Markets Getting Severity Right, But Not Duration

Based on govt money prining, it looks like we're going to have a "jobless recovery". Kind of like the 1970s except Obama will be known as Jimmy Carter 2 instead of FDR reincarnated. Can you say stagflation?

Good post Noah, thanks. It's interesting to me how folks seem to be in awe of the equity markets and yet remain in the dark about the much larger credit markets, which are not in rally mode. And since it was a debt problem to begin with, I'd put my money on the credit markets as the better bellwether.

With what I think will be years of stagnant growth ahead of us, huge tax increases and service cuts looming, it's little wonder that apartment sales have dropped so fast. And yet, from what I've seen, prices are nowhere near an equilibrium. Almost makes me feel sorry for the sellers out there who are stuck chasing bids lower.

john - thanks...keeping manhattan real estate aside, credit has actually improved wonderfully in past month or so but I dont think they believe it will stay that way for long. Like a credit tsunami. Deal with one wave, and then take on the next wave.

this article may help reduce the wrong euphoria that is being called today and will combine perfectly with your prediction that the worst is still to come. congratulations on a realistic blog. http://news.goldseek.com/GoldSeek/1238441510.php

@In Debt We Trust,

The question is: when does the deflation start and the inflation begin?

The follow-up question is, if you expect debasement of the dollar, what do you hold instead of dollars? Gold coins? Cans of Spam? Bottles of Whiskey?

edit: that should read "When does the deflation stop and the inflation begin?"

Thisson,

Watch the credit markets - both the ABS and govt securities. As the Fed continues its buying binge of GSE debt and its recycling TALF program ("trash for cash"), it will continue damaging its balance sheet.

For early warning signals I am watching the UK since their leaders are basically miniature versions of Geithner and Bernanke. Any weaknesses in Q.E. (stagflation) will become apparent in London before the US economy is affected.

For your second question, I favor hard assets - particularly grains. El Nino conditions are developing in the Pacific but won't affect crops for a few more months.

It's a very interesting time right now -- there are so many conflicting ideas of what will happen in the future. Some seem to think the economy will be stuck in a depression/recession and deflation will take hold similar to Japan's lost decade.

What I am personally afraid of is the combination of declining housing prices and increasing food and energy costs. It's a bad combination of inflation and declining asset value. Although if inflation does indeed pick up in combination with population growth, it may keep housing prices reasonably high.

Personally this past month I've been taking long term positions in PM (as a hedge to the dollar) and MO, as well as NRG, COP, and i'm ttrying to research some commodity plays. Being in cash is really no longer an option with interest rates so low.

anyone have any ideas on Con Edison?

julanbi - I have read Prof Fekete's stuff before. For some reason, I have trouble grasping his concept of Burden of Debt, in particular:

"The liquidation value of debt is the amount that would liquidate it here and now. It obviously
depends on the rate of interest. The liquidation value of total debt is inversely proportional to
the prevailing rate of interest. In particular, halving the rate of interest by the central bank is equivalent to doubling the liquidation value of total debt."

Why would halving the interest rate by Fed be equal to doubling the liquidation value of debt?

If a pool of loans got their interest rates halved, the cash flow would produce much less and the overall bond/security value would be halved as well? Is this the basic premise? That halving the interest rate paid, cuts short the stream of future interest payments, and therefore 2x the stream would be needed to match the original? That is the burden of halving the rate? What am I missing here?

Noah,

Do you really believe that cash equivalents or gold is the right place to be right now?

Despite my belief that the recession/depression will last longer and be deeper than the optimists believe -- I believe that having like 90% cash right now or some insane % in cash right now is crazy.

That being said I still have 50% of my portfolio stuck in various cash positions -- earning between 1.7-5.0%.

RegularAnon - well we each have our own risk appetite and personal situations. With that said, I have my gold from mid 2007 prices, mid 600s, and only been trading some calls/puts outside the etfs. Im holding. It may go down, but its a risk Ill take. if its a matter of trust, Ill trust gold more than what banks are telling me.

You cant perfectly time this market for buy & hold. So, if your asking me that question now from a general perspective, I would assume you got hurt in equities with at least some exposure over past 18 months, and may have even jumped ship a few times.

If your asking me to deploy new capital right now, for IRA accounts sure, but for my general account in which I find myself taking positions with a 2-4 month horizon, I say no. Right now I have both shorts and longs on. Nothing full speed. Some gold and tbt. Calls on gold and some ultrashorts. Thats it.

