Tuesday, April 7, 2015

The end of the word is nigh! Not really but it makes a fun title...

Although corporate world is not doing so great with numerous earnings recasting... the world's stock market continue to operate near "all times high".  The question is why?  My guess is liquidity; there's a perception that markets will correct but that "They" (the investors) will be able to get out before the solids hit the fan.

I really have no opinion on the market, but there remains a global weakness (ok China's PMI was just above 50 a few days ago -- which means expansion), but still it remains that Europe is a trouble, Japan just had its 5th or 6th failed bond auction (BoJ monetised the debt instead -- printing more Yen), and America's 4th quarter of 2014 and the first of 2015 are looking weak.

Oil prices that should be a massive stimulus for the global economy -- down from $105 to $51 should have acted as a massive stimulus engine, in fact it did help the US a bit, but the rest of the world saw virtually nothing in terms of GDP growth stimulation -- it may have delayed a recession in Europe, but no one knows the full impact.

So what about this end of the world thing?  The market is not cheap by any measure, using the p/e or p/e10 or other measures it shows that the market is in the expensive range of things (some would say that the market is near its 95 percentile range (the high point in 2007 after the market crashed!), so when you hear that Mohamen El-Erian and Julian Robertson (not exactly lightweight guys) are both saying we are near a massive correction is on the cards, its time to pay attention.  These guys did a very good an compelling study of the p/e numbers.  I really have nothing to add here!

In reality what is important for investors is less where the market is going, but the probability of the market going up or down.  For institutional investors the problem is different, they have no choice than to be in the market -- they can increase the cash portion to reduce the impact of a massive correction -- providing ammunitions for when the market bottoms, but they cannot be "out of the market", so they change the weighting towards non-cyclicals (if such things exist), it would seem to be a good idea to get out of the auto sector (its been on fire recently) consumer discretionary too, since income continue to lag economic growth.

Anyway, the end of the world is not around the corner, but after an 8 year growth its time for the markets to correct.

P.S.  State of my Bet:  Well I am looking increasingly "right" in my analysis -- I mentioned many weeks ago that if the Greek Prime Minister didn't get the attention/solution he wanted from Europe he would call new election to get a "get out of jail mandate" -- a mandate to exit the Euro.  There are now rumours of such call to elections


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