About a month ago, Charlie Rose interviewed PIMCO’s Mohamed El Erian. El Erian is one of the country’s most successful money managers. He’s the co-CEO of the Pacific Investment Management Company, better known as PIMCO which oversees more than 829 billion dollars. He previously led Harvard University’s endowment to substantial returns on investment. In the interview, which is available below, Charlie Rose speaks to him about his new book “When Markets Collide” and how he sees the global economy today.
As you know, GreenLightAdvisor.com is a huge fan of the outspoken Hugh Hendry, CIO, Eclectica Asset, who has been a unique, eloquent, and brash voice in this market. Its our sense that Hendry is also uniquely alone, and lucid, in the marketplace in terms of his outlook, and for this reason should be added to your must see/must listen to list.
click image to watch
The segment which aired August 19, 2008 on CNBC Europe, also contains midway, a terrific interview with GE CEO Jeff Immelt.
“There is no role for speculation or speculators today. This is kaput,” Hendry said. “If we were Second World War generals, we’ve exposed our flanks. We’ve been wiped out. This is about fundamentals … this is about losing money.”
As the crisis unfolds, the policymakers’ focus should shift from the threat of inflation to that of the world economic downturn, which could be more severe than economists anticipate, he said. (Watch Hendry’s interview below for more on the economy, inflation and commodities).
China, which many believe will balance out slowdowns elsewhere, will struggle if difficulties in the U.S. continue, while the current spike in producer prices is just a hangover from rising oil prices earlier this year, Hendry said.
“I fear that the central bankers of the world are fighting yesterday’s battle,” he said.
As for the banking sector, it is “insolvent,” Hendry said, adding he can’t tell just how low those stocks will go.
Below we provide Bespoke’s trading range charts of ten major commodities. The green shading represents two standard deviations above and below the commodity’s 50-day moving average, and moves above and below indicate extreme overbought and oversold levels. It’s no news that commodities have suffered major pullbacks over the last two months, and the charts below provide a good view on how bad it has been.
After trading at the top of its range for what seemed like forever, oil finally traded to the bottom of its range late last week, and after touching extreme oversold territory, it finally bounced for a couple of days, only to see big declines again on Friday. Like most other commodities, natural gas unfortunately hasn’t gotten a bounce. Since touching 13.58 in early July, nat gas is down 42%.
While gold declines from $1000 to under $800 make the headlines for precious metals, platinum and silver have actually gotten hit harder. From their peaks, silver has fallen 38% and platinum has fallen 40%.
Corn, wheat, orange juice and coffee have actually staged some pretty good rallies off of oversold levels over the last couple of weeks. Wheat almost touched overbought territory last week, but all four are still well off their highs earlier this year.
Once again, we continue to be impressed by the charting and tabling work that Bespoke Investment Group compiles on a daily basis. Here below is the latest survey which compiles the largest market capitalizations of companies from around the world.
One notable standout is the size difference between Exxon Mobil ($438-billion) and Gazprom ($237-billion). We point this out simply because while Exxon is worth close to twice as much in market cap, Gazprom happens to be 6 times larger according to their total hydrocarbon reserves, and a reserve life index of roughly 28 years or so, vs. Exxon’s 17-18 years. This is the post Georgia debacle, post-oil-price-downturn price. Russian energy companies are cheap, cheap, cheap.
And, even after the huge haircut that PetroChina and China’s largest banks and companies have gotten the last year, PetroChina still commands 2nd place at $341-billion, China Mobile at 5th place, ICBC at 7th place, and CCB in the 15th spot.
Finally, where is India? We give 3-5 years before several Indian outfits make it to the market cap pantheon. That spells opportunity.
Below we highlight the 30 largest companies in the World by market cap ($). As shown, Exxon Mobil is the top dog by about $70 billion. Exxon is trailed by another energy company, Petrochina, then General Electric and Microsoft. Eleven of the top 30 are based in the United States. The Energy sector has the largest representation at 8, followed by Technology at 5. Only 3 companies in the top 30 are up in 2008 — Wal-Mart, IBM and Johnson&Johnson. And Apple and Google followers will be happy to see them ranked 25th and 26th in the World.
