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.
Amid a flurry of bullishness around the world, Research Watch opens with two timely warnings. The first, from Ambrose Evans-Pritchard, international business editor for the UK’s Daily Telegraph, concerns a turnaround in global money supply, which could choke economic growth ' and the great bull market of 2012. The next, from Barclays, identifies what could be the first unintended consequences of the European Central Bank's low-interest loans to banks, which appear to be eating up financial assets at the expense of investors. On a brighter note, Ray Dalio, the world's most successful hedge fund manager, explains why he thinks the US is perfectly positioned to deleverage painlessly, and Citigroup says a spate of earnings upgrades around the world is a good sign for global markets. Meanwhile, Reuters charts the world's economic hot-spots, as the Australian dollar makes it into a clever global forex strategy. Raymond James analyst Jeff Saut answers five big questions about markets and the economy, and Paul Krugman details the one lesson politicians should learn from Greece. Plus, find out how to receive your dividends in gold. Finally, in company news, a senior Goldman veteran shines a light on the investment bank's moral decay in a scathing retirement note, and an analyst with MarketWatch makes a case for $1,000 Apple shares.
The global liquidity cycle may have rolled '¦ “Data collected by Simon Ward at Henderson Global Investors shows that M1 money supply growth in the big G7 economies and leading E7 emerging powers '¦ peaked at 5.1% in November. It dropped to 3.6% in January, and to 2.1% in February. This is comparable to falls seen in mid-2008 in the months leading up to the Great Recession, and which caught central banks so badly off guard. 'The speed of the drop-off is worrying. This acts with a six months lag time so we can expect global growth to peak in May. There may be a sharp slowdown in the second half,' said Mr Ward. If so, this may come as a nasty surprise to equity markets betting that America has reached 'escape velocity' at long last, that Europe will scrape by with nothing worse than a light recession, and that China is safely rebounding after touching bottom over the winter. Stocks usually turn about two months before the real economy peaks [which could mean trouble in the second half of 2012].” (Ambrose Evans-Pritchard, March 11)
And Europe is running out of assets '¦
“By demanding collateral for their bottomless pit of low-interest loans, the ECB has not only reduced banks' necessary de-leveraging needs (and/or capital raising) but has increased risk for all bond-holders (and implicitly equity holders, who are the lowest of the low in the capital structure) as the assets underlying the value of bank balance sheets are now increasingly encumbered to the ECB. Post LTRO, Barclays notes that several banking-systems (PIIGS) now have encumbered over 15% of their balance sheets but LTRO merely extends a broader trend among European banks (pledging collateral in return for funding) and on average (even excluding LTRO) 21% of European bank assets are now encumbered, and therefore unavailable for unsecured bond holders, ranging from over 50% at Danske (more a business model choice with covered bonds) to around 1% for Standard Chartered. As the liquidity-fueled euphoria starts to be unwind, perhaps Barclays' list of likely stigmatised banks is the place to look for higher beta exposure to the downside.” (Zero Hedge, March 11)
But the US is achieving a 'beautiful deleveraging’ '¦ “Two sorts of credit cycle are at the heart of [Bridgewater founder Ray] Dalio’s economic model: the business cycle, which typically lasts five to eight years, and a long-term ('long wave') debt cycle, which can last 50-70 years. A business cycle usually ends in a recession, because the central bank raises the interest rate, reducing borrowing and demand. The debt cycle ends in deleveraging because there is a 'shortage of capable providers of capital and/or a shortage of capable recipients of capital (borrowers and sellers of equity) that cannot be rectified by the central bank changing the cost of money.' Business cycles happen often, they are well understood and policymakers are fairly adept at managing them. A debt cycle tends to come along in a country once in a lifetime, tends to be poorly understood and is often mishandled by policymakers. An ordinary recession can be ended by the central bank lowering the interest rate again. A deleveraging is much harder to end. According to Mr Dalio, it usually requires some combination of debt restructurings and write-offs, austerity, wealth transfers from rich to poor and money-printing. A 'beautiful deleveraging' is one in which all these elements combine to keep the economy growing at a nominal rate that is higher than the nominal interest rate [as Dalio currently sees in the US].” (The Economist, March 10)
And analysts have finally turned bullish '¦
“Weekly global net analyst EPS revisions finally turned positive after 41 weeks of consecutive downgrades (if you look very carefully to the very far right, you'll see a tiny bar pointing north of zero). If this trend is sustained, it will help support stock markets, in our view '¦ Japan has been the strongest region WoW ( 34%) followed by Continental Europe ( 10%) and the UK ( 3%).” (Robert Buckland of Citigroup, March 13)
Here's where to find economic strength '¦
(Reuters, March 9)
Citi's winning currency trade '¦ “People get really caught up in the weeds thinking about the the euro vs. the dollar or the dollar vs. the yen, and they hang on every word of everyone in central banking, trying to figure out which major nation is going to pump liquidity next, weakening this or that currency '¦ [But there is] a much bigger, simpler trend. The 'small' currencies are crushing the bigs. Specifically, a basket consisting of the Aussie dollar, Canadian Dollar, South African Rand, Norwegian Kroner, Swedish Kroner, New Zealand Dollar, Singapore Dollar, Taiwanese Dollar, Colombian Peso, Indian Rupee, Indonesian Rupiah, Russian Ruble, Turkish Lira, Argentine Peso, Brazilian Real, Mexican Peso, Chinese Yuan, and the Malaysian Ringgit has clobbered a basket of the bigs: the Dollar, the British Pound, the Euro, and the yen. The basic gist of this trade is [that it's] a way of being agnostic on which G4 will be the major liquidity provider to the world and which region faces the strongest headwinds, but it reflects a view that enough liquidity will be provided by the G4 to generate a generally risk-on tone to global asset markets.'” (Citigroup via Business Insider, March 12)
