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What market catalysts can we forsee...? (A bearish post by checklist?)

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February 28, 2010 – Comments (28)

Last summer I did alot of digging around and calculating and adding and dividing and pondering and plotting on the valuation of the S&P.  I concluded then that about S&P 1100-1200 would put us at roughly historical valuations.  We've been at roughly the low end of that range now for months, and that is about where the market rally stalled. 

I know that the louder, more yappy bears llike to say, every day the market is up, that the rally "never ends" and all of this.  The fact is that the Russell 2000 is scarecely up in 5 months (a percent).  The S&P is down over the last 3 months and scarcely up in 4.  The DOW and Nas have faired a bit better, but lets face it, as in early last summer, we are in an extended period of a flat market.  

We will eventually break out of it.  A question of course is whether we break out to the upside or the downside.  I tought I'd take a stab at identifying and offering my $0.02 on some potential catalysts that could send us up, or down.  

POTENTIAL UPSIDE CATALYSTS:

continued improvement in conditions and profits for business:  companies have rebounded quite well from the brink.  balance sheets are largely shored up, business conditions are improving at basically all of the companies I follow, and the widespread cost cuts and efficiency measures lever many businesses to an improvement in top line etc.

Strength of catalyst:  medium to good.  The reason that I don't think this is an excellent catalyst for market growth is that if overall economic conditions are crappy, but businesses remain reasonably profitable, I think we'd probably see multiple contraction.     

probability of happening:  good.  Businesses have made great strides towards a sustainable return to profitability even if econmic conditions don't significantly improve.

continued improvement in economic conditions:  job growth, another quarter or 2 of significant GDP improvement, or a sustainable meaningful recovery.  

strength of catalyst:  medium to good.  I say medium to good, not good or excellent, because I think alot of this is basically priced in.  

probability of happening:  good.   The large contribution last quarter of inventories to GDP wasn't from restocking, it was from a slowdown in the rate of destocking.  Restocking will have to eventually occur.  Also business spending was slaughtered as part of the almost universal cost saving measures taken by businesses.  A rebound there would be huge for the economy.  And according to recovery.gov, only about 1/3 of the stimulus money has been spent so far.   I think there is still some gas in the recovery tank. 

 ongoing low itnerest rates. self explanatory.

Strength of catalyst:  low.  Probably already played out.  

Probability of happening:  we'll have low rates for a long time, extremely good probability

post-earnings-season happy period:  remember Q3 earnings season late last year?  The market was quite negative for a great deal of it despite generally positive reports.  GNW, a holding of mine, returned to profitability (analysts expected a loss) and promptly sold off 20%.  ASH, my largest holding at the time, reported in-line and promptly sold off 25%.  HIG blew it up and promptly sold off.  Etc.  However, in December for a period of several weeks the market rallied, with the companies that had reported well in Q3 recovering nicely.  Will we see the same thing now?  A March rally if for no reason other than earnings season is over?

strength of catalyst:  medium to high, but fairly short in duration

probability of happening:  medium to high in my view.  This earnings season has the market down and sentiment in the toilet, yet across the board companies reported favorably and beat expectations.

The Bipolar Monkeys that are wall street just get happy for a while.  One must never underestimate the capacity of the raving pack of monkeys to change mood, no reason for the mood change is necessarily required.  Markets just bounce or tank at times, and that could happen here.

Its a straight coin flip, and fairly transient in duration.  Could happen anytime over anything in either direction.

That the markets remain below average valuations of recent history.  I know, I know, I know, dear permabears, I know.  I've heard it all before, I've seen that p/e of the S&P chart.  (rolls eyes and vomits in his boots, just a little).  However, the fact is that stocks as a whole are reasonably priced and many stocks remain very cheap compared to historical valuations.  Doug Kass, certainly far, far from a permabull and a guy with an overall bearish lean, says this:

 

In my view #1 and #2 are reasonably likely for the next quarter or two.  I do think that there is some chance that the rise in efficiency at US businesses is structural / permanent and not cyclical.  The fear imparted from the crisis will not fade quickly, and I would guess that businesses will considerably use the increased profitability from their cost cutting measures to de-lever and get themselves in a solid financial position, or rock solid position.  Dividends and business spending may be slow to recover...

 

POTENTIAL DOWNSIDE CATALYSTS:

The Bipolar Monkeys that are wall street just get sad for a while.  One must never underestimate the capacity of the raving pack of monkeys to change mood, no reason for the mood change is necessarily required.  Markets just bounce or tank at times, and that could happen here.