There is little evidence to suggest that Chinese manufacturing competitiveness has deteriorated meaningfully.
The mainstream media has been filled with reports about Chinese companies closing production facilities due to rising costs. Some analysts have concluded that China is quickly losing its competitive edge, and international producers are moving to other countries. In reality, there has been no meaningful decline of China’s export market share, particularly when exports of oil-producing countries are excluded. Indeed, China’s slowing export growth in recent months is a reflection of changing global market conditions rather than a deterioration in Chinese producers’ competitiveness. Rising input costs due to higher commodities prices are not unique to China: manufacturers around the world are suffering similar cost pressures and margin squeezes. In addition, the RMB’s appreciation has not been excessive, rising at a 3.5% annual rate in trade-weighted terms since its 2005 de-peg from the U.S. dollar. The trade-weighted yuan is still below its 2002 levels, when the economy was struggling with a deflationary shock. Finally, recent weakness in the export sector can be partially attributed to the Chinese government’s voluntary export restraints, which have been part of the country’s broader growth-rebalancing strategy. These policies could be removed any time if excessive weakness develops. Already, the government has increased VAT rebates for textile and garment exporters since the beginning of the month.
Jason Zweig’s latest column at the WSJ (Psyching Yourself Up to Let Losers Go ) tackles a tough issue for most investors - when to sell. Selling can be difficult for a variety of reasons, but a big factor is psychology. We don’t like to let go and give up things we’ve bought. Zweig provides us with a telling statistic:
Individual and professional investors alike struggle with selling. Berkeley finance professor Terrance Odean has found that investors are at least 50% more likely to sell their winners than their losers. Among the money managers surveyed by Cabot Research, a Boston consulting firm, fewer than 30% base their sell decisions on “extensive research.” The rest concede they basically sell by the seat of their pants.
To defend our portfolios from our emotions, Zweig offers us six techniques.
1. Use stop-loss orders
I’ve never been a fan of using a stop-loss order on a company’s stock. I know that Investors Business Daily advocates the use of selling whenever a company falls 10% and I think it’s too trivial of a rule. Zweig says that he doesn’t advocate the use of stop losses but prefers “stop look” orders:
Whenever a stock drops, say, 25% below what you paid, automatically review your original top three reasons for buying to see whether they are still valid. That will prevent you from selling without thinking first.
This is a pretty good idea. I practice the same kind of exercise myself. I don’t have any alerts set to tell me when about a drop of 25%, but I do check my company’s prices regularly. An easy way to get notified of drops in your companies can be done with Yahoo Alerts, you can get an e-mail or text message based up requirements you set (price drop/rise or percent drop/rise). Two of my holdings, Air Transport Services Group (NASDAQ: ATSG) and Steak N Shake (NYSE: SNS) have fallen a bit from my initial buying points ($1.70 and $10.00).
In each of these cases, I re-analyzed my investment thesis, to see if anything changed. With ATSG, the fall from $1.70 to below $1.00 was triggered by almost no news. DHL severing business ties with ATSG was already part of my investment idea- so I didn’t see a reason to sell. With SNS, my thesis hinged on Sardar Biglari getting onto the board and gaining control so that he could make the right decisions for the company. I decided that I would not sell till that thesis was properly tested.
2. Don’t Go Far Afield
Here, Zweig recommends buying an industry index if the company you purchased ends up having poor results. I don’t quite agree with this advice. It all seems a little bit like decisions made by an investor who doesn’t know what they’re doing who is trying to catch a trend (and may be too late).
The only time I think that this is valid is when you’re investing in an industry with good economics but where the individual players might be too hard to pick. I’m thinking of Buffett’s investments in pharma with companies like Sanofi Aventis (NYSE: SNY), GlaxoSmithKline (NYSE: GSK), and Johnson & Johnson (NYSE: JNJ). The difference with Buffett’s investments in pharmaceutical companies is that he still was not buying an ETF, he bought just a few of the players in that industry. An ETF will usually have many more holdings and carry the risk of over diversification.
