“Across the entire‘Wealth Management’ side of our firm we have clients who are sitting on cash earning zero return. For that reason we think stocks have to move higher.”
The guy is right. I’m scared to step up and so are a lot of others. So I say back to him, “I’ll think about it.” I did, my thoughts:
The recommendation is to position for a year-end rally. That’s what’s supposed to happen. It happens every year. But all I see is uncertainty.
What’s the Best Case for the EU as far as the markets are concerned? The answer is that a deal in excess of $3 trillion is coming. This is what the market is currently looking for:
-A deal where there is a soft landing restructuring of Greek debt.
-A “solution”, where dozens of big banks will be infused with fresh government capital (a la the US TARP).
-The outcome will be the Socialization of the banking sector and the problematic public sector debts of the PIIGS. This massive transfer of debt/risk will be facilitated with a leveraged SPV.
-Numerous weaker financials will be absorbed by the State(s) (a la Dexia). The terms of those TBTF wind-downs will be market friendly. Equity holders will not be wiped out, Preferred and subordinated debt will benefit from a new State guaranty.
-Coupled with the above, there will be an IMF package to assist in the bailout to the tune of $400 billion.
That’s the Best Case? To me that is a disaster. If all this were to happen it would result in a near immediate downgrade of both France and Germany. The “guarantees” of the SPV guarantors would be devalued in a month.
If this is the way the world is going to go, it is a road fraught with risk. The EU would look like the USA with Fannie and Freddie. Trillions of dollars of debt and guarantees would be "off balance sheet". The losses would be born by Germany and France. I think there is a very real risk that a “positive” outcome in the EU will lead, in short order, to a broad based credit crunch in Europe. The solution to that problem will be for the ECB to print money and the Federal Reserve will have to (again) come to the rescue with a multi-trillion increase in dollar swap lines to the EU Central Banks. The "Big Bailout" is a very slippery slope in my opinion.
That is an outcome that I would rather ‘sell on the news’ then ‘buy on the rumor’.
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The Worst Case (as far as the market is concerned) is that the deep thinkers in the EU actually start listening to the voters in France and Germany. The result is that the “Grand Plan” to save the Euro experiment is a dud. An outcome under this scenario is a deal that is woefully inadequate to the task. A popgun approach. Any “successful” plan must put the German taxpayers at risk. A plan that falls short of today’s very high expectations would be seen through by the markets in just a few hours.
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On the USA side of things, there seems to be a disconnect between the real economy and equities. Over the next six weeks we have a few hurdles to cross:
-Another Continuing Resolution is necessary to keep the government running. The date for this is November 18th.
-There MUST be a resolution of the Bi-Partisan deficit commission on $1.4 Trillion of deficit reduction. (November 30th)
-As of today, the outlook for any 2012 stimulus is up in the air. Failure to pass any legislation will result in a $120 billion middle class tax increase that would kick in January 1. (The reversal of the “one-year only” 2% FICA tax reduction.) We may end up with the “Jobs Bill” being very much a slice of bread when a few loaves are needed. Should that be the case, 2012 GDP estimates would fall to the 0-2% range.
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It’s just a joke to think we are out of the woods with energy prices. Look at this chart of the real cost of crude for much of the country. This chart is telling me that $105 oil is the bottom of the range. It’s also telling me we are headed back up, not down, as Mr. Bernanke keeps telling us. (I discount NYMEX crude pricing as a measure of anything).
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There is a credit crunch that’s sneaking its way through the US debt markets. The latest evidence is in Jumbo Prime loans. See Zero Hedge for details (link). It’s creeping into critical areas of finance. Consider these words and charts from UBS:
The high yield primary market was virtually shut this week, with no deals pricing in the fourth $0 volume week since the start of August.
Since August, weekly volume has averaged a meager $699 million, versus $6.7 billion per week during the same period in 2010
Secondary markets have continued to trade wider. This week, the Broad Market, B-rated, and CCC-rated high yield indices all touched 2011 wides (and their widest levels since 2009). The BB-rated Index, while having fared better than its lower rated peers, also touched a 2011 wide during the week, and its widest level since mid-2010
It's increasingly clear that a credit contraction is in the works. In part, that’s due to folks like me that look at high yield debt returns and see capital loss resulting from default and restructuring. High grade debt pays nothing. Why bother.
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There is no good news coming from China over the next few months. Period. Depending on how the currency issue with the USA is resolved, it could get ugly.
We shall see what the markets will bring. There is too much cash on the sidelines and cash has been made trash by Bernanke. My broker friend may be right that the broad tape has to move higher. But I don’t trust it. I’ll keep the money in the wallet for a bit longer.
