Tag Archives: Market trend

David Rosenberg: How To Play 2011

Chief economist Dave “Rosie” Rosenberg is one of Wall Streets favorite bearish analysts. Those of you who have followed the Econotwist’s activity for a while will know that I frequently publish his daily newsletter “Breakfast With Dave.” One of the most comprehensive day-to-day analysis available for free. In yesterdays edition Rosenberg gives advise on how to play the markets in 2011 – amongst other things. Well worth studying.

“In 2011, the “event risks” that we expect to generate the volatility and periodic spasms that create significant buying opportunities are even larger in number and more diverse.”

David Rosenberg

Lesson of 2010

“What I do at the start of every year is go back and remind myself that each individual year has its own particular story, in preparation for the 12-month period that lies ahead,” the Gluskin Sheff chief economist writes.

For example, 2007 taught everybody that it never hurts to take profits after the market doubles and that if something is too good to be true, as was the case with the housing and credit bubble, it probably is.

The lesson in 2008 focused on capital preservation strategies and the urgency of managing downside risks.

Then, in 2009 it was vital not to overstay a bearish stance in the face of massive fiscal and monetary stimulus, even if the economy was in a deep recession for half the year.

Last year’s lesson was on how to handle the many post-stimulus market swings that are inherent in a post-bubble credit collapse.

It is very tempting to look back at the past year and conclude that it was a great year for the markets because the S&P 500 rallied 13% point-to-point, but that is about as relevant as the fact that by the end of August, the S&P 500 was off 14% from the nearby peak and the TSX was down 6%. But the year 2010 was most noteworthy for intense financial market volatility — there were no fewer than six mini-bull markets and six mini-bear markets (up or down at least 6%) in what was truly a roller coaster of a year.

And we head into 2011 much the same as 2010 — with plenty of optimism and growth priced into the U.S. equity market and facing a year chock full of “event risks” that will likely produce some very nice trading opportunities.

We must be very well prepared to take advantage of volatility this year. Last year, we concentrated on mitigating downside risks and preserving capital at the expense of capitalizing on all the mood swings that took place.

In 2010, the concerns were over Greece, health care, the end of QE1, and the mid-term elections.

In 2011, the “event risks” that we expect to generate the volatility and periodic spasms that create significant buying opportunities are even larger in number and more diverse.

These range from Ireland, Portugal and Spain, to the U.S. debt ceiling file, to the US state and local government turmoil, to another down-leg in US home prices, to surging food and energy prices, and to heightened inflation pressure.

The threat of policy tightening in the emerging markets (especially China) continues, and with the end of QE2 in June, Fed Chairman Ben Bernanke will again have a tough choice to make between unwinding the bloated balance sheet or reinforcing speculative behaviour in risky assets by embarking on QE3.

In this light, we fully anticipate another roller coaster ride in the markets this year, and we intend to be more pro-active at the intermittent lows with a continued eye towards limiting downside risks to our portfolios.

The heightened volatility means extra reliance on our hedge funds, to mitigate the market volatility by focusing primarily on “relative value” trades.

This means essentially going long on undervalued high quality assets and going short on overvalued, lower quality assets.

While we are still cautious on the overall equity market, we do see a silver lining in the energy sector and in large-cap and mid-cap companies that have lagged the upturn this cycle and are relatively inexpensive.

Here, we focus on large cash-flow generators with strong balance sheets that pay out a reliable dividend stream. So despite our concerns over complacency among US equity investors, there are still needles in the haystack — in oil, in large-cap tech and the defensive dividend paying stocks within health care and consumer staples.

The recent backup in bond yields sets up potential decent returns in fixed income markets, as the hiccup we saw this time last year provided. Corporate balance sheets are in terrific shape on both sides of the border and we see market interest rates trading in a tight range through most of 2011; therefore, credit strategies are going to be an area of focus. The secular bull market in commodities is one reason, though not the only one, why we also remain long term positive on the outlook for Canada relative to the United States, especially with regard to the Canadian dollar.

I think it pays to focus on three interesting market developments here. First, the Canadian dollar towards the end of last year re-attained par against the US dollar and I recall that when we saw this unfold in 2007 and 2008 the oil price was on its way to $145 a barrel, not $90, and this tells you that this latest leg-up in the Canadian dollar is more than just a commodity story.

Second, look at the bond market and you will see that the yield on a 2-year Canada bond trades at a 100 basis points premium relative to U.S. Treasuries, which tells you something about the relative strength of the Canadian economy.
Furthermore, the 30-year Canada bond trades at a 90 basis points discount to long US Treasuries, which is unprecedented. This is a huge anomaly but one that carries a very important message because the further you go out the yield curve the more the market tells you about its view of long-term fiscal and inflation risks, and again, this is being transmitted into growing global confidence in the Canadian dollar relative to the US dollar.

