have we reached the bottom of the bear market?

[Sluggy]

Have we reached the bottom of the bear market? Or do you think not ?

 

[ikicker]

Not at all. I could give you loads of reasons why its easier to play the market like its a bear and then move out but the list would be way too long. The point is that what we are looking at is the product of international interactions which were not present during the great depression and the recessions in the 70s-80s

 

[shadowninja]

I can predict that by March 2009, we will reach a low of around 3500 on the FTSE 100.

 

[ivantchourilov]

f*&k no

 

[bangkoker]

I don't think we have but I have to keep reminding myself that doesn't mean that things can't go up aswell as down

 

[china white]

MARKETS vs. ECONOMY: Part I

Hello everyone - I actually published this opinion elsewhere - see thread called "Russia's RTS Index futures - liquid tradable instrument", but I think some interesting and useful discussion may ensue its publication here. Pls feel free to fire away any comments - or critique

You'd normally expect to see something like "Markets AND (not VS) Economy" in the header for such a comment, however my wording is not a typo at all.

If you look at markets alone, things are looking up and the stocks are very attractive. Reasons for that are: 1) Loads of cash sitting on the sidelines waiting to be put into action, 2) as a result, a plethora of M&A deals where the bidder is willing to pay a hefty premium to the target's share price (if British Gas indeed gets snapped up at 16 quid, this will be the mother of such hefty premia), and, 3) most importantly, strong corporate earnings. Currently, 75% of the 484 companies in the S&P 500 that have reported have beaten Wall Street expectations, compared with a quarterly average of 62%, according to Thomson Reuters. I have rarely seen such a wicked bundle of mega positive bits for the markets.

BUT - there is a clear decoupling of markets from economy now. Some clever men are saying there is a 50/50 chance of economy dipping into recession and deflation from this juncture - I will argue we have not YET come out of the recession AND we ARE effectively in a deflationary environment already. I will leave deflation for a later comment in Part II - but I will comment here why we are still DEEPLY in the recession. Answer in fact is very short - job growth, or the lack of it.

In the attachment you will find a little-known (and too bad it is that little-known!) civilian employment-population ratio - in contrast to the better-known unemployment rate, which measures the percentage of working-age Americans who are actively seeking jobs but do not have one, the civilian employment-population ratio measures the percentage of working-age Americans who have a job, whether they are seeking one or not. This distinction matters because the state of an economy affects whether someone looks for a job at all. Bad times discourage potential workers from seeking jobs; boom times encourage marginal workers to seek them. Looking at this ratio, America is suffering its largest drop since World War II. In 2007, a little over 63% of adult Americans had jobs. Recent report shows that only about 58.4% do, a decline of nearly five percentage points. While the unemployment rate remains steady at 9.5%, the employment-population ratio continues to fall each month. In April it was 58.8%, in May 58.7%, and in June 58.5%.

Since America has about 238 million civilian adults of working age, this decrease means that we have nearly 12 million (!!!) fewer jobs today than if the employment-population rate were still at its 2007 level of 63%. No other recession in the past 60 years saw such rapid job destruction in either absolute or percentage terms. In the 1979-82 recession, unemployment topped out at a higher rate, 10.8%, but the employment-population ratio declined by only three percentage points, to 57% from 60%.

And those clever men are saying there is a 50/50 chance of a double-dip recession? We are actually - in many ways - still at the bottom of the recession! Worst thing is that today's leaders will NOT do what was available to Reagan and Maggie in 1982 - I am talking Reagan's tax cuts in 1983 and 1986 tax reform that lowered the top marginal income tax rate to 28%, allowing America to employ the millions of late baby boomers, women and immigrants who sought jobs. That led to the employment-population ratio recovering in less than two years after hitting bottom - the sort of momentum that continued for the rest of the decade (see chart attached).

