Research Watch

PORTFOLIO POINT: This is a sampling of this week’s best research notes. In a world of too much information, we hope our selection helps you spot the market’s key signals.

Well, global central bankers appear to have done it again. Citigroup’s closely-watched “fear and euphoria” gauge suggests stock investors finally have stopped panicking, and David Rosenberg says the cult of equity – previously declared dead – has been revived. In a sign of the times, BlackRock’s equities guru Quintin Price is recommending even his 80-year-old grandmother shift from bonds to stocks. This all begs the question: Are investors placing too much hope in market intervention? Economists at Nomura certainly think so, arguing the European Central Bank’s task is tougher than newly horned bulls seem to understand. And in China, UBS worries the so-called 1 trillion yuan stimulus is essentially make-believe. Meanwhile, Robert Shiller launches three new value investing indices, and the world gets its first peak at “Why I left Goldman Sachs”, a juicy new Wall Street critique penned by Greg Smith, who, you may remember, publicly resigned from the bank with a scathing open letter last year. On video, perhaps investing with Bernie Madoff wasn’t such a bad idea after all.

The equity cult lives... “Some believe [the equity cult is dead], and David Rosenberg himself wrote on it a few months back. In a research note today, the chief economist of Gluskin Sheff and Associates said he realises ‘that this line of thinking isn’t entirely accurate.’ First, he noted, US households still have 42% of their mix in stocks, which is a bit below their historical standing, but still within the range. Next, he pointed out that the most recent Investors Intelligence survey put the bulls at 51% and the bears at 24.5%. The spread is at its greatest since April, but that’s ‘hardly a sign’ of the end of the cult. Unlike the early 1980s. ‘If you were a Merrill broker in the early 1980s and cold-called a prospect with a 15 per cent utility offering, there is a strong likelihood that the recipient of the call would have threatened back then to call the cops - well, that is a classic capitulation in terms of the “cult being dead,”‘ Mr. Rosenberg said. ‘Not to mention the famous 1979 Business Week cover about the “Death of Equities,”‘ he added in his report. ‘Compare and contrast to the current cover of Barron’s (“Tough Stuff”) … you’ll see what I’m getting at. Believe me, in 1982 nobody was ringing the bell...  Third, retail investors aren’t bolting, moving rather toward a different kind of equity exposure by way of hybrids. ‘So if you are bullish on the market, have a reason beyond the “capitulation” theme,’ he told his clients.” (Globe and Mail, September 11)

Investors stop panicking...

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 “The Panic/Euphoria Model... is beginning to warn of an investment community that appears to have become complacent again, as was the case in late March/early April 2012 and in April/May 2011 right in front of equity market wobbles. With September historically being a challenging month for stocks, such signals should be carefully monitored. … Sentiment is still far from euphoric and thus one should not expect a new bear market. Euphoria levels generate an 80% probability of down equity markets in the subsequent year (based on the backtest), which is extraordinarily high given that there is a 70% random chance of markets appreciating in the subsequent year, after buying the index on any given day. Thus, the current level of complacency alone is not overly disconcerting.” (Tobias Levkovich of Citigroup, September 6)

Equities for the elderly... “BlackRock’s Quintin Price has advised his 80-year-old mother-in-law to hold more stocks as rising life expectancy pushes the elderly to seek higher investment returns. ‘The conventional advice, when life expectancy was lower in the past, was to move more investments into fixed income,’ Price, who is responsible for active equities and fixed income as BlackRock’s head of alpha strategies, said in an interview... ‘This conventional wisdom was born during a time when life expectancy was much lower and is simply no longer valid,’ he said. ‘People are going to have to find a new way of investing to make their savings pot last longer after retirement -- that’s not going to come from high-quality bonds yielding almost nothing.’ … Life expectancy increased from a global average of 48 years in 1950 to almost 70 years in 2010, according to the International Monetary Fund. … Price said the threat of inflation amid continued accommodative monetary policy further boosts the case for retiring investors to increase weightings in high-dividend equities to make their savings last longer. Investors must look to a longer time frame and try to shrug off worries about short- term stock moves, he said.” (Bloomberg, September 5)

Billionaires are bullish... “For several decades I have organised a series of ‘Benchmark’ lunches on Fridays in August for serious investors who spend their summer weekends in eastern Long Island. ... There were many billionaires and many others whose net worth hasn’t quite gotten there, but whose views are widely respected throughout the investment community. … At all three sessions, most of the group thought the Standard & Poor’s 500 would hit 1,500 before year-end [from about 1,430 now]. A few even thought 1,600 was possible by next August. A small minority saw the index returning to 1250 (where it started the year) within twelve months. … I was surprised that most participants believed the European Union would remain together over the next year. The ECB would continue to provide the liquidity necessary to keep 10-year yields for Italy and Spain below 7%. It would also be there to enable Greece and Portugal to meet their obligations, keep their governments running and pay their employees. … What did trouble them was that the slowdown in the economies of Europe and the United States had reduced demand for Chinese manufactured products. Inventories were piling up and production schedules had been reduced. The group overall believed that the risks of a hard landing were too great for the government to allow it to happen, and China had both the fiscal and monetary tools to prevent a serious slowdown." (Byron Wien of BlackStone, September 7)

Pulling away from the ‘mega-bears’...

