Have We Reached a Top?
By James Kostohryz Jul 28, 2009 2:25 pm
Bullish, bearish cross-currents don't preclude a blow-off.
When I terminated my core long position a couple of weeks ago for reasons explained in Ten Reasons the Countertrend Rally May Be Over, I outlined a series of factors I believe may manifest in the later half of 2009 and the first half of 2010. Indeed, most of these factors will be more back-end loaded, as negative factors tend to build on one another and gain momentum in time through the medium of psychology and social mood.
It's my view that the flow of economically relevant events -- and perceptions of these events --are in the early stages of a transition. In this case, a transition means the flow of relatively good news will tend to wane somewhat while there's an uptick in relatively bad news. This is what one would expect at a top.
However, it's to be expected that during the transition (or topping process), the distribution of news flow between good and bad will even out for a while.
Let's take recent data for an example. On May 14, I wrote an article positing the prospect for a short-term rebound in housing prices. At the time, I was roundly criticized for even suggesting the possibility. Well, since the article was written, we've witnessed 3 consecutive months of increases in home sales, and today we got the first month-over-month increase in home prices. This is very bullish.
Also bullish was the Richmond Fed number today as well as most of the recently released PMIs. Leading indicators have been telling us for over a month that a recovery of some sorts was right around the corner. And earnings have been beating the socks off consensus estimates.
Yet it’s not all a bed of roses. The revenue numbers in the earnings reports have been underwhelming. Positive and negative surprises for revenue are running about even. However, there have been quite a few massive misses, which put a negative tinge on the revenue data overall. Some bearish analysts have started to spin this revenue data into a complaint about the bad “quality” of earnings. Perhaps even more ominous for the future is the turn in consumer sentiment. Today’s number registered 46.6 versus an expected 49 – a significant miss. This is the second straight month of declines after the index reached an intermediate term peak in May at 54.8. This is a very pronounced shift in reported sentiment in such a short time frame. Remember, psychology is the filter through which human beings see the world. This is critical at a time like this.
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Copyright 2009 Minyanville Media, Inc. All Rights Reserved.
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Reply
2009-07-28 10:35:50
nice update and article!
also liked the distinction 'tween having a trading short position vs a core net short position, nice, thanks!
2009-07-28 11:23:31
presidential popularity NEVER correlates to market
James, I agree with the prudence of keeping a tight leash on any positions here because the market might swing either way. I disagree totally that one can use Presidential Approval levels or trends to assess market direction or strength. Go have a look at the course of the S&P 500 since 1960 and you will find that its movements NEVER correlate to Presidential Approval polls. Most recently, Obamao has been losing public support for months but the market remained in rally mode; during His first three months His approval ratings were higher than His popular vote majority but the market plunged. Bush's approval was LOUSY and DECLINING all through the 2003-2007 bull. Go back and have a look before you postulate something so irrelevant.
2009-07-28 15:14:02
Quality of Earnings
James, as always great article and I totally agree with you, after the earnings surprises (specially the bank sector) have already passed what could catalyze the markets and extend this rally???
I would like to add that in these earnings surprises we have to be very careful, you have to look for the quality of earnings; a good example is that the majority of these earnings surprises have come from cost cuttings. Don't read me wrong, there's nothing wrong with that, but at the end beating earnings estimates while the administration is in a cost cuttings process, instead of growing revenues process, this fact simply is telling us that the company is shrinking its size (yes like Costanza), and for a forward looking market that isn't bullish.
Fil
I would like to add that in these earnings surprises we have to be very careful, you have to look for the quality of earnings; a good example is that the majority of these earnings surprises have come from cost cuttings. Don't read me wrong, there's nothing wrong with that, but at the end beating earnings estimates while the administration is in a cost cuttings process, instead of growing revenues process, this fact simply is telling us that the company is shrinking its size (yes like Costanza), and for a forward looking market that isn't bullish.
Fil
2009-07-28 15:15:21
How it is interpreted is crucial
we should find a way to get corporations out of our corrupt deliberative process and ensure they never become either too big to fail or so big that they improperly influence markets and our government. The thing that worries me most about our current situation is that while our current leadership, on economic strategy issues, talks about the mistakes of their (and our) past, something is moving their policies pointing us back in the same direction.
