Financial Markets Are A Sham - Stewart/Cramer

Readers of this blog will be aware of how much I adore Jim Cramer (not). Hence when news leaked that Jon Stewart was doing a full show with just Cramer, I know it would be merciless on Cramer. As much as I think Cramer is an idiot on markets, I think he does not deserve the full whacking by Stewart. Cramer is first and foremost an entertainer, then a market commentator, he then tries to pick stocks. If you watch his antics, he is more of a momentum trader - if it swings down he will turn very bearish and vice versa, all in a matter of days, I seriously don't know why people will watch him - but because its America, out of 100 million viewers, you will still be a hit if only a fraction of people watches you.


http://seekingalpha.com/article/125804-cramer-grilled-on-jon-stewart

If you click on the link you can watch the entire Daily Show episode. What Jon Stewart tries to do is to be the layperson savior as he lays blame on the financial experts trying to hoodwink the rest of the world. His strongest point was that the financial industry (analysts, mutual funds, commentators, traders, CEOs, investment bankers, etc.) is playing an elaborate game whereby they use the "capital" provided by everyday people to create an elaborate financial game to lull the rest of the world into "investing and trading" the rigged markets. To a large extent, I subscribe to his theory. The financial industry is like a club, once you are part of it, you pick a role and play it according to the monopoly rules of the game - if you play it well, you will be rewarded with supernormal pay, you will be incentivised by moving the "capital" up and down and getting a cut from the movements and volatility. Nobody really cares whether they are creating real value or productivity.

The layperson by buying shares, putting money in unit trusts, subscribing to IPOs are basically giving capital to allow the financial industry practice the shenanigans. The mantra that is always touted to lure investors is that "stocks will be the best investing vehicle over the long term, that it is still the best way to invest your money to ensure that you keep ahead of the pack". As the 80s and 90s were prime examples whereby bull markets dominated the era, that mantra basically was elevated to tablets handed down by God to Moses, nobody questioned its fallibility.

The other mantra is blue chips which is supposed to provide long term steady outperformance - well, blue chips investors really saw their values being wiped out just like the rest, imagine having HSBC, General Electric in your portfolio... There was supposed to be some sort of "unwritten guarantee" but hey, it does not exists.

Life is tough enough, investing is even harder. Bull markets make normal people think they are smarter than they really are. Nobody is smarter than the markets. Once you think you are, you will make your biggest losses. Markets are fluid, we can only try to minimise the damage when its bad, and we hope to make some money when its good. Don't try to beat the markets all the time. Get 6 out of 10 calls right, and you are golden.

p/s photo: Cut Tari

Enzo's Take On The Mess

Readers of this blog would have noticed that I haven't been writing much original thoughts of late - its tiring repeating the dire and tyrannical. Might as well let others whom I respect (definitely not Kudlow and Cramer, they are both better off as cartoon characters, wait a minute... they are! ..) to share their thoughts. Enzo von Pfeil has been an investment economist all of his professional life. Having studied under Nobel Laureate Friedrich von Hayek in Freiburg, Germany, he got his PhD in economics and then joined some of the major banks in their day: Morgan Guaranty, Schroders and Warburgs. He was Chief Regional Economist for major stock brokerages in Hong Kong since 1990. Excerpts from Dr. Enzio von Pfeil's December 11, 2008 appearance on CNBC Worldwide Exchange:

