PORTFOLIO POINT: This is a sampling of the week's best research notes. In a world of too much information, we hope our selection helps you spot the market's key signals.
Forget bulls and bears, this week John Hussman is all goat. The fund manager's latest note warns markets are going to be hairier and more difficult to ride – more importantly, injuries should be expected. Investors appear to be betting on a new round of quantitative easing. Meanwhile, Macquarie is out with an earnings season strategy it reckons will pay off no matter what companies report. Find out why analysts don't like the Facebook float; why everything you know about peak oil should be questioned; and why anyone would ever want to become an investment banker. On video, as we eagerly await the outcome of Greece's latest debt talks, Research Watch's favourite number-crunching country music star, Merle Hazard, explains the whole Mediterranean mess.
Welcome to John Hussman's 'Goat Rodeo' '¦ “Goat Rodeo – Appalachian slang for a chaotic, high-risk, or unmanageable scenario requiring countless things to go right in order to walk away unharmed '¦ While we typically discourage drawing inferences from any single indicator, it's at least worth noting that with the release of Q4 GDP figures, the year-over-year growth rate of real US GDP remains below 1.6% (denoted by the red line below). A decline in GDP growth to this level has always been associated with recession (denoted by the shaded areas), usually coincident with that decline, though with a two-quarter lag in two instances (1956 and 2007), and with one post-recession dip in growth during the first quarter of 2003. As it happens, the GDP growth rate dropped below 1.6% in the third quarter of 2011. Given the strong and rather obvious relationship between the most recent year-over-year rate of GDP growth and the prospect of oncoming recession, it's difficult to understand why Wall Street so completely rejects the likelihood of an economic downturn. Then again, that's exactly why we're expecting a Goat Rodeo.”
(John Hussman of Hussman Funds, January 30)
Macquarie's earnings cheat sheet '¦ “As we enter the first reporting season of 2012 we utilise the history of the Macquarie Analyst database to highlight key stocks that typically perform strongly (and poorly) around their reporting date.”
(Macquarie Research via Macro Business, January 30)
The QE3 trade '¦ “In early January, the big story was how the euro had effectively separated itself from US equity markets, with the latter trading based on rosy corporate earnings and strong US data and the former moving according to Europe’s debt crisis. [Recent] trading underscores how both the common currency and stocks indeed are going their own separate ways, yet for different underlying reasons that may share a common theme. A broadly weaker US dollar is being sapped by the Fed’s dovish stance, which is lifting the euro and gold despite there being no resolution on Greece’s debt negotiations. Meanwhile, stocks are sliding on the back of tame US growth data, and perhaps hankering for the Fed to dive full steam into another round of easing. The thread of commonality between the two trades – and the fact that gold is also surging, recently up to $US1733 an ounce – suggests a market that could be front-running QE3.” (Market Beat, January 27)
Facebook is no Google '¦
“The comparison is actually worse than it looks. Remember, Google was born at time when internet usage, and online ad spending, wasn't even half of what it is today. The fact is, Facebook is a huge consumer hit – 850 million people us the site each month – but its ad products are not, really. Google's ad products are business magic. Consumers see ads for products that they literally want to see. So far, Facebook hasn't found that kind of magic. Investors looking at Facebook's S1 filing this week will have to wonder if it ever will.” (Silicone Alley Insider, February 1)
BRIC exchanges are advancing – fast '¦ “As regulators in the United States and Europe weigh the merits of new regulations to govern high-frequency trading, emerging markets have been methodically paving the way for the practice to expand within their borders. Progress Software's chief technology officer John Bates says the practice of rapid-fire trading is quickly expanding in the so-called BRIC nations – Brazil, Russia, India and China '¦ According to Dr Bates, in the past two to three years, Brazil has already run through a cycle of development that took far longer in London and New York, with algorithm-based trading now available in equities, futures and foreign exchange markets. Brazil's Bovespa stock exchange has invested in new technology, boosting the proportion of algorithm-based equity trades from 4% to 12% in the past year. "The adaptation is faster and they can leapfrog the mistakes that have been made in other places," he says. Brazil has cleared regulatory hurdles of its own to spur the growth of its marketplace. In December it lifted a financial transaction tax for foreign investors, a move that will undoubtedly create new opportunities for Dodd-Frank and Basel III escapees. And the recent moves by Bovespa – the nation's largest exchange – are likely to bring a dramatic lift to trading volumes and the level of liquidity it handles over the foreseeable future. Meanwhile, in India '¦ nearly a quarter of all trading is now done using algorithms, a number that's virtually assured of an exponential jump as well. The Bombay Stock Exchange, a $US1.5 trillion marketplace, said it expects such trading to double over the next three years, which would put that nation on par with Europe and the US.” (Advanced Trading, January 31)
Peak oil is not part of the near future '¦
“It's not a random future, but a future that was held to be improbable, if not impossible. For each extra barrel of oil produced over the past seven years from Russia, and Canada, there has been a loss of production from the North Sea, from Mexico, from Indonesia and elsewhere. And in the case of OPEC, there has been a stubborn flat-lining of production growth, which, in the true spirit of argumentum ad ignorantium, has been taken as proof of OPEC’s hidden and secret supply. Thus, we are led to the newest and strangest meme of all: the failure of global oil production to grow over seven years, in the face of a phase transition in oil prices, is not even suggestive of peak oil. But rather, proof of oil’s imminent supply resurrection.” (Gregor.us, January 29)
The dark side of Warren Buffett '¦ “I’ve never seen a business figure get such a free pass from the media even when his public pronouncements are oozing with hypocrisy '¦ He decries the fact that rich investors like him get taxed mainly at the lower capital-gains rate of 15%. Yet he made his vast fortune enjoying that favourable treatment, and largely kept his mouth shut until now, as he nears the end of his long career. Plus, he plans to use a charitable trust to further shield much of his income from taxes '¦ I won’t bore you with every gory detail of his questionable associations, which include no-lose investments in Goldman Sachs and General Electric just before the companies received massive federal aid during the financial crisis. But other items really take the shine off Saint Warren’s halo – like his insistence that the ratings agencies didn’t play a key role in setting up the 2008 financial meltdown '¦ defending [them] as bit players in the debacle, caught up in the mania much like nearly everyone else. His obvious motive: He held a major stake in rating agency Moody’s Investors Service, so Berkshire Hathaway got a nice cut out of all those fees that Moody’s 'earned' [from the same companies it was rating] as it fuelled the crisis '¦ The SEC interviewed Buffett last year over one of the most sordid corporate affairs I’ve seen in a long time: His long-time aide and one-time heir-apparent bought shares in a company called Lubrizol just before Buffett purchased the outfit '¦ Buffett’s bizarre initial reaction as David Sokol was resigning from Berkshire last year [was to defend his] actions '¦ Buffett later issued a statement that, after reviewing the facts, he’d changed his mind: What Sokol did was bad, after all. But why did it take Buffett so long to realise that corporate cronyism reeks? You’ve got to ask why President Obama has embraced a businessman with this type of record – and why the media are letting him get away with it.” (Charlie Gasparino in The New York Post, January 31)
And the lighter side of quantitative easing '¦ “Someone did well enough from Ben Bernanke's latest round of printing to fund these awesome 'QE-TWO' licence plates, spotted in the hedge funder hub of Connecticut.”
(Business Insider, January 3)
Why people become investment bankers '¦
(The iBanker, January 27)
Video of the Week: Merle Hazard takes on Greek debt '¦ Everything you need to know about Greece's fiscal funk – in song.