Musing on the Markets

Beyond the Sound Bite: An Interview with Dave Rosenberg

Vinny Catalano, CFA — Wed, 14 Jul 2010 14:03:00 GMT

Exactly how bearish is Dave Rosenberg? The answer may surprise you.

The length of the interview is 14 minutes 26 seconds.

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Vinny Catalano, CFA, Global Investment Strategist with Blue Marble Research publishes the "Sectors and Styles Strategy Report" newsletter, which contains the market beating Model Growth Portfolio. To learn about subscribing as well as other benefits, click here.

Uh Oh - China's Property Market

Vinny Catalano, CFA — Fri, 25 Jun 2010 17:02:00 GMT

Is the bubble about to burst?

"China Vanke - the country’s biggest property developer is slashing prices for its new properties by 20 per cent, according to reports in China Business News and the Shanghai Morning Post."
FT.com/beyondBRICs, June 25, 2010

Plus, this

The Misdirection Market

Vinny Catalano, CFA — Tue, 22 Jun 2010 15:45:00 GMT

Magicians do it. So do con artists.

In the coming weeks, the focus for most bottom-up oriented investors will be the earnings results. The trend chasing hedge funds will play that momentum game, too.

As I have articulated repeatedly, 2Q10 earnings results are set to come in at to slightly above consensus expectations. Few surprises should emerge. For bottom-up oriented investors and the hedgies, this is where the attention and action will be focused. Stocks will respond accordingly as results and guidance are dissected.

While this quarterly process is underway, another very important process will occur – macro economic data for the third quarter. It is this data that will provide the early indications as to whether the US economy will sustain its recovery or begin the long (and very dangerous deflationary) slide to double dip land.

Sometimes it is lost on the bottom-up oriented crowd that earnings are the END POINT of the economic chain. To be sure, the feedback loop from the micro (corporate earnings) to the broader macro economic environment is an essential part of the economic chain (capex spending, wage increases, new hires). However, most indicators suggest that a positive feedback loop is muted due to concerns about the sustainability of the economic recovery – Alan Greenspan (misguided) speeches notwithstanding*.

Should 3Q10 macro economic data points come in below consensus expectations, the risks of something more than an economic slowdown (which is occurring right now) could develop producing a nightmare scenario that would produce a global economic recession and all its consequences.

What makes all this extra worrisome are the technical signals emanating from the markets.

Synchronicity

Markets, countries, regions, sectors, and most industries have gone sideways - in some cases since the fall of last year. Such sideways action can only mean one of two things – consolidation or distribution.

Consolidation is the pause that refreshes the bull market. Distribution is the topping action that precedes a bear market. The resolution will signal the next phase of the market. Frankly, my money is on the new bear primarily for a whole host of fundamental reasons, some of which are noted above and throughout this blog.

Moreover, nearly all of Europe has flipped into bearish territory (Mega Trend reversals) while key emerging markets border on the edge of joining the bear club. Only the US stands in modestly good shape, but it, too, appears to be following in the footsteps of other global markets.

Investment Strategy Implications

Chill until, is the operative strategy. Let the earnings season and the new quarter evolve. It is still a bull market until it isn’t. Warnings signs may abound but until the yellow light turns red, it appears advisable not to jump the gun too soon. Yellow lights can stay yellow for quite awhile. Moreover, while it is rare, strength can evolve from those markets that have not turned bearish (US, for example) thereby helping to reversing those that have (e.g. Europe).

Also, it is advisable not to be too preoccupied with second quarter earnings results. And most definitely do not be lulled into a false sense of security by traditionally trained economists with their trend extrapolating methodologies and notoriously bad track record spotting economic turns. The misdirection of the recent earnings results and poor forecasting tools are substantial risks investors would be wise to avoid.

Finally, as noted last week , determine if you want to take the bold approach (100% invested in equities) or the more cautious (60 to 80% invested). For what it’s worth, Blue Marble managed accounts are in the latter category.