I think rally has legs, but if we rise another 10-15%, I would get out of longs and buy more shorts. I dont think pain is over. Thats my trading perspective

Actually i was lucky... i withdrew everything from the market with an exception of about 7% of my equities portfolio at dow 11k summer 08 not pre-13k (kept a couple of mutual funds that were obviously decimated).

That as well as selling 2 nyc apartments that had no mortgages remaining on them left me with cash to deploy. I tend to think there is a lot of cash on the sidelines yearning to get in -- despite the bad news that is still in our future.

As far as investing, I started nibbling back in around dow (6600-7000) and am still buying sparingly now. And I've increased my trading activity as well around dow 7400-7500.

I just dind't want to be in cash or gold or whatever low yielding options.

Here's my strategy right now:
at the lows i didn't touch any banking/retail/travel/etc.

I bought:
MO at (15)/PM (35) /ED (34)(sold at 40 it just ran up too fast for me but i'll want in again.
NRG (17.2)/Just bought today COP at 41.15 (just a little though). some WYE (42.60ish) to make money off the arb.

I just think that energy prices for the most part have bottomed out and are bound too boom in the next 2-3 years -- but i think these stocks will move up before then...

I've been trading RSU and RSW a lot as well other momentum plays....

In my position, I guess I fear inflation much more than deflation.

Noah,

Also wanted to note, that I have been for the last year or so one of most bearish people around. For months, my money was out of the market -- i was buying 4% 6 month CDs, 12 month CDs etc. It basically was not until I saw the dow at 1997 levels that I thought there was money to be made. Also i just sold the apartments in late February -- forcing me to examine what to do with the cash.

Also if u notice the companies i chose mostly have high dividends -- one reason i chose that is that for any CD or cash investment i get taxed at a certain rate and the dividends are taxed as lower and save me money come tax time. I think people don't consider that nearly enough.

I appreciate you posting your trading thoughts and strategies.

Regular - well, sometimes you need luck in these types of markets, but I would say give yourself more credit. Something inside prob didnt feel right, and you reacted.

I think the fed will embark on a mission of quantitative easing unlike anything we have seen in a long time. I think they will be forced to buy treasuries for a while just to keep that market from rolling over. I think ultimately this is dollar negative, and that the US dollar will be the last to fall. Cant time it. But the view is a bigger picture one.

For now, debt deflation continues and dollar may strengthen further before end game takes place. Fiat currency crisis could mark the end to this cycle. I hope I am wrong, but I believe its such a possibility that I am willing to devote 20% of my portfolio to gold since mid 2007. Before that end game, fear/deleveraging and normal market movements will affect gold. The bigger trade covers years in the future.

Look at charts on TGD, so that is enough for me to be very cautious of equities. Ill trade it, sure, but I wont invest in it. Maybe in my IRA account which I leave alone. But even there I am waiting for another wave down before buying; hey, maybe it will never come! I just think it will

Noah,

I've given a lot of thought to gold and I think it's a wonderful trading tool/hedge/short term investment (even for a couple years). And you have obviously done well with it -- very well.

But after a lot of research I tend to agree with Warren Buffett that over the long term equities are the place to be. I think we're in agreement that in the end game the dollar is going to struggle badly. But even if fiat currency is crushed as we know it -- I don't think we're going to see people trading gold and silver at the grocery store in exchange for goods -- at least I don't think or hope so -- I think we're too far removed from that. Therefore I'd rather be involved with energy companies as well as agricultural plays

If you notice, my investments are very very defensive plays -- I just think these options offer great value as well as reduced risk. So if there is a big rebound -- for sure I will be lagging people in more cyclical plays. And Noah, I remain very tentative with equities...paying much more attention to my positions even companies like COP, MO, PM, ED companies that for the most part you can normally just ignore and collect dividends and reinvest them. sorry to everyone for bombarding the real estate blog with stock talk.

ehh, dont worry stock talk is always good. I think your plays are fine! I just tend to be more of a momentum trader, and haven't grasped the buy & hold strategy up until this point. Now, its getting very interesting from these levels. But in past years, equities were no where as cheap. Im def buying some longs in my SEP IRA on the next wave down for a buy & hold.

