Equities: This Time Is Not Different

This should silence those who have doubted the current equity rally under the pretext that this time is different. Equities seem to rally despite the prospect of weak growth in the near-term. And that is the way it should be - equities are a claim to extremely long duration cashflows.




Source: Reinart and Rogoff;"Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison"

Going for Gold

It has been really busy. The call on Russian equities is working really well. Meanwhile, I have invested in gold miners. No, I am no gold bug. I am not a believer in hyper-inflation either. Yet, I think gold will prove to be a good investment over the next few years.

My reason is simple. The economic outlook that we face is fat-tailed. The private sector sector delevering underway is creating deflationary headwinds. The authorities are countering that by spending and keeping interest rates low for long; leading to long-term inflationary concerns.

The fat tailed economic outlook creates a skew in the expected inflation distribution. Democratic governments will go for inflation if pushed to the corner. And, that's all you need for gold to go up.

Russia to Play Catch Up

Bank of Russia was Hiking to Protect the Ruble When Everyone was Easing Policy...



...Not a Surprise that Russian Equities Lagged



I bought RSX eventhough it has rallied significantly from the lows. It is still cheap and will play catch up in the reflation theme. The ruble is now on firm ground and that should help the central bank to aid the recovery.

Cycle dominates Seasonals

No September Effect in 2003




No January Effect in 2008



A number of articles were floating around in August highlighting the negative seasonals for September. Looks like September 2009 will turn out just fine, just like 2003.

India's Water Crisis and the Stock that will Benefit

When the rains fail

Jain Irrigation is the stock I am betting on.

INR Looks Cheap on a Trade-Weighted Basis

INR: 36-Country Nominal Effective Exchange Rate




INR: 36-Country Real Effective Exchange Rate



My initial view was that the US recovers first. That is clearly not the case. In the initial phase of the recovery, both - rising risk appetite (equity rally) and interest rate differentials - should work against the US dollar. The rupee looks cheap and December 2009 forwards are pricing in rupee depreciation of about 1%. Both these factors should help if the dollar starts to strengthen.

Relative Value in Russian Equities

‘Dummy’ Day-Traders Whipsawing Russia Signals Buy

Completely agree. If this recovery is for real, Russian equities could deliver stellar returns.

Food for All Palates

Manufacturing ISM: Looks Like a "V"




Existing Home Sales: Looks Like a "U"



If you look enough, you will find data that supports your view. That is why my endeavour is to find "view neutral" investment ideas. There were plenty of these at the start of the year with several asset classes discounting Armageddon. The low lying picks are gone now.

SENSEX vs. USD/INR: NEGATIVE CORRELATION ALIVE AND KICKING

This negative correlation has been alive and kicking for a long time now. The mid-oughts' bull market in equities coincided with global dollar weakness. During the crisis, the ultimate safe haven status of US Treasuries provided a further boost to this inverse co-movement.

The big question is what happens to the US dollar as the global economy recovers. The answer to that depends on whether the world can decouple from the US. I remain sceptical of the decoupling argument, at least in the near-term.

Russian Equities Are Decidedly Cheap

The Exhibit shows the ratio of RTS (scaled by 1000) to nominal GDP. Clearly, Russia looks cheap. But cheap does not mean that it cannot get still cheaper. That is exactly what I discovered last year when I bought RSX around 19 and it fell like a stone to below 12. That said, after the global rally in equities, valuation still supports a case for upside in this market.

Even if one gets the short-term wrong, there is always the case for buying resource oriented equities for the longer-term.

Sector Performance Since the Correction Started

Oil and materials have driven markets lower. That is in line with reality. It is important to remember that the years 2003-2007 were about a synchronous global upturn and not just India and China growing at a breakneck pace. The global recession will certainly end sometime in the near future. Yet, a worldwide boom is nowhere in sight.

U.S. 5Y5Y BREAKEVENS BACK TO PRE-CRISIS LEVELS

Junk Bonds: A Great Year in Just Five Months ( Barron's)

"IN THE NEVER-ENDING STRUGGLE BETWEEN GREED and fear, greed has had the upper hand lately.

The market for risky high-yield, or junk, bonds has gone from ridiculously cheap to just cheap with remarkable speed. The Merrill Lynch U.S. High Yield Master II index has narrowed from a wide yield margin of 2,100-plus basis points over Treasuries with comparable maturities in February to 1,232 basis points through Thursday. Back in June 2007, the yield margin was a mere 241 basis points."