Industry profit at any cost has captured intellectually, both public policy and a wide range of public intellectuals/pundits. People really believe that we need something like today's financial sector in order to resume reasonable growth in this country. This is despite the fact that financial innovation has added little to productivity in the past two decades, and it flies in the face of the obvious damage done recently by over-borrowing schemes on a myriad of levels. The problem is further extended by the fact so much money has been made and plowed right back into further financial influence by the same special interest industries. So, in a more profound sense, the political strategy of Big Finance is proving incredibly effective...they survived the crisis essentially intact, they will keep the rules that have served them (but not us) well, and their day-to-day influence in the corridors of Washington power has never been higher...as for atonement you will hear them argue that we should now "move on." …and just in case you haven't figured out who is behind any push to confuse, blunt, and shape all substantive current reform measure… it is those that have benefitted the most. Most would be frightened to affirm this truth.
2009-07-28 16:02:19
presidential popularity NEVER correlates to market
Hi Thomas:
I did not make any claims whatsoever about the historical record of presidential approval ratings.
I made a claim that this time, this will be something important to monitor and I explained why. We are in a financial crisis. Confidence in the government's ability to engineer a recovery is key. If people lose faith in this, they will lose faith in the prospects for recovery.
I might be wrong. However, this is my claim and I stick by it. We will see in a year or so whether it was of any relevance.
I did not make any claims whatsoever about the historical record of presidential approval ratings.
I made a claim that this time, this will be something important to monitor and I explained why. We are in a financial crisis. Confidence in the government's ability to engineer a recovery is key. If people lose faith in this, they will lose faith in the prospects for recovery.
I might be wrong. However, this is my claim and I stick by it. We will see in a year or so whether it was of any relevance.
2009-07-28 16:23:05
Quality of Earnings
Filiberto,
I am not as bearish as many analysts are regarding the fact that earnings are being generated through cost cutting. I see this rather bullishly. It is a great tribute to the flexibility of US companies and the US economic system. The sooner companies can stabilize their finances the sooner the economy bottoms and is in a position to grow. The truly dangerous thing is what happened in Japan in the 80s and 90s and what may happen in Europe this time around: That companies, due to labor rigidities, are not able to cut costs.
Adjustment is painful. But the quicker it is made, the sooner the recovery can take hold.
I am not as bearish as many analysts are regarding the fact that earnings are being generated through cost cutting. I see this rather bullishly. It is a great tribute to the flexibility of US companies and the US economic system. The sooner companies can stabilize their finances the sooner the economy bottoms and is in a position to grow. The truly dangerous thing is what happened in Japan in the 80s and 90s and what may happen in Europe this time around: That companies, due to labor rigidities, are not able to cut costs.
Adjustment is painful. But the quicker it is made, the sooner the recovery can take hold.
2009-07-28 17:24:48
short EEM and S&P 500
James, do you expect EEM outperform S&P 500 to the downside IF a market sell off occurs? Thx
2009-07-28 18:30:31
short EEM and S&P 500
I very much expect emerging markets to fall more than the S&P over the next year or so in the scenario which I have outlined.
2009-07-28 20:58:46
Earnings
The only reason that so many companies are beating expectations on earnings is because Wall Street put those expectations very low. They know how to play pyschological games to bring the money back into the market.
2009-07-28 21:50:34
presidential popularity NEVER correlates to market
Hi James,
I'll take that bet. Let's be clear on the grounds and terms.
But first, housekeeping:
I did not say that you claimed anything "about the historical record of presidential approval ratings." I said you should familiarize yourself with the historical record and note that it does not support (in fact, it exactly contradicts) any correlation between such polls and the market. To defend yourself from a charge not made is straw man arguing.
Granted, your article claimed no specific or formal correlation with the market, but said the polls are a "key metric" that serve as a "proxy for consumer and business confidence." However, unless that sentiment correlates to market moves (and it has, historically, but loosely) it is irrelevant to trading and investing. The views of the poll respondants regarding the economy, the importance or advisability of further government intervention, and its prospects for improving the economy are quite beside the point unless this "confidence" influences the market and can be used to inform predictions regarding market moves / direction. That is what is meant by the term "key metric." The logic of your position leads inevitably to the connection between those approval polls and market moves.
Now, the basis of our bet - are our positions summed as follows?
