Positive momentum is feeding the trend, or "she'll be right, mate!"
Factors driving this thing:
- earnings (no worries there)
- positive change in unemployment (the end of the last holdout)
- Fed affirms ZIRP (giddyup)
- the conversion of the naysayers (I can see clearly now...)
- growing realization that recovery is real (only time will tell, but I don't have any time left)
It seems to me the consensus (at least among the major sell side strategists) from the beginning of the year is setting up to be proven right, ie. clear sailing in 1H10, potential ripples in 2H10. Whowouldhaveguessed.
Thursday, March 25, 2010
Friday, March 19, 2010
What to expect of the "more normal"
Looking at the charts, they look a lot like a map of the Indian subcontinent, with Karachi representing October 2007 and Karungulum March 09. That, to my mind, puts us near Satabhaya presently (just south of the Bangladesh border).
The rally is likely to flatten out, as we grow in confidence and comfort with the recovery (with a hiccup or two around monetary exit), and the market will continue to have a positive skew. Welcome to a "more normal" market.
Alas, if we fail to address the serious global imbalances, then we are likely to take a right turn at Chittagong. And that looks ugly.
The rally is likely to flatten out, as we grow in confidence and comfort with the recovery (with a hiccup or two around monetary exit), and the market will continue to have a positive skew. Welcome to a "more normal" market.
Alas, if we fail to address the serious global imbalances, then we are likely to take a right turn at Chittagong. And that looks ugly.
Chinese disconnect
It has always struck me as strange that most of the Chinese companies traded on US exchanges (including the largest companies) sport significantly higher growth rates and, more importantly, margins than their industry peers located in the US and elsewhere.
Call it Chinese exceptionalism.
Now there are some reasonable explanations for some of it (market closed to foreign competition, govt preference, super growth part of the cycle, only the best make it to an offshore listing, etc.). Growth rates I can understand (although even some of them are suspect). Margins, however, are a slightly different story. The laws of economics talk about diminishing marginal returns to production, capital, and labor weighing on the economic surplus that can be earned in a competitive market.
In the case of the newer, smaller cap companies operating in traditional industries, it stretches credulity that they can grow as fast and earn as super-sized profits as they say.
All this in the context of Chinese companies having a reputation for being low margin, seat-of-the pants businesses.
Buyer beware. If it is too good to be true, it just might be too good to be true.
Call it Chinese exceptionalism.
Now there are some reasonable explanations for some of it (market closed to foreign competition, govt preference, super growth part of the cycle, only the best make it to an offshore listing, etc.). Growth rates I can understand (although even some of them are suspect). Margins, however, are a slightly different story. The laws of economics talk about diminishing marginal returns to production, capital, and labor weighing on the economic surplus that can be earned in a competitive market.
In the case of the newer, smaller cap companies operating in traditional industries, it stretches credulity that they can grow as fast and earn as super-sized profits as they say.
All this in the context of Chinese companies having a reputation for being low margin, seat-of-the pants businesses.
Buyer beware. If it is too good to be true, it just might be too good to be true.
Thursday, March 18, 2010
Are we entering a "more normal?"
Man, have I been out of sync with this market.
"Don't fight the tape," and I've been fighting it since July 09.
Followed the good folks at PIMCO and GMO into the "new normal." Consequently stayed away from the cyclicals (big mistake) and also was way too cautious on the Financials.
With the market trudging determinedly higher, investors are slowly, but surely, convincing themselves that we are moving back to normal and are growing in confidence daily. I'm not a card carrying member of that school (yet), but I am worried that my timing could be a tad off (like years!).
The structural problems are real and unsustainable. In the absence of serious change, we know where we are heading. It is only a matter of timing (and that is the hardest part). Another part of my thesis, is that the changed dynamics of the market (new instruments, new vehicles, new players), in conjunction with the the imbalances outstanding, will lead to more compressed market cycles. So, while the historic market cycle has ranged around 5-7 years, we are now likely to experience market cycles of 3-5 years.
"Don't fight the tape," and I've been fighting it since July 09.
Followed the good folks at PIMCO and GMO into the "new normal." Consequently stayed away from the cyclicals (big mistake) and also was way too cautious on the Financials.
With the market trudging determinedly higher, investors are slowly, but surely, convincing themselves that we are moving back to normal and are growing in confidence daily. I'm not a card carrying member of that school (yet), but I am worried that my timing could be a tad off (like years!).