Get your dividends in gold '¦ “Gold Bullion International today announced a new service available to dividend-paying, publicly-traded companies, offering shareholders the opportunity to accept their dividends in physical precious metals '¦ 'The process we provide is safe, easy and secure, fully insured and audited quarterly,' said Savneet Singh, GBI's chief executive officer. 'The new service launched today will more than anything else give investors the optionality to receive their dividends in a form of [gold and silver GRC Double Eagle one ounce .999 fine rounds]." (Gold Bullion International, March 12)
History is on China's side '¦ “The people who say China is going to explode '¦ have been saying that for three years. I guess someday they’ll be right. So far they’ve been dead wrong '¦ In America in the 19th century we had 15 depressions with a capital 'D,' we had no human rights, we had not much rule of law, (and we) had a horrible civil war, yet we became the most successful country in the 20th century '¦ What [the bears] are mainly missing is China has been in decline for three or four hundred years but started turning it around in 1978. And there’s a long history of entrepreneurship, capitalism, they have the brains, they have the know-how, there are many overseas Chinese who will bring back money and management ability. And the Chinese have a very, very high savings rate. They save over 35 percent of their income and so even if they start going off, they’ve got something to fall back on, as opposed to America and the rest of the world. There was a housing bubble in urban, coastal real estate, which the government has popped purposely, I mean they knew what they were doing.” (Jim Rogers, March 11)
Five questions for Raymond James analyst Jeff Saut '¦ “1) Would you buy cyclical stocks or defensive stocks? Answer: I would buy cyclicals because barring some major event I don’t embrace the view that we are going to see another recession in the US for the near/intermediate future.
2) 2011 was a 'risk on/risk off' year, so is it a 'top down' or 'bottom up' strategy for 2012? Answer: Last year you only had to get two things right. You had to raise cash in March/April and put it back to work during the bottoming sequence of August – October. I did that and think a similar strategy will work this year as well. That said, one always needs to employ a 'bottom up' strategy combined with a 'top down' view.
3) Should we buy gold or gold stocks? Answer: Both; but if I am forced to pick just one, I would buy gold stocks because they are well behind gold’s performance. Therefore, after the yellow metal’s consolidation is finished, gold stocks are likely to play catch up '¦
4) QE3 or not? Answer: My belief has been the economy is moving toward a self-sustaining recovery and consequently I don’t think QE3 will be needed. Nevertheless, if it looks like our economy is slipping back into recession, I do believe the Fed will use another QE (quantitative easing) to ameliorate the situation '¦
5) Iran? Answer: I don’t think Iran’s mullahs, who are the ones that really have the power, will let Ahmadinejad do anything in the Hormuz Strait because that would give the world an excuse to 'pound' Iran, which might affect regime change.” (Jeff Saut of Raymond James, March 12)
One big lesson from Greece '¦ “What Greek experience actually shows is that while running deficits in good times can get you in trouble '¦ trying to eliminate deficits once you’re already in trouble is a recipe for depression. These days, austerity-induced depressions are visible all around Europe’s periphery. Greece is the worst case, with unemployment soaring to 20% even as public services, including health care, collapse. But Ireland, which has done everything the austerity crowd wanted, is in terrible shape too, with unemployment near 15% and real GDP down by double digits. Portugal and Spain are in similarly dire straits. And austerity in a slump doesn’t just inflict vast suffering. There is growing evidence that it is self-defeating even in purely fiscal terms, as the combination of falling revenues due to a depressed economy and worsened long-term prospects actually reduces market confidence and makes the future debt burden harder to handle '¦ It is time to stop invoking Greece as a cautionary tale about the dangers of deficits; from an American point of view, Greece should instead be seen as a cautionary tale about the dangers of trying to reduce deficits too quickly, while the economy is still deeply depressed '¦ The truth is that if you want to know who is really trying to turn America into Greece, it’s not those urging more stimulus for our still-depressed economy; it’s the people demanding that we emulate Greek-style austerity even though we don’t face Greek-style borrowing constraints, and thereby plunge ourselves into a Greek-style depression.” (Paul Krugman, March 11)
'Why I'm leaving Goldman Sachs' '¦ “To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money '¦ [There] are three quick ways to become a leader [at Goldman]. a) Execute on the firm’s 'axes,' which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) 'Hunt Elephants.' In English: get your clients ' some of whom are sophisticated, and some of whom aren’t ' to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym '¦ When I was a first-year analyst [at Goldman 14 years ago] I was taught to be concerned with learning the ropes, finding out what a derivative was, understanding finance, getting to know our clients and what motivated them, learning how they defined success and what we could do to help them get there '¦ These days, the most common question I get from junior analysts about derivatives is, 'How much money did we make off the client?'” (Greg Smith, who resigned this week as a Goldman Sachs executive director, via The New York Times, March 14)
Two views on Apple: Pending collapse? '¦ “There's an ominous parallel between Apple today and Google right before the economy collapsed.”
(Doug Kass, March 14)
'¦ Or shares to $1,000? (Video of the Week): '¦ MarketWatch's Cody Willard explains why he believes Apple shares can double to $1,000.
(Wall Street Journal, March 9)