Investment Lines in the Sand

Vinny Catalano, CFA — Tue, 15 Jun 2010 14:55:00 GMT

With investors having nicely responded to my recent blog posting ("Today May Be The Day"), here are a few price points of interest and what to consider when either is breached first: 1100 is the average of the 200 day moving average (simple and exponential). 1040 is the acknowledged lower bound of the support that some have referred to in the media. Both are lines in the investor sentiment sand that are useful for one primary purpose - as contrary indicators. Here's why:

Without fail, whenever price crosses its 200 day moving average (up or down) a reporter contacts me to inquire as to the importance of the cross. My response is always the same - by itself, price crossing its 200 day moving average is meaningless beyond the fact that it means something to some investors and, therefore, should be used to exploit that faux value (as in act in the opposite direction).*

As for the lower support bound of 1040, this is the type of technical analysis analysis that gives technical analysis a bad rap. How some could construe the significance of 1040 from the accompanying chart** is a wizardry that is beyond my human capabilities. Then again maybe I should consult my ouija board more often than I do.

Next Up, Earnings

As we enter the ever treacherous third quarter of the year, the fundamental driver for a new bear should become evident. Macro economic reports issued beginning next month should provide insight into whether 3Q10 earnings (the single stool holding up the equity markets) will continue their recovery or provide the first signs of earnings disappointments to come.

In light of recent macro economic developments (G20 decision to implode the world economy being at the top of the list) and the risk of fragmented governments and their increasing inability to address the problems of the day individually and collectively in a coordinated fashion, the probabilities that the peak in earnings have been realized (certainly gross margins have) increase significantly. Should this occur, the increasingly bearish message of market (in the form of market breakdowns) then makes considerable sense.

Investment Strategy Implications

Head fakes are the staple of good short term trading opportunities. The breaking of arbitrary lines in the sand is an opportunity for contrarian action. As noted several times over the past several weeks, the odds are that we are in distributional range with the outcome pointed toward a new bear market. However, as noted many times before, not all markets have signaled a Mega Trend reversal. It is therefore possible that the heretofore strong part of the global markets - the US - will lift the sinking boats of Europe and the drifting junks of Asia, thereby reversing their recent (realized and emerging) Mega Trend bearish signals. The latter is the lower probability.

*See Mega Trend examples in prior postings for the value in price crossing its 200 day moving average.

**Click image to enlarge. I could see 1050ish as a support price point, but 1040?

The Real Problem With Obama

Vinny Catalano, CFA — Thu, 10 Jun 2010 13:01:00 GMT

Let me cut to the chase: It’s not about Mr. Obama’s capacity to show emotion beyond a clenched jaw that is missing. It’s about his capacity to lead. Just because someone has the title of leader doesn’t mean he/she is a leader.

In his media book tour for “The Promise”, author Jonathan Alter notes how impressed he was with Obama’s ability to manage the job – to synthesize the information and make an informed decision. This is no doubt due to his God given abilities. But it is also no doubt due to his educational training.

Mr. Obama is an excellently trained Harvard business manager. One of the attributes of a good manager is the ability to work for incremental improvements. Another is to be quite pragmatic. Mr. Obama has both qualities, so eloquently combined in Frank Rich’s commentary this past Sunday – incremental pragmatism. And therein lies the rub.

Being an excellent manager means espousing phrases like “don’t the perfect be the enemy of the good”. Stop and think about that phrase for a moment, then ask yourself if that is something that a leader would ever articulate as the centerpiece of his philosophy?

Perhaps a Chicago trained politician might hold such a core view. Certainly a well trained manager would. But a leader?

Then And Now

An earlier Harvard trained President once faced a crisis involving life and death global implications. Having learned his lesson in relying on the experts around him from a prior episode, this President bucked his experts and literally saved the world from a nuclear holocaust. In the process, a metamorphosis occurred in which the man became the leader he was destined to become. He became The President.

For this young man, it was lessons of The Bay of Pigs that taught him to vigorously question his experts and to chart an innovative solution both in process and outcome. He learned to lead. For the current young man occupying the White House, it is The Bay of Rigs that is testing his mettle.

Hopefully this latest crisis will enable Mr. Obama to find his gut, to transcend the moment, to articulate a world to be, to envision a man on the moon within this decade, to demand that Mr. Gorbachev tear down this wall, to reassure that we have nothing to fear but fear itself, to lead. Then, Mr. Obama may, just may, become President Obama.

Beyond the Sound Bite: An Interview with William C. Dunkelberg

Vinny Catalano, CFA — Wed, 02 Jun 2010 12:38:00 GMT

With Friday's job data just 2 days away, it is more than timely to hear from that portion of the US economy that is responsible for most of the job creation - small business.

In my conversation with the Chief Economist for the National Federation of Independent Business, we explore the likely square root recovery for the US economy, the state of small business (not especially good) and how it augers for new job creation (also, not especially good). Understanding why and how small business is in less than stellar shape well into an economic recovery and their implications, economic and political, are topics investors in publicly-traded companies can hardly ignore.