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Posts
Bruce,
ReplyDeleteEverything you have said is consistent with what I've been observing. The Irish politician David McWilliams has a very realistic view of what is happening in Europe right now:
http://www.davidmcwilliams.ie/2011/10/12/troikas-dirty-little-secret-is-theyve-failed-utterly
I read a few days ago that early this year, as part of their austerity plan, Greece had agreed to cut 20,000 government jobs. How well did they do in keeping their promise? Actually, they made it to 24,000 government jobs - hired! (as in, they did NOT cut, but instead increased). [I may not have the numbers precise, but it was something like this.]
Europe is hopelessly stuck in a losing situation. We will enter a recession along with her. The only possible way that it won't happen, is for most of the Central Banks to inflate.
Happy Halloween? Trick or Treat? Are you trying to say something there, or am I reading into it a little too much?
ReplyDelete“Across the entire‘Wealth Management’ side of our firm we have clients who are sitting on cash earning zero return. For that reason we think stocks have to move higher.”
ReplyDeleteAnd it has taken him 3-4 years to realize this?
There is no alternative to equities. There is no other possibility of a return. A lead story today is pension funds expecting ELEVEN PERCENT!!
This IS a casino. Good stocks will always have a bid. (But junior miners...not yet.) That's why no technician is even trying anymore to predict the timing of the much-awaited crash which may never come...
really good piece, Bruce...
ReplyDeleteThanks for the thoughts. Two comments on this, if I may. The end of the FICA reduction would actually be a large tax increase over the status quo of 2010 since the tradeoff for the reduction involved the elimination of the Making Work Pay credit--around $50 billion. The net effect will have been a tax increase which fell primarily on the lower middle class. What does that do for consumption? Secondly, concerning cash on the sidelines--many retail clients are opening up their statements this week and freaking out, and the 401K participants are getting their quarterly readings and losing real money. The mentality could easily shift to--I'm going to cash, at least I won't lose any money that way, especially among retirees who are drawing down their funds.
ReplyDeleteFiat currency will implode after 3 trillion infusion.
ReplyDeleteNew world currency being printer now covertly.
Will be backed by gold and petrol. Best returns
Are hard assets that can not be diluted. Fixed supply
And increased demand will cause astronomical
even meteoric rise.
Yes, financial markets might be subject to another sell-off.
ReplyDeleteSo – does cash on the side mean, in essence, to be long USD
ReplyDeleteIt doesn't matter what the news is Bruce. People sitting on cash get antsy. The cash burns a hole in their pockets. The cash has to go somewhere. Bonds? Bubble territory. Real Estate? Not with interest rates at record lows. Real Estate hasn't gone anywhere but down with low interest rates, now the interest trade will go the other way. We may just see the mother of stock rallies. There may be some baby boomers cashing in, but most of them still have a few years to save, and they are behind, and they have been stung by real estate and stocks, but stocks are more liquid....so. (and high volume with sideways price in many of the banks, either a painful break coming, or accumulation at a bottom).
ReplyDeleteBottom line, the cash will go somewhere...
gh
I anticipate one more march upward of the market, perhaps into 12,000, then things will get very very sour very very quickly. Once the stupid money gets played significantly, all bets are off and we are headed for a real dizzy of a ride down, IMO.
ReplyDeleteBruce;
ReplyDeleteYou have been throwing around that testosterone-induced Wall Street jargon far too long.
"Cash sitting on the sidelines" indeed. For every buyer there is a seller. At the end of every day (or any period) the markets are in equlibrium.
Your predictions are just a guess and are not worth any more than anyone else's. If they were, you would be very, very wealthy and not sharing your secrets with the commonfolk.
Regarding BigEd’s comment: “Your predictions are just a guess and are not worth any more than anyone else's. If they were, you would be very, very wealthy and not sharing your secrets with the commonfolk.” Revelations 15:8 says, “And the temple was filled with smoke from the glory of God, and from his power; and no man was able to enter into the temple, till the seven plagues of the seven angels were fulfilled.” Meanwhile Big Ed is going by the old paradigms, not noticing the weather changes, the cash value. Happily oblivious. Why is making money the criteria to talk about economics and about cash? Can talking about where cash, bailouts and destruction of the dollar in your pocket be enough to warrant alarming others? Is this closed mouth policy of BigEd warranted? No, he means to say you are only important with a big wallet of bills. And BK is telling you, hey, the dollar bills are worth 5 cents, you dummy.
ReplyDeletePontification deliberation and then short term kick the
ReplyDeleteCan down the road policies shall ultimately cause contagion
Denigration and the disintegration of capital markets.
Expect a new one world currency after the collapse
Based in part with a gold standard or petro backing.
Such as banks and public sector debt problems PIIGS of socialization. This will promote the SPV's debt leverage / risk mass transfer.
ReplyDeleteDebt
Such as banking institutions along with public market debts troubles PIIGS of socializing. This will likely encourage your SPV's debt influence Per threat bulk move.
ReplyDeleteBuy RS Gold
Runescape Gold