Beyond the Sound Bite: An Interview with Phil Roth, CMT

My interview with the Chief Market Technical Analyst for Miller + Tabak includes the conditions necessary for a successful stock market bottom, the positive secular story for commodities (especially agriculture), attractive market action in water related companies, and a dismal longer term outlook for financials and info tech and telecom.

Beyond the Sound Bite postings can be found at beyondthesoundbite.blogspot.com
To listen to this week's podcast interview, click here

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The Not-So-Smart Smart Money

It should be fairly evident by now that heavy redemptions at hedge funds over the past two months contributed significantly to the recent pounding in the one area where markets are liquid – stocks. Moreover, the deleveraging process continues to impact many hedgies as available capital (for leveraged strategies) has dried up*.

Accordingly and in anticipation of continuing redemption demands (many of which remain unsatisfied due to gating), many hedge funds have sold more than has been requested thus far. Lastly, there is some talk that private equity commitments of institutional investors are also forcing redemptions in their hedge fund holdings.

Investment Strategy Implications

With the market cap of the S&P 500 sitting at $7.4 trillion and money funds (institutional and retail) amounting to more that $3.3 trillion, the momentum nature of hedge funds and their high cash positions would only need a less bad environment (see Barton Biggs’ comments in yesterday’s Financial Times) to trigger a stampede back into equities.

With valuation currently at deep recession (bordering on depression/deflation) levels, any earnings surprises into 2009 (as in something north of $70) would be the justification for buying what was just sold.

*One wonders what has transpired behind closed doors between financial institutions and government re lending to the masters of the universe.

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Quotable Quotes: Exhaustion

A near state of exhaustion exists be it the investor trying to make sense of the current climate or the avenues being pursued by government in dealing with the credit and economic crisis or the negative feedback loop that is producing lower lows. Therefore, a few words on the topic.


“When you’ve exhausted all possibilities, remember this—you haven’t.”
Robert Shuller

“The man who says he has exhausted life generally means that life has exhausted him.”
Oscar Wilde

“Men and nations behave wisely once they have exhausted all the other alternatives.”
Abba Eban

“An era can be said to end when its basic illusions are exhausted”
Arthur Miller

“Living in a constant chase after gain compels people to expend their spirit to the point of exhaustion”
Friedrich Nietzsche

“I have witnessed and greatly enjoyed the first act of everything which Wagner created, but the effect on me has always been so powerful that one act was quite sufficient; whenever I have witnessed two acts I have gone away physically exhausted; and whenever I have ventured an entire opera the result has been the next thing to suicide.”
Mark Twain

“Tom Cruise's attorney said he is going to sue anyone who claims he is gay. In a related story, Ricky Martin's attorney has been hospitalized for exhaustion.”
Conan O’Brien

Have a good weekend.

Minyanville posting: Resisting Market-Psychology Extremes

This week's Minyanville posting picks up where last week's left off.

"18 months ago in my last appearance on what was then called “Kudlow & Co.”, I expressed serious concerns re the level of enthusiasm for the markets and in particular the Goldilocks economy. The Great Moderation was the anchor for the economic nirvana that supported ever-higher equity prices. Then the credit crisis erupted and the rest is all too well known.

But emotional extremes, the animal spirits had not fully run their course, as the enthusiastic residue had not gasped its last breadth. Commodity prices soared in the summer of 2008 led by predictions of $200 a barrel of oil. Then came the second wave of the credit crisis and with it fears of a global slowdown and demand destruction.

Now, when we flash forward to today’s environment, we see..."

To read my Minyanville articles including this week's posting, click here

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Krugman and El-Erian in the Valley of FUD

In his excellent book, “When Markets Collide”, PIMCO chief Mohammed El-Erian writes about the journey and the destination that the global economy and markets are undergoing and puts in context and helps clarifies much of the current economic and financial chaos. Mr. El-Erian describes a world that will be but is clear to note that the process of getting there may be “bumpy”.

Nobel laureate Paul Krugman points to the same concept in his blog posting yesterday (“After the Stimulus”) in which he lists the components of the US economy for 2007 and their averages from 1979 to 2007. As the accompanying table from his blog shows, the economic mix of the US economy got to be quite imbalanced primarily due to credit inspired high consumption levels by the US consumer. In the process, net exports became the counterbalancing force*.

As El-Erian declares in his book, a transformational world (economic and financial) is inevitable and has been underway for some time (long before the current credit and now economic crisis). And Krugman states, “Consumption probably isn’t going back to a 2007 share of GDP — savings are back. So what will fill the gap, once the stimulus is gone? Housing? Not for a long time. Business investment? Hard to see why. The natural thing would be to trade lower consumption for a smaller trade deficit.”