3. Shop Before You Drop
Zweig’s next technique is a bit better-
Ask yourself: Which stock or fund would I most like to own? Then view your losers as a source of funding to reduce the amount of cash you would otherwise need to raise
Sometimes I think that selling losers can be good, especially if you’re purchasing a better buy. Maybe a new opportunity has presented itself with a higher return or the margin of safety in your losing investment has narrowed.
4. Re-price it.
Here, the idea is to take your original purchase price and divide it by 10 and compare that price with its current price. A simpler method might be to look at the price you’re seeing right now and compare it to your conservative estimate for the company’s margin of safety(the spread between the current price and the company’s intrinsic value you in your eyes). If you’re buying companies at what you think are 50% discounts, you’ll see a wider margin of safety. It will then be up to you to decide if anything has changed.
If the margin of safety has narrowed to a point where maybe the capital could be better used elsewhere, then you should.
5. Follow your sales.
This is some of the best advice in the column.
Using an online portfolio tracker, monitor the returns of all the stocks you sell after you sell them. Studying the aftermath of your mistakes will enable you to learn which you sold too soon and which too late. You cannot improve what you do not measure.
I try to do the same. On my Google Finance page I keep all of my stocks, even after selling them. I like to see what they’re currently doing and learn from my mistakes and the company’s mistakes. By doing this, you expand your circle of competence. It makes me think of a quote from Edward Lampert in Fortune Magazine.
[The] idea of anticipation is key to investing and to business generally. You can’t wait for an opportunity to become obvious. You have to think, “Here’s what other people and companies have done under certain circumstances. Now, under these new circumstances, how is this management likely to behave?” The plays my father designed for me helped me learn to think ahead. Lots of days I asked him, “Why can’t we just invite kids over and play a game?” In order to do something well, he explained, you have to keep practicing and preparing.
And I think that’s one of the more important concepts to keep in mind when investing. You can often draw upon past experiences when making future decisions. The situation might not be entirely the same, but it’s incredibly useful to have that kind of knowledge filed away for future reference.
August 25, 2008 - Courtesy: Bespoke Investment Group - The MSCI World index, which measures global equity market performance, is now up just 68% (not total return) since its bottom on March 12, 2003. After analyzing the performance of various country indices since then, we found some interesting results.
Since the 3/12/03 global market bottom, Brazil, India and Mexico all have total returns of more than 400%, with Brazil leading the way at 427%. Germany has been the best performing Western European country with a total return of 187%. At the bottom of the barrel is Japan, with a gain of 68%, but unfortunately the US ranks second to last at 77%. So while much has been made of how well the US has held up during this downturn, it still lags behind pretty much everyone else when looking at the last bull and the current bear. The most surprising performance number comes from China. After its bubble and bust from 2005 to present, China’s performance is pretty much right inline with the US at 79%. With so much focus on China’s growth this decade, one would think its equity markets would be at the top of the performance ladder with other BRIC countries.
Below we highlight the recent survey of strategist price targets for oil in the fourth quarter of 2008. Goldman Sachs has been making news with the reiteration of their $150 oil call, and as shown below, they’re currently the most bullish strategist amongst participants in Bloomberg’s strategist survey. Overall, 24 out of 31 have a price target greater than the current price of oil, but it’s important to note that these targets were all upped right as oil was peaking. The average price target for Q4 is $121, while the median is $125.
Its hard not to notice that only 3 strategists see the price falling below $100 by Q4. Is this contrarian?
August 20, 2008 - Here’s what BCA Research says about China - Growth moderation in the Chinese economy will continue. However, unlike many previous Olympic-hosting countries, the end of the game-related construction will have little tangible impact.