1. Governments are stepping up measures to ward off the worst financial crisis. How effective are these measures?
   • From a structural perspective, they can be only of limited use. As Robert Samuelson posited in the South China Morning Post, “Private behaviour is neutralizing public policy.” Indeed, The Economist’s illustrious editor, Walter Bagehot (1826-1877) arrived at the same conclusion in London’s City when he said that any money given to Central Banks was not finding its way into the private sector.
   • Thus, the current Economic Time™ is characterized by an excess demand of money. But the reason that Central Banks cannot create an excess supply of money is because commercial banks are the ones who refuse to lend - only, once they re-gain confidence can an excess supply of money be created.
   • So, current measures, are at best, bail-outs. Sadly, it seems as if politicians are privatizing the gains and socializing the losses in areas such as the US car and banking industries. Thus, I am not criticizing governments for acting; it’s just that their room for response is limited.
2. How deep are you expecting the recession to be, and what will be the impact on financial markets?
   • How long is a piece of string?
   • My guess is that the world is going to “L” and will remain there until at least the end of 2009.
   • Indeed, I have likened the current state of the market to that of a fish flopping around on a hot cement sidewalk (as opposed to a cat on a hot tin roof).
   • Leery lenders won’t budge for a long time.
3. When do you see the markets bottoming out, how much more downside is there?
   • Expect to see another 30 – 50% down, once earnings start hitting and analysts have to revise down their rocketing price earnings ratios.
4. What are you expecting from the FOMC meeting next week? A zero rate policy? Reality?
   • More quantitative easing from Bernanke-san.
   • As Robert Samuelson points out in said editorial today, “…the Fed’s new loans and credits easily exceed $1 trillion.”
5. What is your investment strategy, and some trends and themes for 2009?
   • Please see below.
   • The global Economic Clock™ will keep showing an excess demand for money and thus an excess supply of goods.
6. Are there any other topics you'd like to discuss?
   • The current bailout packages are creating scary consequences down the road.
     • On the fiscal side, the US federal budget deficit will balloon.
     • On the monetary side, as Samuelson points out in today’s editorial, the Fed has moved way beyond being a lender of last resort. Indeed, now it is a hedge fund with a) the most toxic assets and b) nobody who knows how to run this hedge fund!
   Excerpts from Dr. Enzio von Pfeil's November 18, 2008, appearance on CNBC Asia, Worldwide Exchange:
7. Asian economies are in technical recession - how does that impact your investment strategy and asset allocation?
   • Investors have discounted this mess for the past six months.
   • Thus, I have no major changes to my investment strategy/asset allocation.
8. What are some investment themes up to the first half of 2009?
   • The next bubbles that have to burst are:
     • Long-dated bonds, on account of the rising US and other budget deficits, and
     • The dollar itself.
9. Which markets and sectors do you especially like?
   
   • No markets, as the global Economic Time™ is virtually the same everywhere: the chickens of irresponsibility are coming home to roost.
   • If one must be in markets, then invest in “vital” sectors like consumer staples, food, healthcare. At least, they won’t get hurt as much because people still have to have these products and services.
10. Current earnings so far - what's your outlook going forward?
    • Earnings will go down even more. The Economic Clock™ is clanging for:
      
      • Excess demand for money, and
      • Excess supply of goods.
    • Under such a scenario, it is impossible for corporate earnings to improve. Indeed, “layoffs” news has just reached our shores in Hong Kong.
    • This implies that neither turnover nor margins can rise.
11. Is there anything else you may want to highlight?
    • Obama’s influence on China and vice versa. It seems like Obama will have to go protectionist, as many of his voters expect this. Meanwhile, Chinese officials will start taking their wrath out on the local operations of U.S. multinationals – something which my most recent book, Trade Myths: Globalization and the Trade Balance Fallacy, warns of.
    • Bond blow out. Seems like markets are not quite aware of the extent of public debt that is being created now that the chickens of irresponsibility have come home to roost.
    • Cost push stagflation. We have been bleating on about this since Spring 2006, so at some point this will occur. This will hit particularly those countries/areas whose currencies have fallen the most against the US dollar, e.g. Euroland (rapidly morphing into Neuroland).

p/s photo: Chen Kuang Yi

Events Searching For Reasons

The global market woke up to the first day of December with markets plunging 3%-7%. I watched CNBC for a couple of hours as talking heads try to make sense of the massive drop following 5 straight days of substantive gains. Suddenly in a couple of days the markets are worried about global economic recession? Suddenly we are surprised with weak oil prices? Suddenly we are worried about Obama? We knew all that a couple of days back, didn't we? We go looking for reasons to explain events all the time. It was staring in our faces all the time:

Thursday, November 13, 2008

Why Things Will Get Worse First - November 30

Let me say that we are about 75% through the correction phase. Is it too early to go long on equities again, I would think so. There appears to be a few more shoes waiting to drop. We have the auto sector. There could a few more big corporate failures which could dent sentiment, e.g. GE Capital and a few big hedge funds, and some private equity companies as well. AIG is still in ICU and the bloody wound is not clotting properly, its still bleeding and the doctors are very tired.

