Chris Lau - Seeking Alpha

Sunday, June 28, 2009

Mauldin: End of Recession?

In New from the Frontline, Mauldin dissects the posted stats and figures to illustrate why they are being spun off for more than what is really the case.

This is not to say that the news is bad or good. It requires deeper interpretation for its consequences. For example, Mauldin also notes that later this year or next, GDP will rise...when compared to previous quarters and years. One bad year will most likely likely follow with a good one because the comparative baseline year was so bad.

My analysis is below.

Recession's End Vs. Stock Market
In 2003, when the market finally turned up, we were already well out of recession. And the market had a very quick 12% or so drop while we were in recovery, while later we went on to a 90% run-up! Was the drop telling us anything, or do we explain it away?

"In the short run," St. Graham said, "the market is a voting machine. In the long run it is a weighing machine." The voting is based on current sentiment, but what the market weighs in the long run is earnings. The market tries to forecast future income streams. And it gets it wrong as often as it gets it right.


The CNBC host talked in breathless terms about the importance of the 50-day average moving above the 200-day average. It means nothing until it means something, and we won't know what that something is for some time.


Most analysis I have done from a macro level strongly suggests that the market needs to fall. This has not happened for four months. Even though traders have made some 40% in this time period, investors need to review earnings, ongoing losses in commercial real estate, and option ARM (adjustable rate mortgages). The unknown factors (helping the markets) still exist around policy and monetary policy, which is distorting the natural behavior of the markets.

About Unemployment:

  • Should labor market conditions proceed along the path taken in the 1992 recovery, the unemployment rate could peak close to 11% in mid-2010 and remain above 9% through the end of 2011
  • Projection indicates that the level of labor market slack would be higher by the end of 2009 than experienced at any other time in the post-World War II period, implying a longer and slower recovery path for the unemployment rate [incorporates involuntary part-time workers plus standard unemployment rate]
  • When the economy rebounds, employers will tap into their existing workforces rather than hire new workers. This could substantially slow the recovery of the outflow rate and put upward pressure on future unemployment rates.

It is difficult not to read into "positive" economic news, but the focus must remain around the level of unemployment, progress of shift into new sectors, and economic changes/trends in the manufacturing sector.

How Income...and Savings...Both Rose

A large increase in "government social benefits" and a decline in personal taxes accounted for all the gain, and then some. The increase was the effect from the recent stimulus package, which is (for now) temporary, and not the result of a recovering economy. Hardly green shoots. It is just borrowed money from another (government) source.
Who's paying for this again? Oh yes. You are. You, the tax payer. It is easy to be skeptical on how much longer the stimulus package will be funded. Tax will not likely go up in the U.S. for another 3 years. This statement is based on the assumption is that the current government will want to be re-elected.

John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to:

Monday, June 22, 2009

A Rally Without Earnings-less Recovery is...

On TradingSystemGuru this week, Matt and his team returned from a nice vacation in Europe (I believe). He expressed his doubt about the stock market rally in the following points below:
  • Average Price/Earnings ratio for the 8,011 US stocks of the VectorVest Composite Index (VVC) was 131.21

In the chart above, Matt notes that "the broad range of publicly trading companies is in uncharted territory and well above any previous rally or recovery high."


Canada may also be vulnerable to a sell-off:

Canadian stocks rallied 40% during a period in which earnings dropped more than 100%! When earnings get this bad, there is no point in looking at PEs – recently they went from +1000 to –1000 in the space of a week!

* So are US and Canadian stocks overprices now? You can judge for yourselves but either we have entered a new paradigm in which earnings don’t matter or the market is betting that earnings are about to take off like a thoroughbred on steroids.
About U.S. Debt:
Net foreign private flows were negative $58.4 billion [in April 2009], and net foreign official flows were $5.2 billion.


Foreign holdings of dollar-denominated short-term U.S. securities, including Treasury bills, and other custody liabilities decreased $39.4 billion and foreigners sold $44.5 billion of Treasury bills in April.

Why is this important? With a looming deficit north of $2 trillion, the US Treasury will have to sell approximately $200 billion in government bonds per month just to pay the bills, a level that is far higher than currently levels of investment in US capital assets. Unless the Treasury is able to attract new levels of foreign investment, there will be growing upward pressure on interest rates and rising rates are bad for housing and nearly every aspect of economic growth.

