And They All Said QE2 Would Fail.
In this holiday-shortened week we thought it only appropriate to publish a holiday-shortened Ramblings. With all the crises around the world, why do we eschew addressing the global troubles in depth? Alfred E. Newman comes to mind. “What? Me worry?”
It’s Tuesday. Let us briefly recount the global fears of the week so far: 1. China is going to tighten itself into a recession. 2. Ditto for Hong Kong. 3. Ireland is either going to sink into the Ocean or go to the Greens (why not? it is the Emerald Isle) 4. The rest of the PIGS are going to be taken down by Ireland. 5. The SEC, seeking to burnish its image post Bernie Madoff, is going to destroy the US financial system and 6. Just in, North Korea took a few pot shots at South Korea, causing the Japanese Prime Minister to suggest that war might ensue. Just another week in the richly diverse ecosphere that we call mother Earth (makes you wonder where all those hand-holding, Coke-holding kids singing on the mountain top went). So why are we adopting a c’est la vie attitude toward it all, just two days from Thanksgiving in the US? Exactly.
We’re not big movie buffs but we’ve seen all these titles before—some more times than our kids have watched the Spongebob Movie (ugh). So, let’s close our eyes and describe that film, scene by scene. 1. The pundits tell us that China is either a fraud or a bubble. Get your story straight and we’ll decide whether or not to start worrying. Meanwhile, we’ll take 9+% growth and p/e ratios on their ADRs of 5x or less. 2. What is Hong Kong and why do we care if their property market cools? Do they buy anything from us, or from anyone else for that matter? They’re an exporter—actually, a re-exporter, turning around products from the Mainland and shipping them worldwide. If anything, cheaper land there means more arable property on which to grow bamboo for chop sticks. That sounds good for the US. 3. The IMF and EU have Ireland under control. Yes, we know they are all wine-drinking socialists but they are acting fast (unlike what they did with Greece) and with determination. They have everything at stake to save the EU and the Euro and they will do so or die. 4. We’re tired of hearing about the PIGS. The only thing they all have in common is the aforementioned affinity for wine. Not a recipe for contagion. 5. No-one kicked in our door looking for files yesterday. Goldman will pay another $half billion to the SEC to make things go away. So will dozens of other wealthy hedge funds and, after the obligatory “perp walks” blazoned across the TV screens over the next week or so, we will hear nothing more about this—certainly nothing about what the Treasury will do with all that money it will collect from settlements. 6. South Korea is very, very limited by treaty in the response it can take with the North. Over the years we’ve seen shots fired across the border, ships and subs sunk, missiles fired and countless other antagonistic actions, all without serious repercussion. The reality is that the Russians don’t want them fighting, the Chinese don’t want them fighting and the US doesn’t want them fighting. They will not fight. Besides, battle hardened Hillary is on the case.
We like turkey and we like thanksgiving buffets. Our favorite buffet, at $40/head for kids, $75 for adults, was booked months in advance and is no longer taking wait list candidates. Meanwhile, we can’t get that Lego Harry Potter set for the kids because Amazon is already sold out of the $140 toy. The dumb bunny on CNBC (it’s just too pat that her IQ is double digits and, literally, her last name means rabbit) at 4am just told us that EU Consumer Confidence and PMI both beat expectations and that US retail sales are already coming in stronger than expected. Expectations for Black Friday in the US get ramped up every day. Of course, all that information will probably soon be deemed insider information but, in the meantime, we call it empirical research and it tells us that things just aint so bad, even here.
“Risk on, Risk off” in the markets, says the dumb bunny. We wonder if she understands how hard it is to hedge and unhedge a $5bn portfolio overnight--even with options and ETFs—as if any responsible manager would do that in response to a headline, even if permitted by mandate, after every financial instrument has already reacted accordingly. Meanwhile, amid all this “turmoil” the worry warts and hand wringers will do the “Risk off” trade and sell their stocks and go back into the Dollar and US Treasuries as a safe haven. Heck, they’ll probably buy some really cheap gold while they’re at it. And as they do, Mr. Bernanke will thank them for making his work on QE2 so much easier and potentially more successful and we thank them for another opportunity to get some good multinationals on the cheap. So much to be thankful for. Gobble Gobble.
Happy Thanksgiving!