Its a straight coin flip, and fairly transient in duration.  Could happen anytime over anything in either direction.

 

Employment numbers don't resume their path of improvement.  They haven't been good lately.  4 week moving avg of new claims has risen recently, January figures dissapointed.  I can see a situation where ... where this trend continues (claims never drop significantly from current levels for an extended periodof time) where the market sputters sideways to down, I can't see it causing a monster crash.

Strength of catalyst:  medium

Odds of happening:  low to medium in my view.  I think alot of corporate payrolls are stretched pretty thin and at least some net hiring will need  to happen in the near future.

Growth dissapoints going forward, double dip, etc.   I can see this causing a long side or side/down slog.  Or if combined with a period when the monkeys get sad, a sudden correction.  But...  I don't think this gets us the huge correction many people are yapping for  unless (see below) we have a surprise or a full blown panic or a significant double dip.  

Strength:  medium unless a significant double dip occurs, then strong

odds of happening:  low to medium

Stretched valuations cause a correction.  Bears love, and I mean they love.  Not love like I love pie, but love like Sampson loved Delila, like Don Gorske loves Big Macs, like hedge fund managers love profits.  They LOVE that thing! Everywhere one turns permabears are calling for a monster correction, if not a drop to S&P 300, based on that chart. 

Strength of catalyst:  low.  Valuations aren't actually stretched.  See my posts from this summer on the topic which showed that historical price/book and price/sales, etc etc blah would be roughly average at S&P 1100.  As conditions improve that level will rise (stayinga t the historical average valuations).  Also, sayeth Doug Kass, he of bottom-calling, hedge fund, and thestreet.com fame...  a noted bearish-slanting (even as described by himself) fellow and noted short-seller says, just this week:

 I continue to recognize that stocks are not meaningfully overvalued and that downside risk is limited. Stocks, unlike other assets classes (e.g., fixed income, private equity, residential and nonresidential real estate and commodities), have not had their valuations stretched. Most already expect a relatively shallow economic recovery. Also, inflation and inflationary expectations are subdued, and an elevated unemployment rate and large output gap are among the many reasons why the Fed will be on hold and the curse on cash will be intact for most of 2010.

Of late, there has been an increase in optimism with regards to profit growth based on better sales, improving margins (lower-than-expected unit labor costs) and rising cash flows, which are leading toward more aggressive share buybacks. The consensus for 2010 S&P 500 profit forecast is now moving toward (and even over) $80 a share, and the 2011 consensus is leaning toward the view that profits will exceed the previous 2007 record level of $92 a share.

Indeed, given low interest rates, benign inflation and reduced inflationary expectations, stocks, at under 13.5 times, remain statistically cheap against consensus 2010 S&P profit forecasts, far less than the historic P/E multiple of 17.5 times under similar interest rates and inflation readings.

Odds of happening:  low.  If valuations aren't stretched, and if anybody cares to debate it lets go over it on a stock by stock basis...    how can this lead to a correction?  IMO the best values exist at a variety of market caps (not just large cap "quality", which has become what "everybody" knows lately, and in the financial sector).

Continuing dollar strength causing a plunge.  Steve Leuthold has suggested that a STABLE OR STRENGTHENING dollar is needed for the next leg up in the markets.  We have seen, to an extent, decoupling of the markets from the dollar in recent months, and every commodity inflation cycle in history has eventually seen the markets decouple from weakening currency and rise without currency falling.  I think that while some people would be surprised, ...  the time for equity markets to decouple from currency may be reasonably at hand.

strength:  medium, but falling

odds of happening:  low to medium

Commodity price plunge leading to another deflationary shock.   Why would commodity prices plunge anew?  I can see several potential catalysts including:

1.  China stopping their stockpiling efforts.  China is buying more than its using, and a variety of china bears from Hugh Hendry to Jim Chanos worry about the commodity space for this reason.  

2.  Hedgies and speculators leaving the playing field.  Alcoa said late last year that "most" of the aluminum inventory was being held as an investment and not by users.  Oil prices are almost without a doubt being supported by speculators and not by actual demand.  The extent to which "commodities as investments" -vs- "commodities as things used in industry or society" isn't something I know, but from various indications its huge and at all time highs.  If the whole world goes long oil because oil is going up...  it creates a self fulfilling prophency, but what happens when they try to cash out?  Are we just going to store thousands of tons of aluminum forever?  

3.  Double dip, slowing of economic activity, etc.  I'm not in the double dip camp.  The most likely catalyst for a double dip, in my view, is a commodity price crash shock hitting commodity producers hard.  

