Are We Now Seeing a "Mario Draghi Put" in the Marketplace?
A central bank put would have big implications for traders and long-term investors alike. Plus, stocks to consider right now.
MINYANVILLE ORIGINAL Do we now have a "Mario Draghi put" in the marketplace? I think that might be the case, and if I'm right, it has big implications for traders and long-term investors alike.
The concept of a central banker put, of course, dates back to the Greenspan era, when it was considered a lock that Fed chair Alan Greenspan would step in and save the day whenever a stock sell off got too drastic.
This may now be the scenario with European Central Bank president Mario Draghi, I believe, and I am not the only one. "Mr. Draghi may very well have eliminated the risk of a Lehman-style meltdown in Europe. This is a very big deal," concludes Ed Yardeni of Yardeni Research, who just did an extensive drill-down for his subscribers, on Draghi's recent barrage of public comments.
Let me explain my rationale, here, which I'll outline in four basic points.
1. Take Draghi seriously. I lived and worked in Italy as a journalist for several years back in the 1990s. I've met Mario Draghi. These days, Mario Draghi would not know me from Mario the Plumber. But I learned a lot about him while I was covering Italian economics and politics. He has a great deal of respect in Italy. And he deserves it. He's a smart guy, and he knows how to maneuver politically, even though he claims not to be a politician. I think it's possible that a lot of outsiders unfamiliar with Italian economic and political figures might be writing Draghi off as "just another Italian," but I think this would be a big mistake.
2. Get the Draghi message. In the past week or two, in extemporaneous and planned remarks, Draghi may have laid down a marker that things are very different in Europe now. He may have signaled that a 2008-style meltdown in Europe is unlikely, believes Yardeni. I agree this may well be the case. Most important, Draghi proclaimed the ECB will do "whatever it takes" to support the euro. "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough," he said recently.
What actually is the ECB mandate, as spelled out in the Maastricht Treaty? Understanding this helps us see where Draghi is going, and the rationale behind it. One key ECB objective is to "maintain price stability." The ECB is also supposed to support Europe's "common market and an economic and monetary union." This seems to give Draghi the latitude he needs. After all, the end of the euro certainly would not induce price stability, or support a common market and a monetary union.
3. Watch for the new Draghi tactics. Draghi also recently extended the ECB's mandate to reducing "risk premia" on national debt if the premia threaten to lead to the breakdown of the euro. Specifically, Draghi suggested the ECB will use the tactics of buying bonds at the short end of the yield curve to reduce risk premia, if necessary. But he did not let spendthrift Southern governments off the hook. He said that, ultimately, they must make risk premia disappear by getting budgets in line and making structural reforms in their economies. The governments will get short term help from the ECB, if needed, as long as they are making progress on the reform front. This, of course, was a nod to both reality (the ECB alone cannot "save" these governments, nor should it), and to the Germans (real changes in budgets really do have to happen, or any "bailouts" are a sham and a waste of money).
4. Play along with the game of chicken. Ultimately, Europe is in a big game of chicken right now, pitting the spendthrift Southern countries like Italy and Spain, against more fiscally cautious countries in the North, like Germany. Boiled down to basics, this means that Germany and other fiscally conservative Northern countries probably want to see enough fear in the markets, to pressure Southern countries into making serious fiscal and structural reforms, before Germany will agree to implicitly back their debt, which is the real end game here.
The "Draghi put" does not mean that this game of chicken has ended. Indeed, Draghi was careful to make it clear that governments in Italy and Spain have to take steps to get their fiscal houses in order.
Meanwhile, any signs that they are not, or any noise from the Germans, will spike Southern European bond yields and hurt US stocks. In other words the stock market volatility will continue, providing a great opportunity for traders and long term investors looking for opportunistic entries. But given Draghi's recent policy comments, I feel more confident suggesting that investors buy the significant pullbacks as trades or as long-term entries.
More Pullbacks Ahead?
Right now, I think sentiment has gotten a little toppy. The market has rallied a lot since I suggested it was time to buy stocks on June 5 (up 9%). Short term sentiment has gotten pretty bullish, a contrarian signal that some weakness lies ahead. Insiders have turned a bit bearish, according to Argus Research.