The result is obvious - companies are more inclined to put loads of money that they have into mergers and acquisitions to grow, with the net result being more job loss than creation. Is there light at the end of the tunnel? Yes, and perhaps an unusual one - health-care reform. Companies are also slow to hire because they are still unclear on how much health-care reform is going to cost per employee. If that is cleared up favourably - it will be a massive burden off hiring shoulder!

And now back to why I am bullish in this grim environment. Health-care reform may help loads, but at the end of the day, it is strong corporate earnings that'll fix the hiring (and spending). And that is the bit we have firmly in place. The only reason why (with this gloomy reality in jobs market) we are not sitting at the bottoms of March 2009 is that the markets tend to run ahead of the economy. And - with this sort of corporate earnings - they have much more way to run!

CW

 

[china white]

MARKETS vs. ECONOMY - PART II

I commented before (see above, also Bloomberg post {NSN L7LFFK3PWT1C <GO>}) that we are actually - in many ways - still at the bottom of the recession, and it is the corporate earnings, and the markets tendency to run ahead of the economy, that warrants our bullish view. But “recession” is not the worst scarecrow in today’s environment – far from it – what many view as the real devil is “deflation”, supposedly looming over the developed countries’ economies. Why? Mostly because most people including those occupying seats in the Congress and the Parliament on the two sides of the pond do not really know how to deal with deflation!

It is a bit late for them to cry over spilt milk, because – from what I am seeing – we ARE ALREADY in a deflationary environment. Why do I see deflation in developed countries as being here and now? Deflation is not just prices for a hot cross-bun or a plate of Jamaican soul food that you get yourself at the Notting Hill Festival ; it also involves prices for assets. Home prices down 35% add to that stocks prices, for many, down the same amount; commercial real estate in many markets down more than 40%; 40% of worldwide auto making capacity unused, and so on – surely you get the broad picture.

Let us get to the bacon now. Since spring highs S&P and FTSE lost how much? Roughly 10%. I can give numerous accounts of such sell-offs over the past decade, in the course of which property (and that is the mother of all indicators, that is your home) would be clocking up new highs, meaning all BUT one thing - inflation. What is happening now? Courtesy of Trovit – see link below:

http://homes.trovit.co.uk/162703/london-price-property

in the last 3 months (May 2010 - August 2010) the average for sale price for property in London has decrease of 8.45 %. And that is not deflation? And that happening when the world’s second-largest maker and distributor of building materials, CRH Plc, tumbles 16% the biggest drop since 2002, after forecasting lower earnings, meaning in plain English fewer homes? Fewer homes at cheaper prices – and that is not deflation, me Ladies and Lords?

You may say – hold on – in the same 3 months the average for RENT price for property in London has increase of 26.63 % - see following link:

http://homes.trovit.co.uk/162703/london-price-rent-property

Isn’t that inflationary? Generally yes, but do not forget that the value of a brick-and-mortar asset and the value of leasing that asset have very different implications for inflation/deflation waterline. 3 reasons come immediately to mind:

1. Take my home in Fulham. 8.45% of my home value goes down the loo in just 3 months, and – if I am slick enough to kick out my tenants and get other ones at a 26.63% mark-up to the rent they are paying me – you don’t need to be a bloody Einstein to figure out I am still 30 grand in the red;

2. Value of leasing assets has the flipside. The trademark for deflation is pretty much “sitting on your money tight”. Now imagine a “buy-to-let” buyer. Him sitting tight on his dough in May and doing his do now is actually DOUBLING-UP on his profit due to lower house value now and higher price he will be charging his lodgers.

3. People are more than willing to pay premium for rentals anticipating the property to deflate even more.

My point is that deflation is not a fear, it is a reality. Now let us look round. – What can possibly stave it off? And that will have to be EMs where you can still get double-digit returns just depositing your money, at least in countries like Russia and Brasil. I hate repeating another man’s words, but I will totally second Mark Mobius at Templeton here. EMs have all the capacity to help out developed nations not just on the front of liquidity, but more importantly, on the account of that delusive inflation that we all so hate but which is the only alternative to the deflation that will be yours, mine and broad market’s Boogey Man.