The biggest shoe among the many shoes to drop will be the hedge funds. Yes, many hedge funds have sold down their positions as early as 2Q 2008. In fact, for Malaysia hedge funds and normal institutional investors have sold down Malaysia earlier than the rest of Asia due to our big political uncertainty, and the flip-flop policies on IPPs and CPO. The entire process of selling has seen its fury over the last two months in particular when funds of all kind had to de-leverage. Good stocks and almost all asset classes were sold down mercilessly. Stocks and bonds as well, even bonds of companies which are in no real danger of going bankrupt are now selling at distressed levels (e.g. 70-75 cents to the dollar).

Naturally there has been an oversold situation, but nobody is willing to come in to bat for these oversold situations yet. Thats largely because fund redemptions are still high and many are still expecting more redemptions. While up to 15%-20% of all hedge funds might have closed shop or is in the process of winding down, the actual number needing to close down by middle of next year could reach double that figure.

While many hedge funds and mutual funds have been selling down everything, there are still a huge number of hedge funds who have frozen redemptions temporarily. You can only freeze redemptions for so long. Unlike mutual funds which are traded daily, hedge funds clients can only request their money back on certain dates, usually once a month or quarter. Many have suspended the monthly dates, but they are unlikely to be able to hold out on the quarterly dates for redemptions requests. Guess the FINAL DATE for this year for most hedge funds investors to file to redeem their stakes. Yes, its November 30th.

Many traders are already shorting some stocks that are likely to to be affected. If you are close to Goldman Sachs, they have a list/index that tracks the top stocks held by hedge funds. Request the index stocks there from them. To get some insight on how hedge funds have been de-leveraging, the 3 weeks ending October 10th saw that GS index falling by a massive 34%, while over the same period S&P 500 fell only 28%. The lock up period is only a temporary haven, it might make for another round of selling. Only, this time it could be a lot worse as volume and bargain hunters may have used up some of their cash already over the last few weeks bargain hunting. 7,600 for the Dow looks more likely than 9,000 for now.

But like I said on the first line, its about 75% over, best to do nothing, best to give up the first 10%-20% in a bottoming rally rather than trading into a volatile market with a strong downside bias. Keep at least 70% cash.

p/s photos: Vivian Chow Wai Mun

Reassessing Roubini's Predictions

Unfortunately for Roubini, there is no Nobel Prize in Economic for being the best predictor of global financial markets. Nouriel Roubini warns that the worst in markets and economies is yet to come. On October 23^rd, Nouriel predicted the potential shutdown of financial markets. A day later U.S. stock futures suspended trading after declines of more than 6% at opening tripped the circuit breakers. Nonetheless, Nouriel does not expect another Great Depression, but states that policymakers must act quickly and wisely.

Here are the main elements of Nouriel’s outlook:

Tsunami of corporate defaults (I see some defaults in third tier companies not being able to roll over or secure new funding, but I doubt very much this tsunami of corporate defaults will happen as I still see this being largely concentrated in property, lending and banking. Yes, we are already seeing secondary effects on the broader markets but its not as debilitating as Roubini paints it out to be)

2-year U-shaped U.S. recession that threatens to turn into an L-shaped one if policymakers do not regain control of the financial system (Wow, L-shaped, I don't believe I have come across L-shaped recession recovery graphs in my economics textbooks ... if its not in textbooks, it should not exist, right... though the Japanese economy in 1990s looked very L shaped to me)

global re-coupling to the U.S. will advance from non-U.S. markets to non-U.S. real economies – not even the strongest emerging markets such as Brazil and China will escape global re-coupling (Why is Roubini talking of re-coupling, when there was no de-coupling in the first place? Mind you, all BRICs and Asian markets fell earlier and more severe than the US markets. If that's not evidence of markets NEVER ever having decoupled, I don't know what is?)