Tuesday, November 23, 2010
Wednesday, November 17, 2010
Ramblings of a Portfolio Manager
News Flash: Lincoln Shot. South May Rise Again. Hide in Your Root Cellar and Don’t Forget Your Musket
It has always amused us that, while we operate in a stock market deemed highly efficient by the economists and other smarter-than-us PhD types, the same news tends to discounted once, twice, even three times chronologically though the contents and substance of that news package never changes. Take for example a negative preannouncement by a company—Management typically lays out a narrow EPS and revenue range expected to be reported for the quarter gone by, gives full reason for the miss and often gives a narrow projection for the next quarter and the rest of the year. And Wall Street, ever the immediate discounting mechanism (some might say spoiled child not getting its way) will send the stock post-haste to the nether worlds of price and valuation. But that price reaction doesn’t provide a great bargain hunting opportunity for value investors—for, 9 times out of ten (our back of the envelope observation), when that same company reports the exact same news on the originally planned reporting date, the geniuses in portfolio management will engender the same reaction for the same reason. And, God forbid, the company tapes the call and offers it up to those missing the original, we can fully expect the markets to put the stock in the penalty box yet again until the tape is pulled from the web. So much for the Efficient Market Theory.
But that’s all anecdotal evidence (although we are doing some home work on this phenomenon) on individual company reports. What has really gotten our goat (literally) is the markets’ reaction to the “same old same old” vis-à-vis European debt crisis—i.e the PIGS. Personally, we thought we had slaughtered those pigs months ago. Remember when the dollar was to reach parity with the Euro back in May? It was all due to weakness in the PIGS. Remember when commodities and exporters were crushed because a stronger dollar would hurt their sales and earnings? That was the talk back in May. Remember when a weakened Europe would engender a double-dip here in the US? That was back in May as well. Let’s examine that happened and rate the economists’ dire predictions: First, the Euro, instead of hitting parity versus the dollar, climbed steadily to nearly 1,50/1,00 (we intentionally used commas to look cool and Euro). US multinationals, instead of reporting weaker international sales, consistently beat estimates solely bases on European strength and are on fire. Greece, whom Long Island can kick in a rumble, seem settled; Portugal and Spain, larger than Greece but still a speck on the screen, were tamed and sent away with strong assurances. All markets moved up as a result. Meanwhile, ever looking back into the rear view mirror, the Fed decided to launch QE2 in response as an insurance policy, a move which initially sent the US markets into a roil because it was interpreted at the Fed knowing something negative about domestic economic weakness that the rest of us mere mortals did not. In short, none of the dire consequence have occurred and, in fact, things have gotten much, much better on both sides of the shore since May. Yup, the economists got it wrong again. Surprised?
So, here we are again, markets in turmoil, dollar rising versus the Euro, commodities and multi-nationals in the shit can and a host of pundits thinking maybe a double dip might be back n the front burner. The amusingly hypocritical part of it all is that many of those pundits, who at first lauded QE2, then begged for it, are now on the lecture tour panning the whole idea because it could cause—heavens to Betsy—inflation! All based on a few stronger than expected reports from the US economy. What, exactly did those pundits think was the intent of the program? Funny case is that Greece is somehow back in the mix (they are fixing their problem but not as fast as the Austrians or Greenwhich PMs would like). All that’s missing is the goat negotiating the riots. Perhaps Greece would like to lend the goat to the French—they could use a little humor in their seemingly constant parade of protests (we lost count of the myriad reasons years ago--we did too). The goat may also make them feel better about their personal hygiene.
Oh, we forgot China. Things seem to be so strong there economically that they continue to put the brakes on their own economy, hoping to stave off inflation. One pundit we haven’t heard from is Jim Chanos of Kynikos. Smart guy but it was is contention at the beginning of the year that China was in a bubble but at the same time was intentionally over-forecasting its economic strength? Huh? For his sake we hope he covered his shorts before the recent meteoric rise in the Shanghai index.
The Dow, S&P, NASDAQ and Russell have all lost 5+% plus in the last week or so. Partially on the back of Europe, partially due to China and a fair amount based on post-election blues. Is this the correction/pullback/consolidation that the technicians have been calling for? Notice that, long absent from the Tube, they are now back on again, all with a universal call for a drop of anywhere from 3% (done) to 50% (uh huh). Our answer, or question rather, is “what has changed in the global macroeconomic environment since April.” In fact, things have gotten better economically in the world with many of the global imbalances beginning to self correct (no disrespects to the central banks).
Michael Steinhart was on CNBC yesterday calling this price action temporary and based on information already discounted by the market. We tend to agree. Though he is light years smarter than we, we both look at the market from a bottoms up perspective—that is, companies and markets first, then look at what’s going on the world and how it may affect those companies.
