks have to now pay for their bail-out in some way- increased taxation, curbs on bonuses, and re-regulation. Secondly, that Ben Bernanke’s endorsement as Fed Chairman is now doubtful. In relation to the banks, their excesses have clearly been massive and these excesses have flowed from Wall Street to Mainstreet where massive unemployment, negative GDP, negative profit growth, and massive domestic deficits have resulted. It has been said of Wall Street :
It can fairly be said that the chain of catastrophic bets made over the past decade by a few hundred bankers may well turn out to be the greatest non-violent crime against humanity in history. They’ve brought the world’s economy to its knees, lost tens of millions of people their jobs and homes, and trashed the retirement plans of a generation, and they could drive an estimated 200 million people worldwide into dire poverty. In other words, never before have so few done so much to so many. And has there been even one major, voluntary resignation by an American financial executive? One sincere apology? One jail sentence? Why the American public hasn’t taken to the streets in revolt is a mystery that can be linked to our inherent belief in the virtues of capitalism.
Graydon Carter Editor Vanity Fair, June 2009 issue. This magazine is an excellent source of economic and political material
And further:
We face two possible states of the world. One is a world in which our economic problems are largely solved, profits are on the mend, and things will soon be back to normal, except for a lot of unemployed people whose fate is, let’s face it, of no concern to Wall Street. The other is a world that has enjoyed a brief intermission prior to a terrific second act in which an even larger share of credit losses will be taken, and in which the range of policy choices will be more restricted because we’ve already issued more government liabilities than a banana republic, and will steeply debase our currency if we do it again. It is not at all clear that the recent data have removed any uncertainty as to which world we are in.
John Hussman, Hussman Funds Management, December 2009. (From ECINYA Insights 8/12/2009.)
The Wall Street banks would not be regarded as ‘banks’ in Australia. The vaporised names – Merrill Lynch, Bear Stearns, Lehman – were speculative trading houses in commodities, derivatives, collatorised debt obligations, hedge funds, and private equity buy-outs. The still-standing major names – Goldman Sachs, CitiBank, UBS, Morgan Stanley – appear to have learned little from the economic chaos of 2008.
In Ohio last week president Obama said; "We want some rules in place so that when you financial guys make bad decisions, we don’t have to foot the bill. That’s pretty straight-forward." Warren Buffett has suggested confiscation of CEO’s assets and their wives’ assets as well. This is pretty serious stuff and transcends debates about capitalism vs socialism, and neo-cons etc. On 12 December Ecinya said: "Political correctness, self-interest, and convenient informal conspiracies have combined over the past decade to induce complacency and to mute criticism of behaviours that were near to fraudulent at worst and criminally careless at best, in relation to this credit crisis and the last tech/ telco crash."
In relation to Ben Bernanke we note that he has received a ringing endorsement from Mr Greenspan. That, of itself, should cause serious questions to be asked and serious reservations to surface. America’s last central banker of substance was Paul Volcker. Just ask him who should be Chairman of the Fed.