The big deflationary shock of late 2008 saw basically all asset classes falling in tandem.  Commodities plummeted (probably partly due to selling by imploding hedge funds), stock prices plummeted, all types of debt and bond markets plummeted, save Govt debt.  Private equity markets plummeted, everything but government debt.  

If commodity prices crash anew, will it be an instant replay of 2008?  Probably not.  The money coming out of commodities will have to go somewhere, for one, and true genuine terrifying panics are rarely, if ever, spaced as close as 2 years.  Look throughout history, find one example of an epic market crash just 2 years apart from another one?  

Also, per Keynes, the market can stay irrational longer than you can stay solvent.  Even if this IS going to happen,t hat doesn't tell us when...  or how severe it would be.  

So I pose as a question:  what if the dollar rises, commodities plunge, but the equity markets don't plunge, or actually rally?  (at least rally outside of commodity related shares)?  That would be something close to a "least expected" situation.  Those who expect falling commodity prices assume that plunging markets will accompany them.  Those who expect commodities to rise via inflation and so forth don't tend to be market bulls.  

I think this situation - the not-real demand for commodities experienced currently in many markets - is one of the riskiest ones out there right now.  A crowded trade can unwind in a hurry.

Geopolitical instability.  War, etc. 

odds:  low to medium.  war is reasonably rare, but its certainly not impossible today

impact on markets:  probably fairly transient, but probably fairly dramatic when it sets in.

China implosion or instability or financial crisis.  China has a real estate bubble?  China cooking the books?  False economy from building cities for nobody and bridges to nowhere and capacity nobody needs?  Hendry thinks so, Chanos thinks so.  Many others are at least wondering. 

odds:  I haven't any idea

impact on markets:  probably noteworthy

European debt situation.  Bailouts will probably happen, problems will probably exist.  They will probably get baind-aided, life will probably go on. 

odds: good, but I think people are basically ready for it

impact: low, because I think people are basically ready for it

 

This post was written over sevearl sitting spanning all day as I wandered to and from my trusty 'puter.  I hope it is organized enough in its final form to be of some use.  

All in all, more plausible downside catalysts exist than upside.  Probably, that is usually the case.  Valuations are no longer extremely cheap and while I can't say I'm bearish on equities, I am mildly bearish on commodities as that trade is a bit crowded. 

For me my cash levels are higher than they have been since last June and my portfolio is meaningfully hedged.  Overall my position is defensively mildly bullish on US equities.  I intend to raise more cash, and, thought I shall disclaim first, I will offer a thought on the future of markets.

Disclaimer:  I suck at predicting near or medium term moves in markets, that has been proven again and again in my blogs here on the CAPs game.  I almost never get timing right, and when I do its probably as much luck as skill.  I am no macro economist, nor even a micro drunken economist.  I am just good at realizing when panic has gotten to irrational levels and capitalizing on it...

Prediction:  We will, sometimes in the reasonably near future, see a second wave of commodity price deflation.  Whether this comes in a rush or as a slow trickle, I don't know.  

That in and of itself isn't that interesting...  but I'll go out on a limb and say that equity markets don't crash alongside commodities.  The basis for that is partly that nobody expects it, partly that equities offer significantly better value relative to historical trendlines and historical valuations than commodities or bonds ...  and a deflating commodity mini-bubble leaves a great deal of money that needs to go somewhere.  And with negativity building around bonds...  decreasing levels of confidence about emerging markets clear superiority to mature economies...  that leaves equities as the last man standing.  

What would nobody expect?  Commodity price deflation + rising equities + falling gov't bond markets + rising dollar + falling debt and other bond markets + good economic recovery.  That is a combination that I have not seen anybody predict.  It would possibly be the outcome that would frustrate the highest possible number of people.  

As commodity stocks already feature crowded trades and premium valuations relative to other sectors, and as I think a second wave of price deflation in commodities is a feasible possibility, I am trimming commomdity stocks over the next month.  

28 Comments – Post Your Own

#1) On February 28, 2010 at 7:23 PM, chk999 (99.97) wrote:

I think geopolitical instability is the largest unknown. Some rogue state popping a nuke could take the economy (and market) down in a few seconds.

I think a big natural catastrophe is the really big black swan. If the Yellowstone super-volcano erupts, the US is pretty much toast.

I rate both an very unlikely, but not impossible. 