And for all those wringing their hands about pending inflation, if you really believe your own PR, sell you Treasuries before you become a casualty. And remember that inflation is good for commodities. The Fed has gone from savior to villain based on your naive concept of what causes inflation (its employment costs, not interest rates per se). So when we reach full employment and the S&P is 500 points higher as a result, look at your depleted bond fund and remember that you were warned.
It has always amused us that, while we operate in a stock market deemed highly efficient by the economists and other smarter-than-us PhD types, the same news tends to discounted once, twice, even three times chronologically though the contents and substance of that news package never changes. Take for example a negative preannouncement by a company—Management typically lays out a narrow EPS and revenue range expected to be reported for the quarter gone by, gives full reason for the miss and often gives a narrow projection for the next quarter and the rest of the year. And Wall Street, ever the immediate discounting mechanism (some might say spoiled child not getting its way) will send the stock post-haste to the nether worlds of price and valuation. But that price reaction doesn’t provide a great bargain hunting opportunity for value investors—for, 9 times out of ten (our back of the envelope observation), when that same company reports the exact same news on the originally planned reporting date, the geniuses in portfolio management will engender the same reaction for the same reason. And, God forbid, the company tapes the call and offers it up to those missing the original, we can fully expect the markets to put the stock in the penalty box yet again until the tape is pulled from the web. So much for the Efficient Market Theory.
But that’s all anecdotal evidence (although we are doing some home work on this phenomenon) on individual company reports. What has really gotten our goat (literally) is the markets’ reaction to the “same old same old” vis-à-vis European debt crisis—i.e the PIGS. Personally, we thought we had slaughtered those pigs months ago. Remember when the dollar was to reach parity with the Euro back in May? It was all due to weakness in the PIGS. Remember when commodities and exporters were crushed because a stronger dollar would hurt their sales and earnings? That was the talk back in May. Remember when a weakened Europe would engender a double-dip here in the US? That was back in May as well. Let’s examine that happened and rate the economists’ dire predictions: First, the Euro, instead of hitting parity versus the dollar, climbed steadily to nearly 1,50/1,00 (we intentionally used commas to look cool and Euro). US multinationals, instead of reporting weaker international sales, consistently beat estimates solely bases on European strength and are on fire. Greece, whom Long Island can kick in a rumble, seem settled; Portugal and Spain, larger than Greece but still a speck on the screen, were tamed and sent away with strong assurances. All markets moved up as a result. Meanwhile, ever looking back into the rear view mirror, the Fed decided to launch QE2 in response as an insurance policy, a move which initially sent the US markets into a roil because it was interpreted at the Fed knowing something negative about domestic economic weakness that the rest of us mere mortals did not. In short, none of the dire consequence have occurred and, in fact, things have gotten much, much better on both sides of the shore since May. Yup, the economists got it wrong again. Surprised?
So, here we are again, markets in turmoil, dollar rising versus the Euro, commodities and multi-nationals in the shit can and a host of pundits thinking maybe a double dip might be back n the front burner. The amusingly hypocritical part of it all is that many of those pundits, who at first lauded QE2, then begged for it, are now on the lecture tour panning the whole idea because it could cause—heavens to Betsy—inflation! All based on a few stronger than expected reports from the US economy. What, exactly did those pundits think was the intent of the program? Funny case is that Greece is somehow back in the mix (they are fixing their problem but not as fast as the Austrians or Greenwhich PMs would like). All that’s missing is the goat negotiating the riots. Perhaps Greece would like to lend the goat to the French—they could use a little humor in their seemingly constant parade of protests (we lost count of the myriad reasons years ago--we did too). The goat may also make them feel better about their personal hygiene.
Oh, we forgot China. Things seem to be so strong there economically that they continue to put the brakes on their own economy, hoping to stave off inflation. One pundit we haven’t heard from is Jim Chanos of Kynikos. Smart guy but it was is contention at the beginning of the year that China was in a bubble but at the same time was intentionally over-forecasting its economic strength? Huh? For his sake we hope he covered his shorts before the recent meteoric rise in the Shanghai index.
The Dow, S&P, NASDAQ and Russell have all lost 5+% plus in the last week or so. Partially on the back of Europe, partially due to China and a fair amount based on post-election blues. Is this the correction/pullback/consolidation that the technicians have been calling for? Notice that, long absent from the Tube, they are now back on again, all with a universal call for a drop of anywhere from 3% (done) to 50% (uh huh). Our answer, or question rather, is “what has changed in the global macroeconomic environment since April.” In fact, things have gotten better economically in the world with many of the global imbalances beginning to self correct (no disrespects to the central banks).