Finally, keep in mind that the Canadian dollar didn’t just rally 5½% against the U.S. dollar last year but also rallied 5½% against the basket of non-U.S. dollars, which is added confirmation that this is as much about a strong Canadian dollar story as it is a weak US dollar story.

Here’s a copy of the full analysis.

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Related by the Econotwist’s:

External reports:

Danske Markets. Research Inflation Scare. 02082011.

DnB NOR Markets. Weekly Update Scandinavia. 07022011.

Markit Economic Research. Economic Overview –growth spurt brings inflation worries. January 2011.

Markit Economic Research. European Union. January 2011.

TrimTabs: Hedge Fund Flow Report January 2011. Topical Study.

IMF: World Economic Outlook Update. January 25. 2011.

Fitch. US securities 2011 Outlook

ChangeValue.com: “Where Are Markets Heading To?” January 2011.

 

 

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Marc Faber Expects Market Sell Off On QE2 Announcement

With vacuum tubes expecting QE next Wednesday to come anywhere between $500 billion a $10 trillion, it falls upon Marc Faber to naturally take the other side of the bet, who, in this interview with Margaret Brennan, tells the impeccably coiffed Bloomberg anchor that instead of inciting the mother of all flash dashes and hitting the BlackRock 12 month target of Dow 36,000, Mr. Faber instead anticipates that the FED decision “could disappoint investors and may prompt a correction in US stocks.”

In response to Margaret’s question if size does in fact matter, Faber responds that anything under a trillion will “disappoint.”

And with Goldman now throwing out bogeys as high as $2-4 trillion, it is almost inevitable that a sell the news type day will be virtual certainty on mid-term election day.

“The markets are stretched: weak dollar, strong PMs and strong equities – I think a correction is overdue. But I wouldn’t think that a bear market is around the corner.”

In fact the opposite: “Maybe we will have a crack up boom in stocks and commodities like between the end of 1999 and March 2000 when the markets went up very strongly,” Faber says.

Marc “Gloom-And-Doom” Faber is once again mostly bearish on bonds (and cash), due to his long-running expectation that inflation, whether modest or hyper, will make all fixed paper investments lose value very fast.

As for specific equity sectors Faber highlights agricultural commodities and “I continue to recommend the accumulation of precious metals, whereby I think they are overdue for some kind of a correction here and then we’ll get the next move probably next year and then thereafter.”

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Albert Edwards Sees S&P500 Returning To 1982-Level at 450 Points

“Yet all logic aside, we know readers are just waiting for the punchline. So here it is: The structural bear market has not reached the end. We have long said that the de-bubbling process would end only when equities became very cheap and revulsion in equities as an asset class hangs in the air like a fog. The problem remains more of excess valuation within the US rather than Europe, but that will not prevent the bear market hurting other cheaper markets as much. We will return to the valuation nadir last seen in 1982 with the S&P bottoming around 450.”

Albert Edwards

Here’s the latest analysis from the famous macro analyst at Socitete Generale, Albert Edwards. As optimistic as ever…

Here are some highlights, as presented by Zero Hedge:

“Investors cannot move for the weight of broker research comparing the current conjuncture in the US with Japan a decade ago. While bond markets at least, move to discount deflation, most sell-side analysts still say the current situation is unlike Japan a decade ago. They are right. Things now in the US are much, much worse than Japan a decade ago.”

“Equity investors are in for a rude shock. The global economy is sliding back into recession and they are still not even aware that these events will trigger another leg down in valuations, the third major bear market since the equity valuation bubble burst.”

Albert Edwards

“This lack of awareness reminds me of reports this week that a 35 year old Polish man hadn?t noticed for five years that he had a bullet lodged in his head. Like the equity market in 2000, the Polish man had been partying too hard to notice that he had been shot. The BBC report the police as saying “He told us he remembered having a sore head, but that he wasn’t really one for going to the doctor.”

“As the equity bloodbath of the last decade enters its final, even bloodier phase, investors continued optimism also reminds me of the Black Knight in Monty Python & the Holy Grail – link. Despite being grievously wounded by King Arthur, the Black Knight makes light of his injuries which he dismisses as a flesh wound. The vast bulk of the investment industry fails to appreciate that we are locked in a structural bear market and about to enter Act III.”

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Read the full post at Zero Hedge.com.

Related by the Econotwist:

El-Erian: Economy Losing Momentum For Recovery

Morgan Stanley: Governments WILL Default

Gold Demand Rose By 36% In Q2, Gold ETF Demand Up 414%

Welcome To The Double-Dip!

Hindenburg Creator Takes Off

Goldman Sachs On Europe: Nothing To Worry About!

Jm Cramer Shoot Down The Hindenburg Omen

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Filed under International Econnomic Politics, National Economic Politics