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#2) On February 28, 2010 at 7:53 PM, amassafortune (29.62) wrote:

Nice post. I agree that euro-based countries will continue to negotiate bailout packages, but I don't think the effect will be benign. With each bailout, the stronger countries of the EU are weakened. Austerity proposals to-date have been soundly rejected, so, as in the U.S., bailouts will be created in lieu of progress toward a real solution. 

I also agree many U.S. companies have adjusted their balance sheets and workforce and are prepared to do pretty well if we have a slow recovery. Small and medium companies have developed creative ways to work with each other to solve credit issues, bypassing their former sole reliance on banks. This trend will continue after recovery and banks may find it difficult to regain this growth segment. 

From my perspective, I don't think you have given enough weight to the extended unemployment problem. This pool of consumers represents a nearly 20% reduction of the customer base for the U.S. As benefits end, savings are depleted, and 401ks are tapped, I think the chances of a double-dip are significant. Because a strong recovery is not in place, state and local workers are increasingly threatened with layoffs. These next waves of public employee reductions, commercial real estate defaults, and unemployment that can no longer be simply dismissed as a lagging indicator, may overpower this weak recovery.  

I still hold high-quality longs in companies with strong balance sheets and recent growth trends, but these are completely hedged. A move to 1200 is 8.7% from 1104 - the maximum upside I see at this point. A few back-to-back down days, though, could easily erode a portfolio by 8.7% given the current fundamentals. Until we see a healthy correction or non-stimulus core growth, I'll continue to lean toward the bearish odds. 

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#3) On February 28, 2010 at 10:09 PM, SockMarket (42.84) wrote:

checklist,

its a shame you don't write longer blogs :). It was a good read, though. You are a good writer.

a couple points:

1) not all bears are created equal. I am a long term bear (on the US at least) but I am not pulling an alstry and calling for the destruction of the financial markets or a crash in stocks.

2) I would argue against oil dropping in price. Commodity cycles work well for metals and other things you can stockpile but for oil it isn't quite as good (because we go through it pretty quickly and production is about = to consumption). 

True, if hedgies leave it will push the price down, especially on gold and oil. However there are significant supply constraints (I think) on oil which will cause them to stick around.

Again a double dip would hurt oil, although I suspect we would see a much more reasonable (say, to $60 I don't have any data I have calculated) drop. Less if the crash is not severe.

Remember that investors are apt to rush to oil so if the price falls below what it costs to bring signficant new production online, the old stuff will peter out rather quickly and start us eating through current supplies, sending investors charging back in, so there is a price floor on the stuff. I don't know where the floor is but since much of the new production is not easy to access, conventional oil I would guess its close to $50 or $60 a barrel.

this, of course, doesn't mention the high inflation that is implicit with exceptionally low interest rates. 

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#4) On February 28, 2010 at 10:13 PM, Option1307 (29.83) wrote:

You've really been cranking out the thought provoking psots as of late, nice work!

All in all, more plausible downside catalysts exist than upside.

Agreed, I honestly don't feel the risk/reward at current levels is really in the bulls favor. That's not to say that there still aren't good deals out there to be found, there certainly are. It's just the number of bargins has dramatically decrased and now many stocks have limited upside with potentially a lot of downside risk associated with them.

Commodity price deflation + rising equities + falling gov't bond markets + rising dollar + falling debt and other bond markets + good economic recovery. 

Now that would be something to see!

Good post, thanks.

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#5) On February 28, 2010 at 11:22 PM, Tastylunch (29.41) wrote:

Checklist

I love this post.

I'm actually an industrial commodity bear (due to china) short term. Historically weakening commodities is good for stocks people forget that. I know my company would like it if our shipping costs were less. I'd say Americans in general would be pyshced to have sub 2.00 gasoline.So that bull argument makes sense to me.

FWIW I have a very simplistic view of what cause major movements in the overall markets

basically it can be summed up as degree of performance vs expectations.

or in other words large suprises = large moves. Which is pretty obvious sounding but I think a powerful rule  ought to be simple.

Anyway if you have never read it, John Hussman of Hussman funds has this excellent essay about how analyst expectations play such a huge role in stock movement. I highly reccommend it, if you never read it.

http://www.hussmanfunds.com/rsi/econsurprises.htm

Looking ahead the number one obvious bear trap I see going forward is Q3 and Q4 analyst expectations. They are expecting a continuation of a Vbounce in earnings. So far we have seen weak unemployment and shrinking revenue at most firms depsite string EPS improvments. EPS improvemnet cannot continue indefinitely without improvement in both factors.

The way I see it 

If employment picks up and revenues start to grow again across the board we keep rallying. If they don't, well....

Anyway fantastic and well thought out post.