The length of the interview is 15 minutes 03 seconds.

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Beyond the Sound Bite: An Interview with Christopher Chabris, Ph.D. and Daniel Simons, Ph.D.

Vinny Catalano, CFA — Fri, 28 May 2010 15:46:00 GMT

If someone told you to keep your eye on a bouncing ball, do you think you would notice a gorilla entering into then departing your field of vision?

We kick off our summer reading series with the authors of "The Invisible Gorilla: And Other Ways Our Intuitions Deceive Us". In a most fascinating conversation with the cognitive psychologists, we explore key elements of behavioral science and many of its applications to decision-making including the myth of intuition, the illusion of knowledge (e.g. Amaranth), and the appeal of confidence and certainty ("...we prefer people who are confident even when we have all the information we need to see that they are less accurate in what they are saying."). Bernie Madoff, anyone?

Investors seeking to gain a better understanding of their own investment decision-making process will find the time spent listening to this podcast as time well spent.

The length of the interview is 16 minutes 28 seconds.

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A Stock Market Correction Hanging in the Balance

Vinny Catalano, CFA — Thu, 27 May 2010 13:29:00 GMT

Stock market corrections, such as the one we are currently experiencing, are healthy processes by which excesses generated in the advance can be wrung out and rotational (sector) change can evolve. In the process, new leadership emerges thereby helping to elevate the renewed rally to higher levels. There is, however, another evolutionary factor that investors should be mindful of: a correction that could easily evolve into a transitional phase resulting in a market reversal.

One way this transitional phase can occur is when a market correction is succeeded by a failing rally which then morphs into a distributional range from which more market weakness is developed culminating in a market reversal. I referenced one such version of this in last week’s post (“37.17”). While this process is underway, those in favor of the preceding market trend (in this case, a bullish one) argue for a continuation of the preceding good times. In the process, further distributional market action occurs. And when the market decline begins in earnest, the market believers continue to dismiss the move.

Will this occur in the current market conditions? It is too early to say for certain, but for the moment the benefit of the doubt must be given to the bull case for the following reasons:

The fundamental argument for a resumption of the bull after the correction is anchored in optimistic earnings growth levels (S&P 500 operating earnings of $80 and $88 for 2010 and 2011, respectively) coming to pass AND for average to above average P/E ratios (15 to 18) being applied to such earnings. For both issues to occur, an economic slowdown in the US and Europe coupled with a only modest decline in China’s growth rate is one key ingredient*. A second ingredient is for little to no serious surprises in the geo political realm. This would include any exogenous shocks, such as a massive terrorism act. It would also include governments that are overly fractured due to the consequences of domestic politics (e.g. the US mid term elections).

A third ingredient would be for longer-term interest rates (5 and 10 years) to remain range bound and neither decline nor increase substantially as either move would imply deflation or inflation. Both will likely be most unacceptable to investors – the former for the implications of a collapsing pricing structure for businesses (not to mention the risks to monetary policy, among other risks), the latter for the implications of a higher cost of capital (among other factors, and not excluding the possibility of a stagflationary environment).

A fourth ingredient has to be the unforeseen and unintended consequences emanating from the final financial regulatory reform bill and/or overly aggressive action by the regulators. Since virtually no one can predict how far the financial tentacles reach from financial innovation products and processes into the real economy, this is a substantial unknown that goes far beyond just the financial services industry and must not produce yet another macro financial services industry surprise (that ends up negatively impacting the real economy).

In sum:

• Sustained economic growth (albeit at very low rates in developed economies)
• No geo political or exogenous shocks
• Stable longer-term interest rates
• No unintended consequences from the new regulatory regime

If any of the above four items fail to live up to expectations, the fundamental arguments for a resumption of the bull market must be reexamined.

Investment Strategy Implications

When it comes to stocks, it must be assumed that the old Yogi Berra adage, “It ain’t over ‘til it’s over”, applies. The above four items could deliver and the current market correction will be all she wrote. Markets get in gear again and higher highs are confirmed. However, if any of the above falls short, the fundamental justification for higher stock prices is in jeopardy.

From a market intelligence perspective, until there are clear signs of a market reversal (a Mega Trend reversal being the most significant), it is advisable to operate on the assumption that the correction will be just that – a correction – followed by a resumption of the trend in force. That said, investors are advised to be ever vigilant for signs of market deterioration and the aforementioned items as the fundamental story hangs in the balance. And that goes a long way toward explaining the contradictory and conflicting market action of late.