It is logical to assume that the US economy will experience two mega trends in the coming years:

• US consumer spending will fall while US consumer savings rise (aided by the baby boomers’ need to provide for their retirement years now that the wealth effect has gone kaput)
• Net exports will improve as global growth, particularly in emerging markets, continues to expand (certainly relative to developed economies)

It is also likely that non-residential investments (capex) will move closer to their average as corporations retool to meet the global export opportunities while government spending will increase as the US government seeks to stabilize the US economy (large fiscal deficits and other government programs like TARP).

Investment Strategy Implications

The bottom line for those investors willing to look beyond the valley of FUD (fear, uncertainty, and doubt) that we are currently wallowing in is to position their portfolios (what’s left of them) to exploit these mega trends. To follow this direction, however, requires context, perspective, and perseverance – something sorely lacking in a panic stricken financial climate.

*table contents
C = Consumer
N = Non residential investment (capex)
R = Residential investment (housing)
G = Government expenditures
NX = Net exports (exports minus imports)

Just How Bad Are Corporate Profits?

Today's earnings report from Hewlett-Packard raises the question posed in this blog postings' title. To help shed some light on the subject, consider the corporate results produced thus far re 3Q08.

Compiled each week from data published in the Wall Street Journal (and produced for subscribers in each weekly report along with more than a dozen other charts and tables), the accompanying table* shows that when you exclude Financials & Energy, the earnings results are less than great but nowhere near as dire as the headlines and sound bites would led investors to believe. Moreover, the quarter over quarter results ex Financials show a net gain.

That said, several items warrant comment:

* Autos (Consumer Goods) had the largest swing from horrendous (-$42.6B) to just plain bad (-$2.5B)
* Broadcasting and Airlines hit the Consumer Services sector with negative swings of $17.5B and $3.5B, respectively
* Conventional Electricity (Utilities) were hit hard due to higher energy costs to the tune of $-5.3B

Going Forward

Needless to say, investing is a forward looking game. Guidance has ranged from cautious to the ever dangerous "challenging". Despite this fact, however, most bottom up analyst projections remain in what could only be classified as the enthusiastic category, as evidenced by 2009 S&P 500 operating earnings estimated in $90 range.

While obviously overly optimistic, the bottom up boys and girls' forecast may not be too terribly off the mark as lower energy costs and a more robust global growth scenario turn out to be two of the surprise events of the new year. Then there is the very serious prospect of write-ups in Financials as assets held get mark to market upward should any return to normalcy in debt and credit related assets pricing occur.

Investment Strategy Implications

Doomsday scenarios abound. The headlines are awful. And while the credit markets show some progress, the TED spread remains elevated as the improvement in LIBOR is offset by the deflation/depression fear driven levels in the 3 month US Treasury rate.

Thankfully, the equity markets are now past the November 15th notification date for hedge fund redemptions, which should alleviate some of the forced liquidations that have roiled stocks over the past six weeks. However, unmet hedge fund redemptions linger as something of an overhang remains (gradual liquidations replaced hurried forced liquidations) as does tax related selling by individual investors.

Lots of conflicting factors at play. Then again, what would you expect during the bottoming process of one of the worst financial and economic episodes in history?

*click image to enlarge

Quotable Quotes: Hogwash!

One of my favorite podcast services is Bloomberg On the Economy. Last week, they posted a very provocative interview with the author of "The Black Swan", Nassim Taleb. In the interview, Mr. Taleb launches several broadsides against conventional investment thinking including "all of quantitative risk management is bogus", equating modern portfolio theories with "astrology", the uselessness of value at risk, and why buying credit default swaps these days is like "buying insurance on the Titanic from someone on the Titanic".

Here is the 17 minute 42 second interview.



Have a good weekend.

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Minyanville posting: Bottoms No Place for Fundamentals Alone

This week's Minyanville posting refers to a recent interview Paul Tudor Jones gave re market behavior at and around market tops and bottoms.

"Every now and then I come across sayings or comments that capture the essence of the current economic and/or market environment. This morning, in my email inbox comes the following words from Paul Tudor Jones II that I strongly recommend all investors take a moment to consider in the current environment.

Here are three excerpts from his recent comments:

"When it comes to trading macro, you cannot rely solely on fundamentals; you have to..."

To read my Minyanville articles including this week's posting, click here

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For Whom the Deep Oversold Bell Tolls (again)

Whatever the fundamental rationale may be – November 15th and hedge fund redemptions; capital gains sales in anticipation of tax increases next year; fears of a global recession; concerns re FAS 140 and QSPEs (more on this one in a future posting); S&P 500 earnings closer to $50 with a 10 or less P/E – the technicals of the market are once again on the verge of signaling another strong non-confirmation low.

