Uncomfortable or Paranoid? FOMO or FOSI?

Uncomfortable’: Feeling or causing discomfort or unease; disquieting.

‘Paranoid’: Delusion of persecution; intense fear or suspicion especially when unfounded.

Collins dictionary.

FOMO: Fear of missing out.

A well-known stock market-acronym.

FOSI: Fear of staying in.

A less well-known stock-market acronym

 

PREAMBLE

At Ecinya we are currently concerned about many things at home and abroad. We are well aware that Roosevelt in 1933 said "We have nothing to fear except fear itself’, but 7 years later the world was at war and America joined in about 2 years after that at great cost in terms of men and machinery. Additionally, the statement was made towards the end of the great depression when things probably couldn’t get any worse than they already were.

Hence context is important in looking at any problem or opportunity including economies and markets. We do not like the current context. Also our methodologies, founded in the natural optimism that comes from being interested in stock-markets at all, are signalling the type of caution that comes before a market retracement, or significant fall.

Generally, as endemic optimists, we are bullish when the market is subdued and we can see signs of emerging strength or reduced weakness in the economy. We are bearish when markets are elevated and we can see signs of emerging weakness or strength not supported by underlying economic evidence. This might be formal evidence from sources like Westpac Economics, observable things like mortgagee sales, vacant shops, staff lay-offs etc.

Our 2 March 2012 Snapshot said: Danger is lurking. Central bankers as the monetary authority cannot easily overcome the cascading effects of bad fiscal policies pursued by inept and short-sighted governments fixated on political survival. There are two economies, the real economy of production of goods and services and the symbol economy of money and credit. Bernanke has led the charge to stifle the former and is creating a monster in the latter. Be extra careful!

This remains our position. We suggest that this market not be chased.

John P Hussman of Hussman Funds expressed a similar view in far more eloquent terms on 5 March 2012 in his Weekly Market Comment –

Last week, the estimated return/risk profile of the S&P 500 fell to the worst 2.5% of all observations in history on our measures. This is not a runaway bull market. Rather, it is a market that again stands near the highs of an extended but volatile trading range. I am convinced that the breakdown of the market from this range has been deferred only through repeated and extraordinary central bank actions.

 

LOCALISED CONCERNS

  • Our market quant model and technical analysis generally
  • Corporate earnings as reflected in our valuation models
  • The opinions of respected Ecinya confidants or sources of long standing
  • The Australian economic debate
  • The $A dollar
  • Politics
  • Tax and the tax system
  • The coming May budget presentation
  • The mining tax
  • The carbon tax
  • Emissions trading schemes
  • The proposed media council
  • Property prices
  • The small business sector
  • The NBN
  • The East coast floods

 

EXTERNAL FACTORS

  • US GDP for the first two quarters of 2012
  • US employment statistics
  • The Greek resolution
  • Other members of the PIIGS
  • US interest rates
  • The US election process
  • Global growth generally
  • Chairman Bernanke
  • The Middle East

 

PREAMBLE HEAD-NOTE QUOTE

 

You can’t handle the truth! Son, we live in a world that has walls, and those walls have to be guarded by men with guns. Who’s gonna do it? You? You, Lt. Weinburg? I have a greater responsibility than you could possibly fathom. You weep for Santiago, and you curse the marines. You have that luxury. You have the luxury of not knowing what I know. That Santiago’s death, while tragic, probably saved lives. And my existence, while grotesque and incomprehensible to you, saves lives. You don’t want the truth because deep down in places you don’t talk about at parties, you want me on that wall, you need me on that wall. We use words like honor, code, loyalty. We use these words as the backbone of a life spent defending something. You use them as a punchline. I have neither the time nor the inclination to explain myself to a man who rises and sleeps under the blanket of the very freedom that I provide, and then questions the manner in which I provide it. I would rather you just said thank you, and went on your way, Otherwise, I suggest you pick up a weapon, and stand a post. Either way, I don’t give a damn what you think you are entitled to.

Jack Nicholson as Colonel Jessep in "A FEW Good MEN".

We are sceptical of our political masters and most of the world’s central bankers working on the basis of what we do not know cannot hurt us. Truth and perspective seems to be in short supply. The Greek solution looks more like a gaggle of lawyers and economists at work without much in the way of business smarts. It looks a bit worse than TARP.