*China's growth must also evolve to a more demand driven model and away from fixed investment and exports, both of which are unsustainable for China and, importantly, the global growth story. Corporate profitability needs to remain at their current levels, something that appears to be quite achievable.

37.17

Vinny Catalano, CFA — Wed, 19 May 2010 00:01:00 GMT

China (FXI).

A closing break below 37.17 (Feb. 8 low) indicates a move to 30 - 32, which is a 30% decline from its April 9 closing of 44.59.

Last decline was Nov. 16 to Feb. 8, which was 20% down.

S&P 500 (SPX) declined 8% during its previous drop (Jan. 19 to Feb. 8).

If China goes down 30% this time and the price relationship holds, then SPX drops 15% to 1034.

Key levels for SPX: 1110 (closing low of May 7), then 1056 (Feb. 8 closing low).

A market correction (15% to 1034) with a breach of the SPX Feb. 8 low (1056) should raise bearish sentiment and produce an oversold condition to sufficient levels to trigger a summer rally. It will likely fail as many global markets would have triggered a Mega Trend reversal (price to moving averages (50 and 200 day), and slope of moving averages): just as the accompanying chart shows China doing right now (as is EAFE (EFA), Europe 350 (IEV), Germany (EWG), and United Kingdom (EWU), among others.*

If all occurs: Bull market over.

Beyond the Sound Bite: An Interview with Lakshman Achuthan

Vinny Catalano, CFA — Fri, 14 May 2010 02:56:00 GMT

The recent market volatility has brought back into the discussion the risk of a double dip in the US economy. To this and other economic issues we turn to the prescient Managing Director of the Economic Cycle Research Institute (ECRI).

Mr. Achuthan describes how the ECRI analysis points toward a deceleration of economic and profits growth and not a double dip. In this interview, we also explore the unique methodology of ECRI, the Euro rescue package, the impact of a shocks, and the preconditions necessary for shocks to alter the direction of a prevailing economic trend.

Note: In addition to the above noted website, those wishing to learn more about Mr. Achuthan and ECRI might consider his book,Beating the Business Cycle.

The length of the interview is 16 minutes 58 seconds.

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We've Seen This Movie Before

Vinny Catalano, CFA — Wed, 21 Apr 2010 21:23:00 GMT

The dramatic news last Friday (re Goldman Sachs) has a more narrow impact (directly on Financials) and a far more limited impact on the broad market as the economic recovery and its sustainability are significantly more important to equity prices overall.

The limited broad market impact would be for Financials to begin to struggle and potentially produce a negative contribution to higher prices. However, the likely offset is a rotation away from Financials and into other sectors where less governmental activism exists. This is similar to what occurred with the Healthcare sector, as the debate became law. Healthcare stocks may have underperformed but the overall bull market remained intact. The same is very likely to occur going forward re Financials and the broad market.

Concerns re an activist government (greater regulation, lower profit margins) appear to be somewhat overblown. The Obama administration's axiom – “Don’t let the perfect be the enemy of the good” – demonstrates both a pragmatic approach to issues and no intention of destroying whole industries and the companies within, the histrionics of the right wing opposition notwithstanding. The price that is being asked to be paid (in the form of greater/tighter/smarter regulation) appears to be a very reasonable one given the economic debacle that succeeded the more laissez-faire approach to regulation.

What may be some concern to investors is the masterful manner in which the Obama administration has finessed their opposition. In a series of events that can only be viewed a classic Clintonian, consider what occurred the past week:

• On Wednesday (April 15, 2010), President Obama meets with congressional leaders at the White House to discuss financial regulatory reform.
• Senate Republican minority leader Mitch McConnell (providing an outstanding example of Pavlovian behavior) steps out of the meeting (fresh from his recent sojourn to the titans of Wall Street) to declare that President Obama is on the wrong side of this issue.
• On Friday, the Securities and Exchange Commission charges Goldman Sachs with investor fraud.

At this point, someone needs to hand Senator McConnell a towel to wipe the egg off his face.

This week, more bank earnings results will be reported, including those from none other than Goldman Sachs (Tuesday, April 20th). The results are sure to further inflame the public outcry re bank bailouts and buttress the efforts of the Obama administration and the Democrats to push through financial regulatory reform.