Michael Steinhart was on CNBC yesterday calling this price action temporary and based on information already discounted by the market. We tend to agree. Though he is light years smarter than we, we both look at the market from a bottoms up perspective—that is, companies and markets first, then look at what’s going on the world and how it may affect those companies.
And for all those wringing their hands about pending inflation, if you really believe your own PR, sell you Treasuries before you become a casualty. And remember that inflation is good for commodities. The Fed has gone from savior to villain based on your naive concept of what causes inflation (its employment costs, not interest rates per se). So when we reach full employment and the S&P is 500 points higher as a result, look at your depleted bond fund and remember that you were warned.
Monday, November 8, 2010
Ramblings of a Portfolio Manager
The Neville Chamberlain Market?
The mid-term elections are over and they largely went the way of consensus with Republicans re-taking a majority in the House of Representatives and making inroads into, but not capturing, the Senate. The equity markets, ever the discounting mechanism, read the late polls and bid the market higher ahead of the actual results, leading us to believe that those results were indeed fully discounted on November 3rd. And like many observers, we expected some sell on the news action on that day, albeit shallower and quicker than the bevy of analysts in the financial media were predicting, primarily because that was what the bevy of analysts in the financial media were predicting. But then something happened that the skeptics, including ourselves, weren’t expecting: a quadruple of headlines that seemed to come from the equity owners’ Christmas wish list hit the tape. The sell on the news reaction, whether it was indeed a discounted discounting or actually responding to these headlines, turned out indeed to be shallow and quick. In fact, the “dip” lasted approximately a half a day.
The equity markets started strong the morning of November 3rd on post-election euphoria, even though some of the Market’s most wanted “villains” (e.g. Harry Reid and Barney Frank) survived the Democratic drubbing. The Market’s Santa list item #1 was soon delivered by President Obama, who appeared on TV to make what sounded to all like a conciliatory concession speech. In fact, the President sounded downright humble, if not contrite, in his pronouncement that he had learned from the “shellacking” the Democrats took on Tuesday. To many, that sounded so reminiscent of Clinton’s move to the Center after his first mid-terms that the Market rose even higher--but equities soon began to weaken as the Federal Reserve’s pronouncement on the size of QE2 drew near. While the markets earlier had initially expected close to $1Trillion in easing, a Wall Street Journal article late in October cut that expectation in half, to $500 million and there was unease that the announced number could be even lower. Santa list item #2, however, came around 2:15pm with the Fed announcing $600mm in expected easing with the potential for more to come if needed. The market’s reaction was swift and powerful, with the Dow gaining over a hundred points from its lows in about 2 seconds. Bonds sold off as rates rose in anticipation of a stronger economy down the road. Yet for all Wednesday’s volatility and drama, the markets closed the day essentially flat with many investors unsure what to make of the news they had just digested.
That was Wednesday and it seems that investors’ digestion period lasted exactly overnight. Thursday morning awoke to strong equity futures followed by a correspondingly strong opening to the US markets. Why? In our view, there were just too many people on the sidelines waiting for the post-election selloff to get back into the market (or cover shorts). When it didn’t occur on Wednesday, they panicked and jumped in feet first on Thursday. But Santa list item #3 was about to be released—that is, the unbelievable statement from President Obama that he was willing to consider extending the Bush tax cuts to all income classes—something about which he was adamantly negative pre-election. That pronouncement was the icing on the cake for the “move to the Center” crowd and the market rallied right into the close and by the end of the day the Dow and S&P 500 had closed up 2% while the Russell 2000, a proxy for risk taking, closed up 2.6%. The final Santa wish list item came on Friday with a jobs’ report that showed new jobs created over twice the consensus estimate. All combined, with the delivery of the Christmas list, the US equity markets closed the week with a 2.9% gain on the Dow, a 3.6% gain on the S&P 500 and a 4.7% return on the Russell 2000. Not a bad week considering that the consensus was for a big sell off.