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 (Doug Short, September 11)

But risks remain... “We see no imminent intervention in either Spain or Italy (a change in view relative to last month). Indeed, improving market conditions should reduce the incentive for both Italy and Spain to call for help in the short term as they will try to exploit the threat of intervention to avoid falling into the ‘bailed out’ camp. … We believe that markets have only improved because they have priced in a very high probability of intervention in the Italian bond market. With heavy issuance ahead and no clear sign of a call for help, market conditions could deteriorate faster there than in Spain where the inevitability of the bailout is much clearer. The current backstop set up remains highly risky in the context of Italy given the very large funding needs of that sovereign in the next three years (around 550 billion euros, ex banks). With the ECB having terminated the SMP, the only mechanism left is the under resourced, but senior ESM. This remains the biggest threat to the stability of the system, in our view. Event risks around Italy are disappointments around the economy, political risk and rising NPLs in the banking sector.” (Nomura, September 7)

Chinese stimulus myths... “Wang Tao at UBS takes aim at [China’s] ‘Rmb1tn stimulus’; she thinks it is not really real: ‘Well, that is what we call a bit of make-believe. Sure, the weak August data seem to have prompted more policy actions by various government agencies and we expect better implementation and coordination as well. But a closer look at the newly announced approvals shows that these projects have been approved in the past 2-3 months, some as early as April and May, and most of these projects are part of the local governments’ 12th Five Year Plans. In other words, many readers believed that the government suddenly rolled out a RMB 1 trillion stimulus package in the past week ahead of the weak August data, but the truth is that the NDRC just suddenly PUBLISHED the project approvals of the past few months, perhaps to demonstrate that the government’s policy support in the form of infrastructure investment has already been underway.’ Wang has also downgraded her forecasts for full-year GDP growth in 2012 to 7.5% from 8%.” (FT Alphaville, September 10)

The Shiller index... “Barclays and Robert Shiller, the Yale economist, are to launch a series of US equity indices to identify undervalued sectors by comparing stocks’ long-term value in a way that looks through short-term swings in profitability. The indices are based on a valuation measure designed by Mr Shiller and economist John Campbell called the cyclically adjusted price/earnings ratio, a metric that has gained a wide following since Mr Shiller successfully used it to predict the bursting of the technology stocks bubble in 2000. … Barclays said the three indices will be... linked to a range of ‘over-the-counter’ instruments including swaps, structured notes, certificate of deposits and so-called Delta One products. … The indices will weight undervalued sectors differently and will initially be available in US dollar, sterling and euro versions, Barclays said.” (Financial Times, September 11)

Wall Street’s latest tell-all tome...

“From the shenanigans of his summer internship during the technology bubble to Las Vegas hot tubs and the excesses of the real estate boom... to the day Warren Buffett came to save Goldman Sachs from extinction-Greg Smith will take the reader on his personal journey through the firm, and bring us inside the world’s most powerful bank. Smith describes in page-turning detail how the most storied investment bank on Wall Street went from taking iconic companies like Ford, Sears, and Microsoft public to becoming a ‘vampire squid’ that referred to its clients as ‘muppets’ and paid the government a record half-billion dollars to settle SEC charges. He shows the evolution of Wall Street into an industry riddled with conflicts of interest and a profit-at-all-costs mentality: a perfectly rigged game at the expense of the economy and the society at large.” (Amazon, ships October 22)

Fifty-two shades of greed...
 

“‘52 Shades of Greed is a deck of playing cards bearing illustrations of the people and financial institutions whose lust for money took the rest of us for a ride toward economic collapse,’ the Alternative Banking Group of Occupy Wall Street said in a release. The creators are currently hosting a fundraiser for the project. They said they hope to cut 1,000 decks to give out during Occupy Wall Street’s one year anniversary on September 17th.” (Business Insider, September 5)

Video of the Week: Bernie Madoff versus the banks... Which has been a better investment over the past four years?

(CNBC, September 7)