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#6) On March 01, 2010 at 1:36 AM, awallejr (81.59) wrote:

Except that the stock market and commodity/oil directions seem to still be in sync.  I am a permabull for both for the simple reason that world population is growing faster and faster while on-world natural resources (not discounting the potential mining of the moon or Mars one day) continue to dwindle.

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#7) On March 01, 2010 at 9:59 AM, russiangambit (29.42) wrote:

Checklist, all good points. And normally I would love to discuss but what is the point of discussing when answer to everything is more money printing? See my rant here:

http://msncaps.fool.com/Blogs/ViewPost.aspx?bpid=347069&t=02003747771379460461

Which of your point addresses the continuious stimuluis via money printing - the first one? The game will go on unless it plays out all the way and most likely still ends in the deflationary collapse. 

 

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#8) On March 01, 2010 at 10:23 AM, Quantemonics (98.97) wrote:

Excellent post -checklist!!!

The only and obvious black swan you failed to mention is the coming debt rating downgrade for America slated for September or October, from my sources at several agencies.

Assuming Congress fails to rein in the out-of-control deficit spending spree in the summer, sky-rocketing interest rates and a double dip recession now look assured from my vantage point in 6-9 months.  At some point the markets will start to discount a huge list of new economic problems that we will be dealing with in late-2010 and 2011.

The SEC's cop-out 10% circuit breaker rule on short selling announced last week, is further evidence that the only thing that has changed in New York or Washington DC the last several years and new administration is that the Federal Reserve bank has added about $5 trillion in securities to prop up a fictional economy, and the Treasury has borrowed another $3 trillion or so America will never pay back.

If you can look the other way at this ponzi scheme and conclude all is well, I guess you are truly an optimist.

Otherwise, Kudos!!!

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#9) On March 01, 2010 at 10:27 AM, outoffocus (23.22) wrote:

Personally I like the raving pack of monkey's theory. In order for the market to stop behaving like a casino and go back to fundamental investing, alot of leverage would have to come out of the market somehow; and with record low interest rates, I don't see that happening anytime soon. 

Also,

Commodity price deflation + rising equities + falling gov't bond markets + rising dollar + falling debt and other bond markets + good economic recovery. That is a combination that I have not seen anybody predict.

No one is predicting it because fundamentals don't justify it.  Thats not to say it wont happen.  The only way I could see the above happening is if the Fed voluntarily raises interest rates.  That would be enough to set most of those factors into motion.  The rest of those factors would come into play if the US government uses common sense, reverses its spendthrift (socialist) course,  actually begins to pay of our debt and starts encouraging capitalism rather than hindering it.  And TBQH I think I have a better chance of hitting the powerball (and I dont play).

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#10) On March 01, 2010 at 2:08 PM, JakilaTheHun (99.93) wrote:

Great analysis, Checklist.  I enjoyed it quite a bit.  I also agree with most of it.

 

What would nobody expect?  Commodity price deflation + rising equities + falling gov't bond markets + rising dollar + falling debt and other bond markets + good economic recovery.  That is a combination that I have not seen anybody predict.  It would possibly be the outcome that would frustrate the highest possible number of people. 

I'm actually veering in the direction of most of those predictions.

Commodity price deflation - check - China will slow its buying, which cause commodities to drop.  Also, there is too much speculative activity in the commodity markets and it's worth noting that a gazillion ETFs have been created in the past few years for this activity.  Once a bearish trend starts, it will accelerated fairly quickly.

Rising dollar - check - the case against the Dollar isn't much of a case at all.  It's basically driven by some conspiracy theorists who don't have much understanding of how central banks operate.  The US debt load is nothing to sneeze at, but this does not mean a "weaker dollar" necessarily.  Right now, the Euro is the weakest link; not the dollar.  

Rising equities - check - I agree with you on this.  I think the market is *slightly undervalued*, but not highly undervalued as it was a year ago.  It will slowly crawl upwards.

Falling debt/bond markets - check - but I think this is being predicted by a lot of people.  Bonds are too crowded right now.

Falling gov't bond markets - check - but once again, I think this is the mainstream opinion.  

Good economic recovery - this is the one I don't see.  So we've heard about the U- the L- and the W-shaped recoveries ... I think the L- or U- will be most accurate, except I'd imagine an L- with a very, slow, drawn out upward slope. I'm thinking of this sort of like the Great Depression post-1933 and without a giant World War brewing.  

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#11) On March 01, 2010 at 2:51 PM, TigerPack1 (96.74) wrote:

I'm thinking of this sort of like the Great Depression post-1933 and without a giant World War brewing.  