vicious cycle of deflation in goods markets, labor markets, commodity markets, financial markets, corporate and household earnings, and aggregate demand (Agree to an extent, but not a prolonged period. The basic roubini's thesis is de-leveraging = deflation, not true. De-leveraging has almost been completed, hedge funds are falling like a ton of bricks, the majority of the weak ones have closed shops already. Good thing about hedge funds, when things are bleak, they close shop very quickly... because no more 20% performance kicker, might as well close and lay low for a while, then reopen a new fund later)

de-leveraging to reduce excess debt in municipalities, households and some firms (As above)

U.S. stock markets declining another 20%-30%, bottoming fall 2009 at the earliest, then moving sideways for years post-recession if growth remains anemic as it did in Japan after its 1990s real estate and equities bust (Again being right for the first part of the call does not mean Roubini will get it right again, I think success has gone to his head. The Japanese experience was due to "inaction", banks were very slow to recapitalise, restructure or allowed to fail. Thats why it took them 15 years and growth is still flat. What the Japanese took 15 years to do, the US and European financial markets did it in 3 month. Roubini losing track of events)

U.S. unemployment rise to reach 8-9% (That is probable but not a prolonged phase because at that unemployment rate, the discount rate may very well go to zero, and we know what happens when there is negative real interest rates)

According to Nouriel, USD assets, commodities, U.S. and international equities, housing, and the USD are quite risky right now. Seek safety in cash or cash-like instruments such as T-bills and bonds of safe, large governments. Though he believes the U.S. dollar will retain its reserve currency status for decades, its status will gradually erode.

Given the size of the expected contraction in private aggregate demand (likely to be about $450 billion in 2009 relative to 2008), Nouriel argues that a fiscal stimulus to the order of $300 billion minimum (and possibly as large as $400 billion) will be necessary to partially compensate for the sharp fall in private aggregate demand.

I like Roubini a lot and he was brave enough to call and defend his views way before they came to fruition. But we should not be blinkered as well, I see some blind spots in his current predictions, as he seems almost "one-tracked-minded" on the whole shebang unfolding to the worst of his nightmares. But, what do I know, I am not a professor or an economist.

p/s photos: Im Ji Hye

Credit Frozen & Cuban Missile

Don't ask me why or how, but there was an IMF meeting a couple of days ago in Washington DC, and me being still in New York, I had the opportunity to talk to a very senior, influential gwailo friend ... I asked for his assessment of just how bad the whole crisis had been over the last few days. His comments shocked me.

Like the rest of the world, we were shaking our heads over the daily dips of 5%-10%, but we also thought that things would stabilise once the central banks of the world got their act together. He said that on Friday, he had never been so "hapless, resigned to fate in a bad way". Mind you, my friend is on the board of two top 1,000 companies and has been on select committees on banking oversight committees. He has access to influential board members of the Federal Reserve and many of the top guys at IMF.

He said things were so ON THE EDGE last Friday, he felt the same way when the Cuban missile crisis was at its peak fervour. During the latter period, he was resigned to either side sending the nuclear missiles to each other and knowing in his heart that there is a very real chance that life as he knows it may evaporate in a matter of hours. Can you imagine a person comparing that to the the situation last Friday. He said that things were so "open and shut" that the central banks were in real danger of not being able to come up with the deposit guarantees and buying of stakes in banks. There was a real chance that all markets was going to continue to collapse further. He added that if people knew how bad things were behind the scenes, they would wobble at their knees. He said on Friday, he was willing to take a bet that the Dow Jones may hit 6,000 in the coming days.

His view has improved now. Now he thinks there is a good chance that things will work, that liquidity will return, but sees thing only returning to normal after 6 months.

p/s photo: Yuri Ebihara