While the growth moderation in China will persist, it will be gradual with limited downside. Olympics-related capital spending (although estimated at a record US$43 billion) is only a fraction of China’s total capital spending and a relatively small portion of its US$3.6 trillion economy. In addition, the Chinese authorities are being proactive and have already shifted their focus to protecting growth, even though signs of the slowdown are still very preliminary and headline inflation remains above their target. So far, domestic demand is holding up well: retail sales volumes continue to accelerate and the softening in food inflation over the past several months is helping to alleviate a meaningful drag for lower-income households. Although it is still too early to expect a rebound in China’s export sector (the weakest link in the economy), the slowdown may already be well advanced. Moreover, the Chinese government has started to increase its tax rebates to exporters of some low-value-added industries, which should help stabilize their overseas sales. Additional fiscal support is expected if excessive weakness in these sectors persists. Bottom line: We expect a further moderation in China’s economic growth but maintain a positive outlook. The two primary risks that we are monitoring are the ongoing shortage of electricity and the rebound in the U.S. dollar.
The current losses from the “credit crisis” have reached a staggering landmark of $500 billion. That’s enough cash to buy Exxon Mobil outright and still have $100 billion left over. Or you could pick up Wal-Mart and Microsoft. As nasty as $500 billion sounds consensus says we are still only halfway through.
Bob Farrell, a legend at Merrill Lynch for several decades, had a front-row seat to the go-go markets of the late 1960s, mid-1980s and late 1990s, and the brutal bear market of 1973-74, and October 1987’s crash.
He retired as chief stock market analyst at the end of 1992, but continued to occasionally publish. Rumor has it for a humongous donation to Farrell’s favorite charity, you can get on his very exclusive email list.
Marketwatch gathered some of Farrell’s more famous observations, and republished them as “10 Market Rules to Remember.”
1. Markets tend to return to the mean over time
When stocks go too far in one direction, they come back. Euphoria and pessimism can cloud people’s heads. It’s easy to get caught up in the heat of the moment and lose perspective.
2. Excesses in one direction will lead to an opposite excess in the other direction
Think of the market baseline as attached to a rubber string. Any action to far in one direction not only brings you back to the baseline, but leads to an overshoot in the opposite direction.
3. There are no new eras — excesses are never permanent
Whatever the latest hot sector is, it eventually overheats, mean reverts, and then overshoots. Look at how far the emerging markets and BRIC nations ran over the past 6 years, only to get a sizable haircut.
As the fever builds, a chorus of “this time it’s different” will be heard, even if those exact words are never used. And of course, it — Human Nature — never is different.
4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
Regardless of how hot a sector is, don’t expect a plateau to work off the excesses. Profits are locked in by selling, and that invariably leads to a significant correction — eventually.
5. The public buys the most at the top and the least at the bottom
That’s why contrarian-minded investors can make good money if they follow the sentiment indicators and have good timing.
Watch Investors Intelligence (measuring the mood of more than 100 investment newsletter writers) and the American Association of Individual Investors survey.
6. Fear and greed are stronger than long-term resolve
Investors can be their own worst enemy, particularly when emotions take hold. Gains “make us exuberant; they enhance well-being and promote optimism,” says Santa Clara University finance professor Meir Statman. His studies of investor behavior show that “Losses bring sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning stocks.”
7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
Hence, why breadth and volume are so important. Think of it as strength in numbers. Broad momentum is hard to stop, Farrell observes. Watch for when momentum channels into a small number of stocks (”Nifty 50″ stocks).
8. Bear markets have three stages — sharp down, reflexive rebound and a drawn-out fundamental downtrend
I would suggest that as of August 2008, we are on our third reflexive rebound — the Januuary rate cuts, the Bear Stearns low in March, and now the Fannie/Freddie rescue lows of July.
Even when these sporadic rallies end, we have yet to see the long drawn out fundamental portion of the Bear Market.
9. When all the experts and forecasts agree — something else is going to happen
As Stovall, the S&P investment strategist, puts it: “If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?”
Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.
10. Bull markets are more fun than bear markets
Especially if you are long only or mandated to be full invested. Those with more flexible charters might squeek out a smile or two here and there.