You are assuming that China does not take back Taiwan, as retaliation for the U.S. and Israel taking down Iran in a few months.

The U.S. quickly moved an aircraft carrier from the earthquake relief effort in Haiti to the Taiwan Straight and South China Sea in the last month.

China is fuming mad at the U.S. presently as we pay zero for interest on the bonds China owns, and we have promised to devalue the Dollar and the corresponding value of all bonds owned by foreigners.  Perhaps you have not kept up to date on the trade war and internet attacks of late going on between the U.S. and China the last few months.

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#12) On March 01, 2010 at 3:14 PM, Tastylunch (29.41) wrote:

You are assuming that China does not take back Taiwan...Perhaps you have not kept up to date on the trade war and internet attacks of late going on between the U.S. and China the last few months

Believe me TP, Jakila knows all about Sino-US relations. He and I have talked about it a fair amount.

Personally I figure WWIII has a better chance of starting between India and China than between the US and China.

They aren't as mutually dependent and have significant regional economic tensions and share a common border.....

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#13) On March 01, 2010 at 3:38 PM, TigerPack1 (96.74) wrote:

Please describe the trade war and internet attacks going on between China and India, or the ownership of $2 trillion in bond assets that are being pissed on currently by one or the other nation's leadership and policy?  I was not aware of such.

Wars start over a battle for resources.  There are many of areas of contention including Iranian oil, U.S. control of the Persian Gulf, and dispute over the ownership of riches and economic production in Taiwan that are on the front burner now.

The average investor in the U.S. will ignore such until actual shots are fired.

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#14) On March 01, 2010 at 4:40 PM, Tastylunch (29.41) wrote:

TP

The talk may be understandably US vs China tit for tats tariffs, intellectual property thefts etc, taiwan etc, but there's been no blood shed yet. That's not true for China vs India. They actually went to war once recently in 1962.

China has been actively stealing entire towns along the border of Tibet. If land is not a resource I don't know what is

You'll want to read this TP

http://www.fundmymutualfund.com/2009/10/wsj-china-india-border-stoke-rivalry.html

And unlike The US, China directly competes with India for customers and regional influence

http://www.fundmymutualfund.com/2010/02/nyt-india-worries-as-china-builds-ports.html

India has been complaining loudly about china's currency policy as well which hurts their competiveness in terms of exports.

Like it or not China needs us at least to some degree,The bond market tie forces us to cooperate at least a  little. they don't need India at all. And India would be much easier to attack strategically as they are internally disorganized, have a horrible transporttaion system, are  nearby and have easy enemy to use as a proxy (Pakistan). China could clandestinely raid the Northern half of India with minimal fears of effective retaliation.

To  make matters worse for India, last I knew their emergencey line to pakistan for last minute nuclear negoitations is non functional as rebels in Hindu Kush destroyed the line.

if it were to escalate I'd imagine the US would jump in on India's side and prays to God that Russia would't back up china.

not saying it couldn't happen between the US and China but Chian vs India seems more likley to me if it were to happen anywhere.

just my opinion

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#15) On March 02, 2010 at 4:34 AM, checklist34 (99.71) wrote:

chk, world instability, do you think it owuld be a transient impact on the markets, like 9/11, or a catalyst for someting uglier?

 

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#16) On March 02, 2010 at 4:36 AM, checklist34 (99.71) wrote:

amass,

    your point about maximum upside -vs- downside is a fair one.  I think we sit at about fair value, and could move up with some flow of good news (employment being a big part of that), but could move down with some flow of negative news also.

    Risk to reward I guess...

    Now, on the other hand, as SentinelBrit pointed out the other day, we may be looking at some very favorable risk/reward in panic-zone European stocks like NBG and OTE and so forth.  Thats my new theory on where to look for deep value.

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#17) On March 02, 2010 at 4:46 AM, checklist34 (99.71) wrote:

Daniel,

    haha!  You're so right about that blog, it was a monster!  And it also had some sloppy editing...  I posted it in stages, as in I started posting it, then cooked lunch, then wrote some more, came back after a movie and re-did some.  lots of oop's in there.  lol

    Thats an interesting outlook on oil, and a solid argument.  Oil prices in the $30s aren't sustainable, limiting how far down the stuff is likely to go.  I don't know much about the oil industry, but I know that, for example, the drilling in North Dakota wouldn't be supported with oil at $30/gal.

     good post

 

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#18) On March 02, 2010 at 4:55 AM, checklist34 (99.71) wrote:

Thanks Option.