My Comments: I missed the fast furious equity rally, but certainly rode this one!

U.S. High-Yield Cheap Versus U.S. Equities

Benchmarking the Current Bear

Lessons from the Anatomy of the Bear by Russel Napier. I found the analysis interesting in context of the current state of the market.

Brief Summary

The author researches 4 equity bear market bottoms: 1921, 1932, 1949 and 1982. These years preceded spectacular stock returns. The author seeks to identify the factors that would have helped investors to identify the bottom and capitalize on the impending rebound.

Common factors present at all the bottoms: 

1. Presence of optimism and good news. Unlike the popular market belief that “it is darkest before dawn”, reasonable amount of good news and optimism existed as evidenced by WSJ articles around each of these episodes. Investors just chose to concentrate on the bad news.
2. The best valuation parameter for identifying extreme undervaluation of equities in each of these episodes proved to be the q-ratio. The P/E ratio did not appear useful given extreme uncertainty surrounding earnings around these turning points. 
3. Commodities bottomed first and the copper price upturn figured an important harbinger of subsequent stellar market performance. Surprisingly, this point held sway even in the 1982 episode when a rise in commodity prices could have un-nerved investors given Volker’s inflation fight.
4. The bond market led the recovery.  Corporate bonds rose first, followed by stocks.   
5. A final sell-off on low volume. This theme also works against the common belief that markets often bottom out with a final capitulation on high volume.
6. Liquidity analysis did not help in any of the cases. Broad money/credit trends did not make the task of calling the bottom any easier. If Fed rate reduction were taken as signals of easier liquidity, the market fell further from that point.

 

Tata Motors: Who is Right?

China Led Markets?

U.S. Adds to the Global Savings Glut

Personal saving as a percentage of disposable personal income was 5.0 percent in January, compared with 3.9 percent in December.

My Comments: The sharply rising U.S. savings rate makes me more cautious than I was earlier. This is great news for the U.S. dollar as the current account deficit will continue to contract, but a very bad development for the global economy. Government dis-saving  is the only way out of this quagmire.

Citi = State Bank of America

U.S. Eyes Large Stake in Citi (WSJ)

My Comments: Carnage in financial stocks will continue. I think the November market lows will be conclusively broken in the times ahead. The market is not going to believe anything bank CEOs will say about capital adequacy. I maintain that nationalization is a good thing for the short-term.

DOW Broke November Lows: I Am Buying S&P Hedged for Financials

Source: Wall Street Journal

My Comments: Bank stocks are weighing on indexes. XLF fell 5% today(Citi: -14% to $2.51, BAC: -14% to $3.93). The nationalization theme is playing on markets. Ruling out the case where the government injects capital by buying bad assets at above current market values, severe equity dilution seems a certainty. Markets are adjusting to that eventuality. I think S&P will also break its November lows at some stage. But minus financial stocks, nationalization makes me optimistic. In the long-term, political interference will certainly not be a good thing for allocative efficiency. For now, however, government ownership will inspire confidence and is good news for the rest of the economy. I am now inclined to buy SPX hedged for financial sector stocks. I am also selling December S&P@1000 calls.

Distribution of Consumer Debt Burdens

2004 Survey of Consumer Finances

Mean Values of Net worth and Debt in Thousands of Dollars

Percentiles of income
**********NW*Debt
INC<20 * 72.6 * 24.6
20-39.9 * 121.5 * 41.9
40-59.9 * 194.6 * 69.9
60-79.9 * 340.8 * 108.9
80-89.9 * 487.4 * 156.4
90-100 * 2,534.6 * 296.5

Percentiles of net worth
**********NW*Debt
NW<25 * -1.4 * 32.0
25-49.9 * 47.1 * 66.3
50-74.9 * 185.4 * 111.4
75-89.9 * 526.7 * 137.5
90-100 * 3,114.2 * 293.9

Source:http://www.federalreserve.gov/PUBS/oss/oss2/2004/scf2004home_modify.html

My Comments: This data is dated. The latest survey results are not out yet. A lot of analysis is needed to arrive at solid conclusions. How income,debt and ownership of earning assets are distributed is key. Without that most of these aggregate numbers do not mean much to me.