The consequences of a victory in financial regulatory reform will have repercussions in this fall’s midterm elections. Moreover, it is the manner in which Obama handled the Republicans this time around that is yet to be fully digested by most investors (think Bill Clinton and his famous triangulation strategy). It does appear that the Obama administration (and President Obama, in particular) have relocated their political voice and have combined that with a governing style that needs to better appreciated by investors.

Investment Strategy Implications

Right now, what matters more to equities is the global cyclical recovery. The challenge will be whether the economic handoff (from government spending to sustainable private sector growth) can truly occur. That is a question that still remains to be answered. Despite the solid earnings results of 4Q09 and thus far from 1Q10, it is hard to determine whether growth can be sustained without the life support mechanisms put in place by governments around the world. And the growth in debt, the extraordinary and inventive governmental actions (quantitative easing, for example) and the generous amounts of liquidity cannot go on indefinitely.

The longer-term structural problems (e.g. debt levels, consumer demand in emerging economies, imbalanced domestic growth policies in key emerging economies (notably China), the currency straightjacket on weak economies within the Eurozone, among others) along with the aforementioned Obama’s emergent political skill wait in the wings and may become the rationale for the long overdue market correction. These fault lines are to be monitored closely for signs that they will become the focal point for investors. This is where market intelligence earns it pay*.

In the meantime, the excess liquidity and encouraging cyclical growth remain center stage for most investors. A clear case of the cyclical over the secular. Accordingly, there is little reason for investors to move to the sidelines and adopt anything more than a cautiously bullish position. There will come a time for a more aggressively conservative view. That time does not appear to be now.

*The absence of traditional investors is also a worrisome sign as trading continues to be dominated by the fast money crowd. More on this in a future posting.

Beyond the Sound Bite: An Interview with Komal Sri-Kumar, Ph.D.

Vinny Catalano, CFA — Fri, 09 Apr 2010 14:34:00 GMT

If you're looking for a truly out-of-consensus view re the economy and markets, my interview with the <a href="https://www.tcw.com/About_TCW/Our_People/Bios/Komal_Sri-Kumar.aspx"TARGET="_blank"> <b><u>Chief Global Strategist and Chairman–Comprehensive Asset Allocation Committee for TCW</b></u></a> will not disappoint. The economic risks of a double dip (courtesy the slingshot effect), the uncertainty re the economic handoff (from government spending to sustainable private sector growth), and a stagflation (you read that correctly!) resistant portfolio mix are among the many interesting and challenging views expressed by my guest. The length of the interview is 17 minutes 08 seconds.

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Beyond the Sound Bite Interview with Joe Battipaglia

Vinny Catalano, CFA — Wed, 07 Apr 2010 16:12:00 GMT

My annual conversation with the Market Strategist/Private Client Group for Stifel Nicholas and Chief Investment Officer with Washington Crossing Advisors includes the prospects of an economic handoff to the private sector and a sustainable recovery, the risks of yet another jobless recovery, and the consequences of high corporate profitability and excess cash.

The length of the interview is 15 minutes 58 seconds.

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Beyond the Sound Bite: An Interview with Jason Zweig

Vinny Catalano, CFA — Fri, 02 Apr 2010 20:29:00 GMT

Before earnings season consumes most of your attention, my interview with the well-regarded columnist for the Wall Street Journal and author of "Your Money and Your Brain: How the Science of Neuroeconomics Can Help Make You Rich" includes the emerging investment field of neuroeconomics and behavioral finance, attributes of good investors, and what constitutes a good investment attitude.

Investors seeking to take a step back and reflect on the investment decision-making process and understand why we do what we do will find this interview a most rewarding experience.

The length of the interview is 17 minutes 50 seconds.

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Beyond the Sound Bite: An Interview with Dr. George Friedman

Vinny Catalano, CFA — Tue, 30 Mar 2010 01:31:00 GMT

In my interview with the founder and CEO of STRATFOR and author of "The Next 100 Years: A Forecast for the 21st Century" we explore the provocative views that are a hallmark of Dr. Friedman's work. Challenging the status quo of conventional thinking, this interview will stretch your intellectual horizons as Dr. Friedman describes the consequences of the coming global population bust, the disruptive role technology will play, the geopolitical fault lines that lie ahead, the philosophy that is American pragmatism and its conflict with European metaphysics, and the current rift between the US and Israel.

The length of the interview is 14 minutes 49 seconds.

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