I 100000% agree that big, deep bargains are far, far fewer and farther between than they were a year ago.  Far, far.  The % move in the S&P greatly understates how many  mega-cheap stocks existed a year ago.  The S&P is up greatly, yes, from, say the beginning of 2009.  But only 20% or so.  Yet in the beginning of 2009 literally dozens of stocks were 5x or more off their highs and so forth.  Today, not as many at all.  

I honestly think these factors could combine into an interesting scenario:

1.  the bond markets are falling out of favor and are closer to overvalued than any other markets right now

2.  the recovery may well work out

3.  the dollar may strengthen (part or much of its low may have been artificial, via shorts) and commodities may drop as speculation in them wanes.  A rise in interest rates will certainly reduce the urge to sit on commodities. 

4.   most companies do not benefit from sky high commodity prices and

All of that makes for a potentially interesting view of stocks rising as other asset classes fall.  Where would money go if bonds fall out of favor and commodities are carried less broadly as investments?  

And what stocks are likely to rise?  Europe?  Japan?  Troubled, they are.  China?  What if sentiment sours on china due to all of this bubble talk?

It potentially sets the stage for the one thing nobody expects:  US equities outperforming other asset classes for a while.

This isn't a prediction, just a thought.

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#19) On March 02, 2010 at 5:00 AM, checklist34 (99.71) wrote:

Tasty,

     Good post.  Yes, the end of commodity inflation and/or a touch of commodity deflation has, historically, coincided (within a year or 2) to a new secular bull in stocks.  Very good for stocks, as its good for businesses.  Stability of price inputs allows things to reach equilibrium, and in general low commodity prices are good for far more companies than they are bad.

     Nice link to that Hussman article.  Hussman's/Tastys philosophy is not unlike that espoused by Zacks (www.zacks.com).  Zacks focuses on earnings estimate revisions.  Per Zacks philosophy, earnings estimate revisions drive individual stocks and, hence, the market. 

      There is merit there as well.  All of 2009 saw earnings estimates slowly creeping up, until we stand at $80 estimates for hte current year right now i believe...

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#20) On March 02, 2010 at 5:02 AM, checklist34 (99.71) wrote:

Good to see you, Awall.  I doubled down on ATPG at $12 recently.

For now the linkage between the weak dollar and oil prices and equities seems to be intact, but it has weakened over the last 4-6 months.

you are a perma equity bull or a perma commodity bull?  

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#21) On March 02, 2010 at 5:07 AM, checklist34 (99.71) wrote:

Gambit, thanks I appreciate it.

It is regrettable, as you hint in your link, that the first to benefit in this recovery are not the innocent bystanders but bankers and investors (like me).  I have ranted a couple of times lately on these blogs about how the US societies biggest flaw is who gets rich and how... not that some get really rich.  

Hopefully main street gets theirs in 2010/2011

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#22) On March 02, 2010 at 5:10 AM, checklist34 (99.71) wrote:

TickRTape,

    I don't think that a US credit downgrade is on the horizon...  many countries remain worse off (including their lack of control over monetary policy) and we retain the reserve currency.

    I wonder, also, how much of a black swan effect that would have, as its fairly widely anticipated/wondered about?  To truly shock the system, someting has to be, well, a shock, perhaps?

good post, thanks

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#23) On March 02, 2010 at 5:13 AM, checklist34 (99.71) wrote:

outfocus, i think your paragraph on the gov't was fantastic.

I think the scneario could play out in some sneaky ways.  The dollar could strengthen just by accident.  Because the Euro tanks, because Britain is worse off, Because Japan is worse off, because China won't let their currency float, because short interest in the dollar was probably at an all time high late last year.

And ... the rates raise you mention would probably catalyze money coming out of commodities-as-investments, but a strengthening dollar and simply stalling commodities markets could also catalyze a drop in commodity prices.  The old "well, that party is over, lets move on" trick.

 

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#24) On March 02, 2010 at 5:18 AM, checklist34 (99.71) wrote:

Jakila, thanks for the thoughts and y....

you're right about the bonds thing.  That is suddenly popular opinion.  Well, that government bonds had to fall has been one of those "everybody knows it" things for a year at least.   "everybody" tends to not usually be right.  

The economic recovery... honestly, I can't comment intelligently on it.  I can only hope that it works out, for the greater good of all.

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#25) On March 02, 2010 at 5:20 AM, checklist34 (99.71) wrote:

Hey Tiger, nice to see you.