Sunday, June 21, 2009

Notes from Frontline Thoughts: The New Normal

This week, Mauldin comments on the need for the economy to supply less, most especially in the consumer sector. His macroeconomic view is described as "the new normal."

The reason is clear: consumer spending will not increase, because savings rates have permanently and necessarily increased:

To expect a normal recovery cycle, whether it is corporate profits or lending or consumer spending or capital investment or (pick a category) is just not reasonable. This is a period that is fundamentally, in so many ways, different. And the recovery (and there will be one!) will also be of a different warp and woof throughout the entire world economy.

Three of the major points mentioned to support this argument are summarized below:

  • First, we are at the end of a huge cycle of increasing private debt that ended in an overleveraged society.
  • Secondly, my premise is that the recovery is going to take longer and be much less robust than any recovery since WWII. With unemployment likely to go over 10%, and with our new normal world not needing as much production of so many things, unemployment is going to stay stubbornly higher for longer than in any previous recovery.
  • Thirdly, all this is going to affect corporate profits, especially for companies that depend on consumer spending. Those investors who expect corporate profits to rebound in 2010 are likely to be disappointed. (For the record, if you go to the S&P web site, analysts are projecting anywhere from a 40% to a 60% rebound in earnings for 2010 for the S&P 500. ...It is going to be tough to get much of a return from traditional buy-and-hold equity index investing for some time.
  • Fourthly, this is a global problem and primarily one in the "developed" world. I think we will find that much of Europe will be in a worse state of affairs than the US.
What's next? Mauldin explains that:
In 2001, I wrote about what I called the Three Amigos that I watched to give us an indication of the direction of the economy. They were capacity utilization, high-yield bonds, and the (now-renamed) ISM numbers. Watching the direction they go gives us a good idea where the economy is headed.
1) Capacity Utilization is still declining
2) Junk bond yields are now at levels associated with a "recession." They were previously priced for what Mauldin calls "Armageddon"
3) ISM (Supply in the manufacturing sector of the economy) improved but it is still indicating that the economy is still bad.

Full original article may be found here:

John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to:

To subscribe to John Mauldin's E-Letter please click here:

Comments and Conclusions:
Not to place myself at the same level as a hedge fund manager, but Mauldin complains about the very things I complained about. The term "Green Shoots" is nothing more than hype created by Bernanke. Second, "less worse" does not mean getting better. These two ideas continue to support the market, but ultimately over time, the points brought up by Mauldin must be reflected in the stock market.

In the meantime, the stock market may have enough positive self-feeding positivity to rise. It is up to investors who have the primary goal of preserving capital not to mistake this as a bull market.

Saturday, June 20, 2009

Psychology is Everything...Fundamental Analysis is Everything...Which is it?

Ken Norquay posted his views on the current market sentiment. He recently published the book "Beyond the Bull." I had the privilege of winning a copy of his book at one of his company's investment seminars. It is a very good book, because the author illustrates the relationship between market cycles and investor psychology.

I recommend this book, and also caution you not to simply judge a book by its cover: the publisher (?) did not appear to spend much time on "prettying up" the cover.

Norquay uses technical charting as one way of gauging the market sentiment. He does not use charts as the only way to analyze companies.

When I read his most recent blog entry, it reminded me of my correct early call late last-year that "Obama-rama" would be a disappointment. Norquay reminds us that the latest wall street marketing to spin a miraculous "Green Shoot" recovery is built on false hope. I would agree on this viewpoint.

It would appear that the positivity today is based on the positivity of the market, and not solidly on fundamentals. I remain weary about the health of the market, because of the impending troubles that will result with the maturities for option ARMs (adjustable rate mortgages) and for CREs (Commercial Real Estate debt).

We are in constant contact with ordinary investors and stock brokers. And right now they are REALLY BULLISH. It seems that most of them were fully invested in the stock market at this time last year, June 2008. Within 5 months they had lost 45%! Winter of 2008 and ‘09 was a long painful financial experience for most of them. But spring brought new hope. ‘Midst news of increasing unemployment and GM’s bankruptcy, the stock market rallied. Analyst after analyst talked about the market “climbing a wall of worry.”