 

DISCUSSION OF OUR LOCAL CONCERNS

Quant & Technical

From our quant model we ascertain that the current upwave is now 76 days old. The XAO is up about 8% and the SP500 is up 20%. The upwave started on 28 November, 2011. We believe the S&P is technically over-bought. Should it retreat, our market will follow. Since 13 March 2003 our reference market indices have been up 1091 days, in transition with an upward bias for 433 days, in downwave 249 days, and in transition with a downside bias 369 days. Simply stated the markets have been up 71% of the time and down 29% of the time. Tactically we have been prepared to ‘go with the flow, without conviction’. As the market rises we have been happy to sell, ‘going against the flow with conviction’. (refer Strategy pages for explanation)

Corporate Earnings as reflected in our Valuation Models

Earnings are generally being downgraded by analysts and companies. In our last Portfolio Recommendations we had only 18% of our stocks on buy/ accumulate, 71% on hold and 9% on spec buy. What this means is that we could not see many entry points that gave us an 10% upside over the next year, excluding dividends.

The opinions of respected Ecinya confidants or sources of long-standing

Most of our confidants are sitting on about 30-50% cash. Over our 3 published portfolios we are about 30% cash. Many of the blogs we have accessed for years are turning bearish based on economic fundamentals and technical readings.

The Australian economic debate

The local economic debate is at a low ebb. The commentariat is either too sanguine or too bullish in our view, or simply misguided. Today the front page headlines are "Greens put business tax cuts at risk" (The Australian), "Big business $2bn business tax cut faces defeat" (AFR), "Coalition blocks tax cuts for big business" (SMH). Our observations are that taxes are going up – flood levy, private health rebate, local taxes and charges, the mining tax, mining royalties, carbon tax.

Ross Gittins in the SMH today says: "The only path that’s politically feasible and economically responsible is for us to pay higher taxes". Given that ALL taxes find their way into prices and/ or lower employment or higher inflation and interest rates, and often larger (intractable or structural) deficits, why are higher taxes good for us? We also believe that Wayne Swan is an awful Treasurer despite his European award and that Joseph Hockey is most likely only marginally better. We find it difficult how a grandiose paid parental scheme under Mr Abbott and an aspirational dental scheme under any government makes good common or economic sense.

We see tax revenues decreasing in the forward estimates and the Treasurer having moved this year’s costs forward to manipulate his way to the promised surplus next year. In aggregate we have had nothing but deficits under Labor. These deficits have led to increased levels of public debt at both state and federal level. Debt levels relative to GDP are not a current problem, but the trajectory is. The economic buffers we had under the best years of Hawke-Keating-Walsh and Howard-Costello no longer exist.

The $A dollar

We have a large and narrow export base and a deep and broad import base. Overall a high $A dollar is not good for the economy.

POLITICS

The debacle of the recent Labor Party fracas about the leadership and the confirmation of Ms Gillard as Prime Minister was extraordinary and still represents unfinished business. The lack of a parliamentary majority is leading to poor policy development, rhetoric that saps consumer and business confidence, and poor policy implementation. Mr Swan is now at the epicentre of a political debate talking about misguided concepts such as ‘fairness’ which has no sound basis in economics, inflammatory rhetoric about former Prime Minister Rudd, and villainous billionaires destroying Australian democracy. Dumb policies and politics seem to be in a happy nexus with dumb economics.

Tax and the Tax System

The Henry Report comprised about 1500 pages and weighed circa 5 kilograms and its recommendations have been substantially ignored. We still have well over 100 silly taxes. And the Henry mandate excluded consideration of the GST!? Capital gains taxes are paperwork intensive, reduce asset turnovers especially in relation to rental properties.

The coming May budget presentation

The May budget presentation will be so large, as it always is, to make comprehension difficult and ‘smoke and mirrors’ will be in abundance.

The Mining Tax

The mining tax is poorly constructed and appears to assume robust mineral prices forever. It ignore ROI calculations, economic flow-through, economic cycles, and competition possibilities from other mineral-rich areas. With a bit of bad luck we might find ourselves in a no-speed economy.

The Carbon Tax

The carbon tax appears to us to have little to do with greenhouse gases and a lot to do with taxation. We cannot see the benefit of Australia going ahead and being ahead of the rest of the world. Greenhouse gases are an absolute problem, not a per capita problem. Real or false morality is OK when you can afford it.

Emissions Trading Schemes

Creating ETS securities when we have trouble controlling and policing financial securities seems to us to have manifest problems. Emitters are well known to authorities and technical solutions should exist to reduce their greenhouse gas outputs. A securities industry involvement is unlikely to help, adding complexity and bureaucracy. Imagine letting the scallywags of Wall Street loose on carbon trading.

The proposed Media Council

The proposals from the Finkelstein inquiry would appear to make no sense at all. Media is not perfect and legislation will not make it so. But freedom of the press is the last bastion of economic and democratic freedoms.

Property prices

Property prices may be improving or bottoming but there is a considerable way to go. We are still hearing about and seeing enough mortgagee sales to know that the bottom is not in yet.