So now that the big catalysts are behind us, with a few surprises thrown in, what can we expect from the equity markets for the rest of the year and into the next? In our opinion, it all boils down to the credibility of the President and the Federal Reserve. It was clear that Obama was doing a fair amount of public eating crow last week and much of it was for PR purposes--but if he stays true to his word on taxes and working with the new majority, we could see further gains ahead. The same holds true for Bernanke. If, indeed, the Fed is good for its $600+mm number, then rates can stay relatively low and the equity markets can continue to rally. But, as a former British Prime Minister discovered over 70 years ago, dealing with politicians can be a tricky affair. It’s not that they lie but they often “misspeak.” So we will keep our ears and eyes open to see if this market is expanding into fictitious Lebensraum or if, indeed, it is soaring on the wings of crows.
The mid-term elections are over and they largely went the way of consensus with Republicans re-taking a majority in the House of Representatives and making inroads into, but not capturing, the Senate. The equity markets, ever the discounting mechanism, read the late polls and bid the market higher ahead of the actual results, leading us to believe that those results were indeed fully discounted on November 3rd. And like many observers, we expected some sell on the news action on that day, albeit shallower and quicker than the bevy of analysts in the financial media were predicting, primarily because that was what the bevy of analysts in the financial media were predicting. But then something happened that the skeptics, including ourselves, weren’t expecting: a quadruple of headlines that seemed to come from the equity owners’ Christmas wish list hit the tape. The sell on the news reaction, whether it was indeed a discounted discounting or actually responding to these headlines, turned out indeed to be shallow and quick. In fact, the “dip” lasted approximately a half a day.
The equity markets started strong the morning of November 3rd on post-election euphoria, even though some of the Market’s most wanted “villains” (e.g. Harry Reid and Barney Frank) survived the Democratic drubbing. The Market’s Santa list item #1 was soon delivered by President Obama, who appeared on TV to make what sounded to all like a conciliatory concession speech. In fact, the President sounded downright humble, if not contrite, in his pronouncement that he had learned from the “shellacking” the Democrats took on Tuesday. To many, that sounded so reminiscent of Clinton’s move to the Center after his first mid-terms that the Market rose even higher--but equities soon began to weaken as the Federal Reserve’s pronouncement on the size of QE2 drew near. While the markets earlier had initially expected close to $1Trillion in easing, a Wall Street Journal article late in October cut that expectation in half, to $500 million and there was unease that the announced number could be even lower. Santa list item #2, however, came around 2:15pm with the Fed announcing $600mm in expected easing with the potential for more to come if needed. The market’s reaction was swift and powerful, with the Dow gaining over a hundred points from its lows in about 2 seconds. Bonds sold off as rates rose in anticipation of a stronger economy down the road. Yet for all Wednesday’s volatility and drama, the markets closed the day essentially flat with many investors unsure what to make of the news they had just digested.
That was Wednesday and it seems that investors’ digestion period lasted exactly overnight. Thursday morning awoke to strong equity futures followed by a correspondingly strong opening to the US markets. Why? In our view, there were just too many people on the sidelines waiting for the post-election selloff to get back into the market (or cover shorts). When it didn’t occur on Wednesday, they panicked and jumped in feet first on Thursday. But Santa list item #3 was about to be released—that is, the unbelievable statement from President Obama that he was willing to consider extending the Bush tax cuts to all income classes—something about which he was adamantly negative pre-election. That pronouncement was the icing on the cake for the “move to the Center” crowd and the market rallied right into the close and by the end of the day the Dow and S&P 500 had closed up 2% while the Russell 2000, a proxy for risk taking, closed up 2.6%. The final Santa wish list item came on Friday with a jobs’ report that showed new jobs created over twice the consensus estimate. All combined, with the delivery of the Christmas list, the US equity markets closed the week with a 2.9% gain on the Dow, a 3.6% gain on the S&P 500 and a 4.7% return on the Russell 2000. Not a bad week considering that the consensus was for a big sell off.
So now that the big catalysts are behind us, with a few surprises thrown in, what can we expect from the equity markets for the rest of the year and into the next? In our opinion, it all boils down to the credibility of the President and the Federal Reserve. It was clear that Obama was doing a fair amount of public eating crow last week and much of it was for PR purposes--but if he stays true to his word on taxes and working with the new majority, we could see further gains ahead. The same holds true for Bernanke. If, indeed, the Fed is good for its $600+mm number, then rates can stay relatively low and the equity markets can continue to rally. But, as a former British Prime Minister discovered over 70 years ago, dealing with politicians can be a tricky affair. It’s not that they lie but they often “misspeak.” So we will keep our ears and eyes open to see if this market is expanding into fictitious Lebensraum or if, indeed, it is soaring on the wings of crows.
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