Review: “Climbing a wall of worry” refers to a phenomenon that occurs at important bottoms in stock market cycles. Economic news is so bad that the investing public worry that the economy is getting worse and the stock market will continue down. In other words, the stock market goes up, but investors do not believe it… they are too worried.

Is that what’s happening now? That’s not what we see.

What we see is “don’t worry, be happy.” It started with last year’s lightning losses in the crashing stock market of September 2008. People were shocked! Then came Obama-mania: hopes that the new president’s stimulus package would somehow save us all. Surely a new economic age had begun: surely the economy would rise like a phoenix out of the ashes of America’s fallen corporate giants. Then came a normal bear market rally: March 9, 2009 to now. The Canadian stock market has retraced about 40% of its 2008/9 drop; the US market about 30%. This rally has both Canadian and US investors breathing a huge sigh of relief. “Another four or five months of this and we’ll break even for the year!” The latest stock market buzz-phrase is “green shoots.” These are the early signs of economic recovery: the green shoots of spring, growing out of the icy soil of winter… optimistic hope that the worst is over and the recovery is just around the corner.

That’s not a wall of worry. The wall of worry is about investors NOT believing that things are getting better. In June 2009, investors think [hope?] things ARE getting better. They think they WILL make back the money they just lost in 2008. If they are worried at all, they are worried about missing out on the recovery.

When the 2008/2009 bear market finally does end, the first move up will be met with an attitude of disbelief. Investors will have a bad attitude toward the stock market. The green shoots they see now will be replaced by the green light they don’t see.

Psychology is Everything...Fundamental Analysis is Everything...Which is it?

It is both. The phrase "I want to have my cake and to eat it too" comes to mind. We are told you cannot have one without the other, and that a sacrifice needs to be made to get one thing at a cost of the other.

Market pricing is based on psychology. Fundamental analysis is based on security analysis. Is it possible to analyze solely on a balance sheet, or solely on what everyone else is thinking?

Sunday, June 07, 2009

What is Next: Stock Rally or Selloff?

How does one not become distrustful, cynical, and doubtful about things being merry again overall?

Wise words would dictate that the stock market is all-knowing, and is a forward indicator of the health in the economy, but who exactly said these words?

I am doubtful that all is well for the economy despite most major indexes now up 40% in a 3 month period. Annualized, that is a 120% return. Investors need to pay careful attention with market prices (all stocks on average are up 40%) rising to quickly against declining fundamentals. Look out also for speculators to take profits, further adding pressure to stocks in oil and gold to possibly sell-off.

What has changed over the past few months are LIBOR spreads. LIBOR spreads are not at worrying levels, implying that banks should begin lending again with credit flow improving. In that time, distressed companies in the resource sector and in REITs used that opportunity to raise cash and to improve balance sheets.

I noticed news media continues to report bad news by ending articles with suggestions that "this might be an indicator of a bottom." Most recently, in the U.S., unemployment increased 345,000. The unemployment rate continued to rise, increasing from 8.9 to 9.4 percent.

On Mish's blog, he notes the following:
  • there are 9.1 million people are working part time but want a full time job. A year ago the number was 5.3 million
  • The official unemployment rate is 9.4% and rising sharply. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

    It reflects how unemployment feels to the average Joe on the street. U-6 is 16.4%. Both U-6 and U-3 (the so called "official" unemployment number) are poised to rise further.

As noted on CalculatedRisk, the current recession is now one of the worst recessions since WWII in percentage terms (not in terms of the unemployment rate):

Additional Areas for Concern

I realize that this entry is admittedly full of "concerns." It's no wonder that bankers, stock traders, and investors pretty much always have a grim look, even in good times, but I digress.

Bonds/U.S. Dollar
Over the past two weeks, yields in longer-term U.S. Treasuries rose. This indicates that the "great" economic experiment to pump money into the system is being rejected by the economic system. Look for repercussions to take place in the currency market (weakness of the U.S. dollar, Pound, Euro) in the days and weeks ahead.