The Small Business sector

The small business sector does not need tax breaks so much as an increase in their incomes and a reduction in their expenses. Interesting that small business becomes a rhetorical focus around election time. A lot of people went into home insulation and solar only to have subsidies removed pre-emptively. Wrongful dismissal laws are a major problem for small business.

The NBN

Would someone tell us how much, when, why and how. Our guess is it is now over time and over budget. Large-scale government projects are rarely successful.

The East Coast floods

Little has been done on water mitigation and no quick monetary response system appears to exist . The floods will subtract from 2012 growth.

 

EXTERNAL FACTORS

US GDP

US economic forecasts from the WSJ Economics February Panel for Quarter 1 reveal a wide disparity of views, but in the pessimistic camp 16 out of 49 economists have an average GDP number of 1.7% (stall speed) compared with the overall consensus of 2.3% (lacklustre speed) which itself is distorted by 12 economists with an average forecast of 3.1%. The latest durable goods figure interrupted the plethora of less bad economic news being defined as ‘good’ news. Additionally, the ECRI (Economic Cycle Research Institute) came out with some bad outlook data deliberations. Watching Uncle Ben Bernanke carrying the US economy on his narrow fed shoulders is close to appalling as Congress remains gridlocked and seemingly oblivious to deep-seated cyclical challenges and structural problems.

US employment statistics

The official unemployment rate has fallen from 8.5 to 8.3% recently. In November 2007 it was 4.7%. There does not seem to be a lot to cheer about here. Commentators suggest that from the government’s own data base about 9 million people without jobs have been removed from the labour force simply by the government defining them as not being in the labour force anymore. This process has the benign title of ‘the participation rate’. Many people have the real rate of US unemployment around 17%. It seems that employment is not a sign of recovery of itself without also looking at productivity numbers.

The Greek Solution

Greece has borrowed many billions of Euros which it cannot repay so we lend them more money which they also cannot repay, but we give them an extension of time in which to not repay it. Somewhere along the line about $27 billion of credit default swap gains are to be made by some people and about $30 billion of default swap losses will occur for a ‘benign’ net loss of $3 billion. An Austrian bank also goes under along the way.

Other members of the PIIGS

The handouts to Greece, which is less than 3% of the European economy, would seem to lend credence to the concept of moral hazard. If Greece can have a good deal after hard bargaining why not Italy, Portugal, Ireland and Spain.

US Interest Rates

US interest rates are abnormally low and the Fed wants to keep them low until 2014. This would appear to penalise savers, drive dollars offshore, and at the end of the day is unsustainable. Chaos is not dangerous until it begins to look orderly.

Global Growth generally

Europe in recession for 2012, Brazil slowing, China consolidating, America slowing and some calling recession.

The US Election process

Mr Santorum seems to be the religious candidate. We regard overt religion and politics as a bad mix. Mr Romney seems to be more of a manager than a messiah. We often worry that America too often seems ungovernable with cronyism out of control. Mr Gingrich we have long followed and regard him as a ‘5 star nutter’. The American system seems sometimes as reckless as it is robust exposing many fears, fissures and failures.

Chairman Bernanke

Mr Greenspan gave us two bubbles – dot-com and sub prime- and a plethora of soothing words along the way. He was trusted, but in the end was nothing more than a too-clever-by-half politician. Is Mr Bernanke cut from the same cloth? Reading his convoluted FOMC statement there are many jarring words – para 1 "suggests","moderately", "depressed", "prices of crude oil and gasoline". Para 2 "moderate", "gradually", "strains", "significant downside risks". Para 3 "highly accommodative", "subdued" Para 4: "rolling over", "reinvesting". Para 5 Jeffrey Lacker disagrees (why?). We don’t see it as an inspiring treatise sufficient to drive the US or global economies towards a sustainable recovery.

Information received since the Federal Open Market Committee met in January suggests that the economy has been expanding moderately. Labor market conditions have improved further; the unemployment rate has declined notably in recent months but remains elevated. Household spending and business fixed investment have continued to advance. The housing sector remains depressed. Inflation has been subdued in recent months, although prices of crude oil and gasoline have increased lately. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects moderate economic growth over coming quarters and consequently anticipates that the unemployment rate will decline gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook. The recent increase in oil and gasoline prices will push up inflation temporarily, but the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Sarah Bloom Raskin; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who does not anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate through late 2014.

US Federal Open Market Committee 13 March 2012

 

The Middle East

Iran, Syria, Afghanistan, Israel, Palestine…. all hot spots consuming vast amounts of men and materials and creating large numbers of refugees fleeing to other countries. Any attack on Iran cannot be priced into markets.