“Markets have gone up too much, too soon, too fast” - ROUBINI 5th Oct 2009
Nouriel Roubini, dubbed Dr Doom after he predicted the financial crisis, yesterday warned stock and commodity markets will fall as the slow pace of recovery disappoints investors. “Markets have gone up too much, too soon, too fast,” said the New York University professor. “I see the risk of a correction, especially when the markets realise the recovery is not rapid and V-shaped, but more like U-shaped. That might be in the fourth quarter or the first quarter of next year.”
Since March this year the sentiment in the markets has changed dramatically from the dark days of the credit crunch allowing for a thinly traded rally to occur (S&P up around 60%). Many financiers minds have been bewildered somewhat and find it incredulous that Wall Street and Main Street could disconnect so alarmingly. Today the bulls still hold the market by the scruff of the neck but as I highlighted in my ‘market warning’ email of 11th September investors globally have entered dangerous territory. Alarmingly markets and investors are ignoring consumer confidence statistics alerted to the fact that unemployment is actually rising (see US non-farm pay roll numbers recently) and production is suffering as businesses fail to come to terms with lower revenues and fewer customers. These same consumers, many of them cash investors, are hardly showing much faith in the stock market either. Cash net inflows into US equity funds is a measly $2.6bn in the last 6 months whereas bond fund inflows have increased appreciably. Politicians crow about the supposed success of various measures especially the scrappage schemes and yet GM report a drop of actual car sales end-Sept as -47% year on year. This is hardly good news.
In UK banking sector many tax-payers (self-employed & SME’s mainly) complain that lending has stalled or at least when proffered is wholly unreasonable. Despite a bank rate of ½% most banks are still profiteering from their entrapped customers (one can count the number of UK retail banks remaining on one’s fingers leaving the thumbs free). With FSA now calling for 3 x more capital amongst UK banks (to be held in Gov Bonds) one wonders where the money is coming from or how the lending practices and practicality thereof can be improved and ignited. Elsewhere billions have been raised in discounted rights issues where many household names have stiffened resistance by bolstering over-geared balance sheets but as I’ve highlighted since joining Redmayne’s in January 2005 the (dis)trust in universal accounting practices whereby companies are being encouraged (by accountants, consultants and investment bankers) to spuriously withhold detailed information concerning derivative positions and suchlike from shareholders is still very much in evidence. With regulators, politicians and market commentators calling for better transparency in the mature economies the opposite still seems to be the case when it comes to treating shareholders fairly. This and unfathomable corporate governance is the most damaging aspect of the latter stages of the long bull run that encompassed dot-com and then a global base metals stampede. In essence the continued prospects in the BRIC’s and other emerging markets are keeping mature markets alive but the real concern should be that practices adopted by western banks might just be replicated in the final engines of growth which the ‘emerging/emerged’ markets appear to represent. With very little growth in mature markets being translated to the bottom line it’s likely that more dividends are cut in problematic sectors as businesses struggle to manage and profit in an increasingly slowing global economy. Over-regulation could easily kill off many more smaller businesses unless incoming governments can get to grips with curbing the Public Sector and the nonsense that goes with it. Obama, Cameron, and Blair (in anticipation of the Fettes boy’s rise to head boy of the EU Senate) may just find that trying to translate jobs from the public to private sectors is virtually impossible in the current unreal regulatory universe. The domestic outlook for investors and young people is truly depressing and it’s not surprising that the pessimists are suggesting that the so called recession may well migrate towards The Greater Depression.
With £175 billion of Quantitative Easing in UK and some similarly shocking US$ numbers over the pond the real result of all this regulatory and governmental interference in capital markets is that debt levels across the private and public sectors is still spiraling (out of control?). I heard the other day that every citizen in UK may well have to pay directly/indirectly £25,000 per person for years to come just to stall the overall public sector debt. This frightening scenario just hasn’t been taken on board by most of the electorate (yet). Nor by most politicians either nor the vast numbers of spin doctors by the judge of it.
A further major sell-off of global equities is likely quite soon. Multiples (price earnings ratios) and valuations on all accounts appear over-cooked (see 20 & 30 day moving averages). A nasty surprise may come from China very soon as the 10s of millions there embrace all the creature comforts of rapid growth <=Rapidly rising property prices, extraordinary sales in domestic goods -computers, mobiles, iPods, etc, new factories (cars), greater mobility and a stock market in the stratosphere, etc, etc.> Where has one heard that before?
When will equities become attractive (again)? Well, some think they already are but markets don’t just retrace and rise constantly and consistently. It may be a worrying loss of faith in the $, it may be a shock in taxes, it may be a black swan event (Iran, Korea, Afghanistan), an implosion of growth in China &/or emerging markets, a major corporate scandal and failure (& this is quite possible), but something will happen that brings markets back to reality.
Going forward hereon the shrewdest way to position one is to focus on oils, metals (mainly of the precious variety) and the odd gem amongst traditional equities. To date those investors holding blue-chips may indeed have had a good run but when the train slides off the track or enters the siding the repairs or replacements may be very laboursome and cumbersome.
To summarise then I continue to believe that the next quarter is (yet again) one to batten down the hatches! My favourite stock picks are BP, Royal Dutch Shell ‘B’ (safe dividends), Randgold, Harmony Gold and Yamana Gold; the latter 3 are ‘insurance viz-a-viz capital protection’ against a severe downturn predicted. I am still avoiding banks/financials and thinking seriously about pharmas (Glaxo), water (Northumbrian) and grocers (Sainsbury). Whether Noudini is right about the ‘U’ shape is open to conjecture as others predict ‘L’ & ‘W’ patterns but a wake up call similar to what happened when Lehman failed is a virtual certainty. Detroit still is in a mess and western industries are struggling to maintain momentum. The stock markets, of course, aren’t looking at Main Street just yet but I detect an undercurrent of doubt creeping in. As you know I have been advocating high cash positions throughout the last Q and exposure in ‘gold’ where appropriate as inflation can be spotted on the horizon.