WRT the war talk, China would not dare start a full blown war with the US, it'd be a fight they could not possibly hope to win.  

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#26) On March 02, 2010 at 5:24 AM, checklist34 (99.71) wrote:

In and among all the hoopla and all of recent wars in the middle east... the vast, vast superiority (a superiority which nobody anticipated in the 80s.  more on that later) of the US war machine (and machines) to the rest of the world seems largely lost. 

In the 80's, as a lad, I was a big fan of reading millitary equipment books.  like those books that talk about all the worlds planes and stuff.  They'd talk about how the M1 was inferior to this Russian whatever and the F-15 was outclassed by some new Mig, the mig 29 i think.

Then they met in the skies over Iraq.  And in the desert.  The M60 had little trouble moving through the Soviet sourced Iraqi armor from what I've read, much less the M1.  etc.

Nobody will start a full blown war with the US

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#27) On March 02, 2010 at 8:28 AM, JakilaTheHun (99.93) wrote:

TigerPack,

I'd give the odds of a Taiwan-China war as about 1 in 1,000 over the next decade.  I see it as somewhat unlikely.  It's not that the PRC doesn't want Taiwan.  It's that there's nothing to gain by going to war. 

It's 2010, not 1810 or 1910.  At this point in time, developed nations have such advanced weapons, that outright warfare ends up being counter-productive in the extreme.  Taiwan is heavily militarized, so China would have to throw overwhelming force at it in order to subdue it.  Therein lies the problem --- essentially, China would have to blow Taiwan to Kingdom Come in order to take it over --- but at that point, Taiwan would be devastated and worthless to China.

If China wanted war with Taiwan, it's had about six decades to pursue it.  It hasn't yet.  The longer it waits, the less likely it becomes.  There would probably be a lot of opposition in the PRC.  I see the PRC-Taiwan relationship somewhat like the early US-UK relationship.  The US-UK were hostile to one another for several decades after the Revolutionary War; even by the time of the Civil War, there were considerable fears that the British would ally with the Confederacy.  But by the late 19th Century, the US and UK harmonized their relationship and became buddy-buddy in the 20th Century.  I think PRC-Taiwan is evolving more in that direction than towards war.  

 

As far as the US and China ... there has been an ongoing trade war for years.  China's been manipulating its currency and enacting protectionist measures for years.  If China is mad over 0% interest rates, they shouldn't have been massively buying bonds and they shouldn't have created the Dollar peg.  

The entire belief that we're "printing away" is based on common misperceptions about American policy.  Fiscal policy and monetary policy are essentially separated in the US.  Monetary policy is administered by the Fed.  Fiscal policy is Administered by Congress and the President.  

Congress and the President are spending like mad.  The Fed is not "printing away."  In fact, the Fed's ideology is arguably too conservative in trying to keep inflation at 1%.  Money supply was only up 1.9% in 2009, in spite of an astronomical demand.  There are signs that we are moving back towards deflation.  

 

 

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#28) On March 03, 2010 at 10:41 AM, TigerPack1 (96.74) wrote:

I guess it depends on what your definition of "war" is, and "world war" for that matter.

I would say we are already in a low-grade fever world war with China, and have been for several years... Military vessels pass each other daily around Taiwan, we are still "officially" at war with North Korea (as China is N. Korea's largest ally), the Chinese government is continually attacking and hacking computers in the U.S. We are slowly increasing pressure on commerce between the two countries with trade barriers.  We compete with China for influence in Africa and the Middle East daily. etc.

We have been in "official" world wars for 10 of the last 100 years.  U.S. troops are shot at, or fire upon our "enemies" nearly 100% of the days the past decade, and roughly 95% of the days the past 65 years since the last "world war" ENDED.

U.S. troops are stationed in about 30% of the nations of the world, with "official" U.S. bases in at least 20% of them.

Really at any moment without much warning, the Iranian, Korean, or Taiwan situations could turn into shooting between China and the U.S. from a variety of circumstances too long to list here.

Overall, I am just saying, the odds of another world war making into the newspaper (requiring another draft for the military) are higher than the typical investor understands.

The odds of either 1) a shooting war with China breaking out, or 2) our federal deficit spending situation hammering U.S. finanical asset pricing, are growing DAILY, as China moves away from Treasury bond purchases.  This simple act may, in fact, be putting U.S. and China on a large scale military conflict collision course.  When national pride and economic stability get thrown into the mix, many things once thought impossible end up taking place.  All wars are generated by mistrust, patriotism and malice... All three are festering quickly on both sides of the Pacific, make no illusions.

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