Below we highlight the estimated current year P/E ratios and dividend yields for the major equity indices of 13 countries. As shown, Europe has the lowest estimated P/E ratios, with Italy, the UK and France all below 10. The US ranks 3rd to last behind China and Japan. European equity markets also offer some attractive dividend yields well above 4%.
The July headline and core inflation numbers were higher than expected. However, lower energy prices, if sustained, should begin to help cool inflation fears. In addition, core inflation will turn lower because the economy remains weak and companies are failing to pass through higher input costs.
We have highlighted several times before that core CPI is likely at a cyclical peak: inflation lags economic growth by several quarters and the economy continues to slow. We still assign a very low probability to rising inflation on a cyclical basis, because wage costs failed to rise during the economic boom and are already rolling over substantially. In addition, the gap between headline and core inflation is likely to close dramatically, via a sharp decline in the headline rate as both energy and food inflation cool. Bottom line: Hawkish Fed rhetoric is unlikely to translate into a change in policy rates for a long time because inflation fears should gradually recede. Further economic weakness remains the more immediate threat.
Last week, we highlighted that the rising prices of commodities during 2008 was costing the average American an extra $1.77 per day this year, which was down sharply from the $4.77 we saw in early July when oil and most grains were peaking. In the chart below we calculated the ‘08 price change of the major food and energy commodities in the CRB index (Corn, Soy, Wheat, Cattle, Hogs, Oil and Natural Gas) and multiplied the changes by the annual per capita consumption of each item. While this method may oversimplify the actual costs, it provides a good idea of how changes in commodity prices have impacted consumers’ wallets. As shown, this week we have seen the daily increase in food and energy prices in ‘08 decline to $1.37, which is now at a four-month low. A decline from $4.77 to $1.37 per day in a little more than a month is huge for consumers.
Here are Bespoke’s unbeatable trading range charts for 22 key equity markets around the world. The light blue shading represents one standard deviation above and below each index’s 50-day moving average. The green shading represents between one and two standard deviations below the 50-day, and vice versa for the red shading. Most countries continue to trade into oversold territory, but some have been getting hit extra hard while others have rallied off of their lows. Some countries that failed to bounce off the July lows include Brazil, China, Hong Kong, Malaysia, Mexico, Russia and South Africa. On the other hand, India, most of Europe, and the US have come off their lows and are testing their 50-day moving averages.
Check out the new ‘China Only’ UPS ads, that we will never see on TV in North America. UPS is really pinning its hopes on these, now ubiquitous, China ads. Judging by the message of the ads, it appears that UPS understands that what the Chinese revere is good ol’ American ingenuity, probably more than American culture. You don’t need to understand Chinese to get it. China is an integral part of America’s corporate growth strategy.
In recent weeks, UPS’s ads have become ubiquitous in China, showing up on buses and subways, on TV and radio, and on the luggage carousels at Beijing International Airport. The tagline on the billboards targets China’s emerging business managers: “If UPS can fully assist the Beijing 2008 Olympics, they can fully assist you.”
Its not just advertising or talk. The company is putting its money where its mouth is:
UPS has been planning for this for three years, timing all the traffic lights along its Beijing delivery routes and measuring the height and width of every bridge, tunnel and overpass. The company estimates it will have handled 19 million pieces of equipment and other items by the end of the Games, using resources that include 2,000 employees and 217 trucks.
The target isn’t TNT, its China, and China acquisitions.
Treasury Secretary Henry Paulson gets grilled by Tom Brokaw — live from Beijing.
Running time, 07:36 minutes
Thanks to VJ for alerting TBP about this video, who posted the following comment:
“Brokaw repeatedly splashes Paulson in the face with reality on this morning’s Meet the Press: * Tells him the stimulus checks that his Treasury sent out “had about as much effect as a BB gun on a bear”. * Displayed his ‘CONTAINED’ quote up on the screen, “I don’t see [subprime mortgage market troubles] imposing a serious problem. I think it’s going to be largely contained.” * Showed the video of Chimpy saying that “Wall Street got drunk”. Paulson said that in 5 months, he exits, stage Right.”
Who knew Brokaw had the stones to grill a senior politico?