The structural problems are real and unsustainable. In the absence of serious change, we know where we are heading. It is only a matter of timing (and that is the hardest part). Another part of my thesis, is that the changed dynamics of the market (new instruments, new vehicles, new players), in conjunction with the the imbalances outstanding, will lead to more compressed market cycles. So, while the historic market cycle has ranged around 5-7 years, we are now likely to experience market cycles of 3-5 years.
Tuesday, March 16, 2010
Where are we vulnerable
The seas appear to be calming, but the quiet reflects the passing of the storm, and rocks lie just beneath the surface.
So, where are we vulnerable. And, what are we vulnerable to.
Given the amount of debt outstanding, we are vulnerable to a rise in interest rates.
Given the fragility of the recovery, we are vulnerable to a rise in oil prices.
Given the trade imbalances in the global economy, we are vulnerable to a trade war.
Given the level of confidence in China, we are vulnerable to an asset collapse there.
Given the fickle nature of financial markets and the risks outstanding, we are vulnerable to a generalized decline in confidence.
Given a host of structural issues (prospective new wave of defaults, unemployment, monetary/fiscal exit) we are vulnerable to a double dip.
As we found out so painfully in 2008. Confidence is fleeting. We know and can see the vulnerabilities in the system. What we don't know is when the positive will turn to negative.
So, where are we vulnerable. And, what are we vulnerable to.
Given the amount of debt outstanding, we are vulnerable to a rise in interest rates.
Given the fragility of the recovery, we are vulnerable to a rise in oil prices.
Given the trade imbalances in the global economy, we are vulnerable to a trade war.
Given the level of confidence in China, we are vulnerable to an asset collapse there.
Given the fickle nature of financial markets and the risks outstanding, we are vulnerable to a generalized decline in confidence.
Given a host of structural issues (prospective new wave of defaults, unemployment, monetary/fiscal exit) we are vulnerable to a double dip.
As we found out so painfully in 2008. Confidence is fleeting. We know and can see the vulnerabilities in the system. What we don't know is when the positive will turn to negative.
Friday, March 12, 2010
Vacuous mouthpieces
I feel sorry for the likes of anyone who heads-up a confidence game (financial CEOs, central bank chairman, country heads), because they have to compromise their integrity in order to maintain confidence.
When the system/company/country's wellbeing is predicated upon maintaining confidence, then they reason that it is worth compromising their personal integrity (or belief) for the greater good, and the potential of getting through the crisis du jour.
However, after calamity strikes, they are seen to be vacuous mouthpieces.
Even though I think there is some truth to this, I think it is also somewhat unfair. We knew they were compromised, but we chose to turn the other way, because it also served our purposes as well.
When the system/company/country's wellbeing is predicated upon maintaining confidence, then they reason that it is worth compromising their personal integrity (or belief) for the greater good, and the potential of getting through the crisis du jour.
However, after calamity strikes, they are seen to be vacuous mouthpieces.
Even though I think there is some truth to this, I think it is also somewhat unfair. We knew they were compromised, but we chose to turn the other way, because it also served our purposes as well.
The "self" dilemma
We face a dilemma of sorts. Call it a selfish dilemma.
While it may benefit me personally for the government and the Fed to continue stimulating the economy, it is not necessarily in the best long term interests of the country to do so.
Therein lies the dilemma. At a personal level, it makes absolute sense for me to support the government's stimulus efforts. I am a large beneficiary, albeit indirectly, of the bailout. The rise in the markets has increased my company's AUMs, thereby solidifying its financial position, thereby bolstering my employment situation, thereby helping provide food, shelter, and clothing for my family (and indirectly those from whom I purchase those goods).
By stimulating at the scale that they have, authorities are effectively rolling the dice and hoping that it will somehow solve our problems. It might, but most likely it won't.
While it may benefit me personally for the government and the Fed to continue stimulating the economy, it is not necessarily in the best long term interests of the country to do so.
Therein lies the dilemma. At a personal level, it makes absolute sense for me to support the government's stimulus efforts. I am a large beneficiary, albeit indirectly, of the bailout. The rise in the markets has increased my company's AUMs, thereby solidifying its financial position, thereby bolstering my employment situation, thereby helping provide food, shelter, and clothing for my family (and indirectly those from whom I purchase those goods).
By stimulating at the scale that they have, authorities are effectively rolling the dice and hoping that it will somehow solve our problems. It might, but most likely it won't.
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