As the accompanying chart* shows, the deep oversold in Slow Stochastics (below 20) combined with a vastly improved Momentum and MACD readings point to a bell ringing non-confirmation low. In my experience, when combined in this fashion these indicators have a > 80% probability of success. And when they fail, the worst-case result is breakeven.


Investment Strategy Implications

Will this time be different? Perhaps, but only the nightmare scenario of plunging earnings and deflationary level P/Es justify lower prices.

*click image to enlarge

Out With The Old, In With The New

On the surface China’s actions re stimulating their economy may look to some as a modestly positive development. However, such thinking misses the larger point.

Emerging economies are beginning to show a willingness to take the global growth lead. By seeking to generate domestic demand (which is what their stimulus package is designed to target), China is showing the way for other well capitalized emerging economies to take control of their own economic destiny: Depend less on exports to the developed countries and their overburdened consumers and more on their own emergent middle class for growth and stability. In the process, emerging economies will be a central part to a world economic transformation that will usher in a new, more sustained era of global growth that is difficult to impossible for many to see through the current haze of the credit crisis.

It is, of course, reasonable to be skeptical that such a transformation will succeed, certainly to the extent that it replaces in large part what has been the engine of global growth – the US consumer. Moreover, the process of transformation will not be smooth. The disruptions to the world economy and financial markets have been profound. And the policy responses have been both disjointed and evolutionary. But progress is being made as evidenced by the TED spread.

Of course, in a world dominated by conventional thinking and simplifying assumptions re trends, it is not hard to find many doubters that the progression to a new multi-polar world order underway will result in growth and stability that far exceeds the credit juiced era just ended. Moreover, it is equally hard for many to believe that such a world will include better managed financial instruments to satisfy the emergent global appetite for financial innovation. But that is precisely where the surprise may lie.

Investment Strategy Implications

While it won’t happen overnight, the global growth handoff is underway. Coupled with a rebalanced developed economies, global growth driven by emerging economies appears to be poised to lead the way for a more sustainable and balanced era. More work needs to be done and things must go right on a whole range of levels (economic and financial). However, yesterday’s news re China is a big step in the right direction.

Where will the S&P 500 end the year?

⇐ 20 days remain. Cast your vote.

Quotable Quotes: Inspiration

A fitting end to a most momentous week. A few of the lesser known but no less profound words of a living inspiration. And a cautionary word from another place and time.


“Human salvation lies in the hands of the creatively maladjusted.”

“Our scientific power has outrun our spiritual power. We have guided missiles and misguided men.”

“A man can't ride your back unless it's bent.”

“Success, recognition, and conformity are the bywords of the modern world where everyone seems to crave the anesthetizing
security of being identified with the majority.”

“Lord, we ain’t what we want to be; we ain’t what we ought to be; we ain’t what we gonna be, but, thank God, we ain’t what we was.”
Dr. Martin Luther King, Jr.

"You may not be interested in war, but war is interested in you."
Leon Trotsky

Have a good weekend.

Minyanville posting: Actionable Ideas, Emerging Markets

This week's Minyanville posting leverages upon yesterday's Beyond the Sound Bite interview by pointing out certain facts related to politics and the markets.

"Sometimes having the facts about the market environment in which investors operate can be very beneficial. In my podcast interview, conducted yesterday..."

To read my Minyanville articles including this week's posting, click here

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Beyond the Sound Bite: An Interview with Sam Stovall

My conversation with Standard and Poors' Equity Research Chief Investment Strategist includes how stocks tend to perform when one party controls government, fourth quarter of an election year stock performance, first year of a new administration and stock performance, and the earnings estimate split between bottom up analyst forecasts versus top down driven estimates.

The length of the interview is 13 minutes 30 seconds.

Beyond the Sound Bite interviews can be found at beyondthesoundbite.blogspot.com
To listen to this week's podcast interview, click here

An Overbought Pause

As delightful as the rally has been, a key super short-term technical indicator, Slow Stochastics, is registering an overbought reading (above 80) and a cause for a pause.

As the accompanying chart* shows, while the near-term indicators, Momentum and MACD, are in fine shape (especially MACD) and supportive of further market strength, Slow Stochastics suggest that the market may have reached a near-term peak.

As was the case with the recent oversold levels and near unanimous non-confirmation readings, overbought readings are abundant (most indicators registering the same readings) and give further evidence of a peaking out in the rally.

*click image to enlarge

Time to Vote!

What's your opinion on where the S&P 500 will end the year?

Vote now (nav bar to your left).