“Bonds! The credit crunch – you’ve got to go back to 1942 to last observe the contraction in lending in America to the corporate and industrial sector. You can’t go back far enough to find a period in the UK where mortgage loan growth has just stopped. There are queues outside banks to get mortgages. That is profoundly deflationary. This spike that caught everyone out in oil - when it went from 100 to 140 - got all the experts pointing the wrong way, and saying “inflation inflation”. When the banks are as insolvent as they are today, there is no dissemination. There is no ability to carry higher prices from the specific sector of commodities into the general and into general wages. You have to be willing to be contrarian at this point and own government bonds. And it’s hardly contrarian because — would you believe — if you had a portfolio that was solely comprised of 10-Year US treasury bonds then in the year to June this year you would have returned 15 percent. Ross, the market fell 20 percent, so you would be up 35 percent vis-à-vis the average stock. It’s ironic that we have this obsession with something, whereas the reality – the litmus test – is the Treasury bond, and it’s recording gains of 15 percent, and that’s telling you of the turmoil in the equity markets and the turmoil in the real economy.”
Investor Marc Faber, publisher of the Gloom, Boom & Doom Report, talks with Bloomberg’s Kathleen Hays about the euro’s performance against the U.S. dollar, the commodities market and the global economy. The euro fell the most in almost eight years against the dollar as traders pared bets the European Central Bank will raise interest rates as the economy slows.
click for video
00:00 Euro versus dollar; “global recession”
01:54 U.S. economy, ECB rates; commodities market
04:14 Investment strategy: dollar, Japan
Running time 05:18
Dennis Gartman says that the bull market in oil is over for now, and it could be as much as 2 years before it resumes. He goes on, when asked, to say that oil could fall below $80 a barrell and that he would leave the trading in oil to much smarter people. Given the risks, there are many other trades that he’s more comfortable with right now.
August 8, 2008 - (Courtesy: Investment Postcards) Donald Coxe, Global Portfolio Strategist of BMO Financial Group, has established a great “big picture” track record and built a large following over the years. His eloquently phrased investment recommendations are particularly insightful and are repeated in this post in an attempt to make sense of the troubled times encountered by financial markets.
Click Below for Donald Coxe’s, Basic Points - The Devils and the Deep Blue Sea
Courtesy: Bespoke Investment Group - August 4, 2008 - Below we highlight the 25 most overbought and oversold US ETFs based on their 50-day moving averages from our list of nearly 800 names. Currently, the biotech ETF (BBH) is the furthest above its 50-day at nearly 18%, followed by Turkey (TUR), the Ultrashort Oil&Gas ETF (DUG) and XBI. On the oversold side, natural gas (UNG) is trading the furthest below its 50-day at -24%, followed by more energy related ETFs.
Ann Davis has this report on an aspect of the selling in the crude market.
Christopher Peel, chief executive officer of London asset-management firm Blacksquare Capital LLP, which launched a new fund of commodities-focused hedge funds in June, says a big contributor to oil’s slide has been momentum trading by computer-driven commodity trading advisors.
Natural gas was cheaper on a relative basis than crude, but instead of rallying, the sell-off in natural gas accelerated.
Such traders move en masse in and out of commodity markets when prices hit certain thresholds. Sentiment on oil has turned bearish, and “the muscle at the moment is with the trend followers,” says Mr. Peel. Once such computer-driven traders all start to sell, that “by its nature, sucks in the discretionary managers” who also reach a point where they have to sell, if their portfolios have dropped so much that they need to cut their losses.
Another popular energy bet — on natural gas — has hobbled some hedge funds, Mr. Peel said. Several traders recently bet, incorrectly, that natural gas prices would increase, while crude oil would come down, since
There is little evidence to suggest that Chinese manufacturing competitiveness has deteriorated meaningfully.
The July headline and core inflation numbers were higher than expected. However, lower energy prices, if sustained, should begin to help cool inflation fears. In addition, core inflation will turn lower because the economy remains weak and companies are failing to pass through higher input costs.