I am not convinced that the rally in the energy sector will hold. Ditto for gold and for silver. The rally is not even based on an argument about inflation. The strength in this sector is due largely from countries like China accumulating raw materials in place of accumulating U.S. debt or assets in U.S. currency. Watch out for the possibility this summer for a sell-off in gold and oil, and a flight to safety to the U.S. currency. The way things play out will depend on how well the stock market holds its level of confidence, especially if economic figures continue to show a deterioration in unemployment, effects of de-leveraging, and the impact of a permanent decline in consumer spending (and higher savings rate).


US Dollar Collapse: Double Peaked between Oct/08 and Mar/09.

Volatility, what volatility?

Wednesday, June 03, 2009

Market Unable to Sell-Off...

Below is a comment posted from a blog post on xtrends. This entry is in contrast to news media posts from, say, Reuters. Reuters consistently ends negative news posts with "this could be a sign that the economy is improving"/"it might be a sign the market has bottomed."
I now see the bears getting bulled up...they are now even talking about a secular bull now...investor sentiment almost at 11/07 peak...this is all just the part of the process...sure we could run to 1000-1100 on SPX after a modest correction but that will be it!...we will not enter a new secular bull from my eyes it is almost an impossibility.

Am I a permabear?...more yes than no...but if we dip to 750-820 on SPX will I be short? favor being long at that point really...but there is a big difference between a IT bear/bull vs LT bear/bull...the ones that come late to this bear mkt rally will get killed...I can tell you from economic sense why I think we will make new lows within the next yr and perhaps Ill list some but another reason is this, if you search on the net you will see how the elites have planned most of this financial crisis...why is it that insiders from Bilderberg already knew about the runup in commodities and eventual collapse many many months before it happened...they told about the subprime collapse, credit crisis, stock mkt collpase yrs before it happened...wanna know what Geithner said this month at Bilderberg...if they should create a long lasting stagnation/depression or a quick violent depression creating a new system...this will take and debt is contracting and the dollar will run up soon enough...the mkt will collapse for round 2 when this happens...Atilla will ultimately be right about this one....the elites said they will bring this mkt down even further and eventually collapse our else are they going to pay the asians and middle east back unless they pay back with devalued dollars? what the bulls will eventually find out the hard way is this, the govt and elites are not trying to bring our economy back, they want a new system where they can control it even further.

Mark my words, soon from now, the govt will talk this mkt first it will be confusing because for the past 3 months they have been fudging the number and lying to us with their green shoot garbage but son from now, they will take the other side and may will be puzzled why they will do this unless you understand their final endgame.

But here are some triggers.

1. CRE will blow up any way you look at it...they were leveraged way more that RRE...many bought CRE with 1% down...many will need to refinance and wont be able to...banks arent stupid they will not lend using crazy criteria anymore...if you look at many CRE building selling right now, they are already off 30-50% from the top...that is reality.

2. so where will the money come from to fuel this new bull?...70% of GDP consumer spending...we get money from home equity lines(gone), credit cards(personal credit to contract 4T in next 2 yrs), jobs(losing 500-600K jobs per month, real unemployment 18% right now), stocks(dont need to say anythere about this one)....ok, so tell me, where will the money come from?.

3. corp and state pension obligations will blow up...CA is bankrupt...PERS plans will fess up they cannot pay soon...I can see the riots and protests from the teachers, firemen and cops already...corp's will soon fess up they cant pay screw with someones money and they will react.

4. interest rates have to go up as the past month has shown...Feds said they were buying treasuries but rates rising instead of falling..people arent stupid...using debt to pay off debt is dumb...Feds printing money to give to the banks via govt is kinda dumb when you consider the private banks are the feds!...high rates will kill RE and borrowing...gas and food prices will rise while assets such as stocks and RE will remain supressed...a hyperinflationary depression is what I see.

5. we need to move away from paper pushing but this will take time...we have given away manufactoring over the past 2 decades...the middle class is being squeezed now...the good jobs are leaving or gone...but out of the 12T committed by the govt about 200B committed to infrastructure so all is well...when will people realize that 95% of the money going to bail out bankrupt institutions that need to go away...the weak must die and replaced by the smart and will not solve any probs until this tragedy is resolved...forget about Friedman, Keynes and etc...Minsky will ultimately be proven correct...but in the process of learning this, we and our children will pay.