I'm not going to be surprised to see a little correction here of, who knows, 5% or possibly more. I'd ease out of trading positions now. Then I'd use pullbacks to put on trades, or get into long-term positions. I would not touch medium- or long-term positions.
There is surely plenty of room for more volatility between now and October. (Yearly lows and sell-offs often happen in early October.) For example, a lot of things have to happen before the ECB can act in the ways that Draghi describes, points out Yardeni. Spain would have to formally request assistance. Eur zone leaders need to decide to let their bailout fund buy bonds. A German court has to rule on the legality of Europe's rescue fund, probably on September 12.
Plus the US economy may show signs that it is sputtering. Ultimately, I think the US economy will be OK. Not great, but I doubt it goes into recession. Recent employee tax receipts have been strong, a signal that relative labor market strength of late may continue at modestly positive levels, at least. And the Fed has made it pretty clear it has a stronger bias towards further easing. And that it won't take much in terms of bad economic news to move in that direction.
I still believe this is a good time to establish long-term buy and hold positions, and this will be the case even more so, if I am right about near term downside volatility ahead. One reason I am bullish on stocks long term is that we just got a great contrarian signal from PIMCO's Bill Gross. Recently, he declared that the "cult of equity is dying." These kinds of high-level, sweeping proclamations by big market figures like Gross can be great contrarian signals, just like the classic magazine cover contrarian indicator.
Now here are some stocks I've recently suggested with buy limits that mirror prices at which interesting insider buying recently happened.
Coca-Cola (KO), Buy limit: $77
Coca-Cola has been a little weak lately, but the fundamentals continue to be solid. This company has a nice economic moat in its global distribution network and powerful brands, and it's continuing to expand that network in China, Russia and Brazil. So Atlanta-based Coca-Cola is a play on the ongoing development of a middle class in emerging market economies, a nice long-wave trend to invest in. It pays a 1.3% yield. Back in April there was a massive insider buy here by Barry Diller, a director, who plowed another $20.3 million into the stock. Another director also recently purchased. Diller bought around $77 and so I consider that to be a good buy limit.
JPMorgan Chase (JPM), Buy limit: $34.50
Yes, the recent big trading loss is scary. But I'm sticking to my thesis that JPMorgan's ability to make it through the credit meltdown with less damage than other big banks suggest a more prudent culture of risk management here, instilled in part by CEO James Dimon. Speaking of Dimon, he recently made a large purchase just below $34.50, which I'd set as the buy limit for traders or long-term investors.
Philip Morris (PM), Buy limit: $88
Yes smoking is very addictive and bad for the health of smokers. If that bothers you as an investor, then skip this one. If you believe in freedom of choice, or you think people are going to smoke anyway, regardless of whether you own a few shares of this company, then consider purchases of this name as good buy and hold position. Philip Morris handles the international sales of powerful brands like Marlboro, which makes it an emerging markets play of sorts. It also pays a 3.3% yield. Recent insider buying just below $88 suggests that's a good buy limit.
Deckers Outdoor (DECK), Buy limit: $46
Have Ugg boots finally jumped the shark? The stylish boots have been wildly popular for years, enriching shareholders of Deckers Outdoor, which sells Uggs and other footwear.
Now, though, investors and Wall Street analysts think it's game over for the stylish Ugg. Deckers Outdoor stock has fallen to the mid-$40 range from above $110 last fall. CEO Angel Martinez begs to differ with all of this. In the weakness created in part by analyst downgrades, he recently bought nearly a half a million dollars worth of stock just below $46. I love it when insiders go up against Wall Street analysts, using their own money. I'm no style expert, but my guess is that Ugg boots have not finally become passé.
Pacific Sunwear of California (PSUN), Buy limit: $1.82
I've been terribly wrong about this turnaround for about two years. But I'm not giving up. Recent sales numbers, and insider buying, suggest the turnaround here may finally be gaining traction. The insider buying, which was admittedly light, happened at $1.45 to $1.82, which I'd suggest as a buy range.
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