Re: where does deflation end and inflation begin, well, at zero. unless of course you are dealing with imaginary numbers, literally speaking. practically speaking, i read a good piece that argued inflation has a strong shot at actually being tame given that the major source of inflation is wage increases. given the amount of capacity utilization out there it will be a while before we see any meaningful wage pressure. this could end up being a case of goldilocks come lately....as for real estate, well, future is much less bright. i walk by the Related project at w 76th and they are all but inactive over there. put the skin on, left the scaffolding up around the base but nothing happening inside. i hear Equinox is sucking wind as well. they've been offering a 48-hour-only no initiation special for several months now.....

Noah,

Be careful w/the levered ETFs. The decay on those things is horrendous. Google "constant leverage" to see what I am talking about. FXP, SRS, EEV, and others are prime examples of what happens to leveraged ETFs. On the long side you have UYG (ugghhh!).

Better to stick w/vanilla spy and qqqq imho.

(Again, sorry to post stock stuff on a re board).

As for this 25% rally in three weeks – the consensus has swung to the view that this is a real inflection point. One warning. We saw this happen in late 2001 and early 2002 too … big, big rally; early cyclicals flew; the markets thought we were in for a V-shaped recovery … it was longer away than many at the time believed and many were burnt as a result. And keep in mind that the ‘second derivative’ on growth began to improve in the fourth quarter of 2001, and the S&P 500 still did not bottom for another year.

Currently, the equity market is priced for $70 on earnings on a going-forward basis, or a 75% rebound. And with retailing stocks up 30%, leisure/accommodation up 35%, and the homebuilders up 40%, the market is priced, amazingly, for a revival that is led by the consumer! (in fact, the only S&P sector that is now trading at P/E multiples that are at post-2001 highs is the consumer cyclical group). If we see that in the next year, we will be the first to hang up our Hewlett Packards. Being up 25% in a year and staying bearish … well, shame.

Achieving that in less than a month – come on. Too flashy for our liking.

In fact, let’s learn from history. The only times we have ever seen the stock market surge close to this much in such a short time frame were:

* December 1929
* June 1931
* August 1932
* May 1933
* July 1938
* September 1982

Only in September 1982 and in May 1933 was the equity market embarking on a new bull phase. But guess what? By the time the S&P 500 surged 25%, it had already crossed above its 200-day moving average. So call us when the S&P 500 crosses the 1,000 mark – another 20% to go. That is how deeply entrenched this particular bear market has been – that even after this massive rally, the onus is still on the bulls! Consider as well that on 4 of the 6 occasions that the equity market staged such a huge rally over such a short time period, it relapsed. So we are going to wait this out, acknowledging that we could be late to the party. We still feel the downside risks are too high to be involved.

David Rosenberg

Have to agree with the comments on the leveraged ETFs. Those things are for day traders only. Fast in, fast out and don't hold them for the long run. People think that if the index it follows goes up 20% over a 3 month period it should 2x or 3x match it at 40/60% but it's often not as pretty.

Anyways, to RegularAnon I wouldn't buy ConEd. They are in need of updating their infrastructure. With credit markets as they are today and if you believe in inflation in the future those capital expenditures will eat into the E in the P/E horribly. Besides, utilities often trade like bonds, inflation goes up - stock goes down. Why not look to a better play in one of the pipelines like ETE or KMP?

Meekshop

I have been thinking about KMP never looked at ETE though. Since I've never owned a MLP I have to research more about the tax benefits and implications.

I agree about the leveraged ETFs for the most part I actually held RSU for 5 days earlier this month. They need somehow to have disclaimers with those things for the general public -- but I think most traders/investors with any knowledge at all know what is going on.

[i]Based on govt money prining, it looks like we're going to have a "jobless recovery". Kind of like the 1970s except Obama will be known as Jimmy Carter 2 instead of FDR reincarnated. Can you say stagflation?[/i]

This is so right on. Stagflation from 2003/2004 economic base.

totally right on levered etfs! I do own some fxp, eev, mzz, and srs, but at good levels based on where they are now. The decay on these things is awful, as you say.

Its as if, once they fall below a certain price, they start behaving differently.

Case in point. SRS / URE are inverses of the same index right - DJ RE INdex. SRS is 2x inverse, URE is 2x the index. In oct, URE was at $25 and SRS was at $80.

Today? URE at $3, SRS at $39. Ummmmmmm, yea!

So, last october if you told me URE was going from 25 to 3, I would have thought SRS would be at $200!

totally right!

Thanks Noah for the great post.