You:
1. reckon His approval ratings are a proxy for consumer and business confidence even though they have not correlated during His term except over the last few weeks, nor in any previous President's term,
2. but they will going forward, because this time "we are in a financial crisis. Confidence in the government's ability to engineer a recovery is key. If people lose faith in this, they will lose faith in the prospects for recovery" and
3. His approval ratings are therefore a "key metric."
Whereas I:
1. reckon confidence and the market will both move without correlation to His approval, since historically they have for every other president,
2. remember that we lived through financial crises before and managed best when managed least. He was elected with a slim majority, while the rest (and now some of those experiencing buyers' remorse) wish He would get LESS involved in the economy, have NO faith in (or desire for) His engineering, and believe the government is key to our plunge, not our rise, and
3. that His approval numbers are therefore irrelevant and are NOT a proxy for anything to do with the market or "confidence."
In a year, time's up and one of us will be right. Shall we bet a beer (winner's choice) on it?
I'll take that bet. Let's be clear on the grounds and terms.
But first, housekeeping:
I did not say that you claimed anything "about the historical record of presidential approval ratings." I said you should familiarize yourself with the historical record and note that it does not support (in fact, it exactly contradicts) any correlation between such polls and the market. To defend yourself from a charge not made is straw man arguing.
Granted, your article claimed no specific or formal correlation with the market, but said the polls are a "key metric" that serve as a "proxy for consumer and business confidence." However, unless that sentiment correlates to market moves (and it has, historically, but loosely) it is irrelevant to trading and investing. The views of the poll respondants regarding the economy, the importance or advisability of further government intervention, and its prospects for improving the economy are quite beside the point unless this "confidence" influences the market and can be used to inform predictions regarding market moves / direction. That is what is meant by the term "key metric." The logic of your position leads inevitably to the connection between those approval polls and market moves.
Now, the basis of our bet - are our positions summed as follows?
You:
1. reckon His approval ratings are a proxy for consumer and business confidence even though they have not correlated during His term except over the last few weeks, nor in any previous President's term,
2. but they will going forward, because this time "we are in a financial crisis. Confidence in the government's ability to engineer a recovery is key. If people lose faith in this, they will lose faith in the prospects for recovery" and
3. His approval ratings are therefore a "key metric."
Whereas I:
1. reckon confidence and the market will both move without correlation to His approval, since historically they have for every other president,
2. remember that we lived through financial crises before and managed best when managed least. He was elected with a slim majority, while the rest (and now some of those experiencing buyers' remorse) wish He would get LESS involved in the economy, have NO faith in (or desire for) His engineering, and believe the government is key to our plunge, not our rise, and
3. that His approval numbers are therefore irrelevant and are NOT a proxy for anything to do with the market or "confidence."
In a year, time's up and one of us will be right. Shall we bet a beer (winner's choice) on it?
2009-07-28 23:04:53
German Helmut....
We are setting up for a German Helmut formation...
2009-07-29 11:39:02
presidential popularity NEVER correlates to market
Hi Thomas,
Probably the only way to judge this well is to do it somewhat qualitatively. For example if we simply say: If the market and poll numbers are down a year from now, presumably I would win. The problem is that the correlation might be merely coincidental.
A qualitative element need to be introduced to be able to establish some notion of causation. That shouldn't be too hard.
Finally, some housekeeping on housekeeping. You cited historical evidence to refute a claim I made. However, I did not base my claim on the historical correlation. I based it on another rationale. Do not assume that I had not seen the data. I had. That is why I did not mention that this metric had any sort of history of relevance. If I thought a historical data series supported my conclusion I probably would have mentioned it.
My view is that this metric will be usefull in the present environment.
Finally, I believe that you have characterized my argument fairly.
Probably the only way to judge this well is to do it somewhat qualitatively. For example if we simply say: If the market and poll numbers are down a year from now, presumably I would win. The problem is that the correlation might be merely coincidental.
A qualitative element need to be introduced to be able to establish some notion of causation. That shouldn't be too hard.
Finally, some housekeeping on housekeeping. You cited historical evidence to refute a claim I made. However, I did not base my claim on the historical correlation. I based it on another rationale. Do not assume that I had not seen the data. I had. That is why I did not mention that this metric had any sort of history of relevance. If I thought a historical data series supported my conclusion I probably would have mentioned it.
My view is that this metric will be usefull in the present environment.
Finally, I believe that you have characterized my argument fairly.
2009-07-29 11:58:39
Quality of Earnings
Jemes, I think we are talking about two different things, I see your response to focus on the quality of the business management, and I tried to focus on the quality of earnings. The quality of the management is always bullish and something you have to look for a company to have and achieve, the management in my point of view is the switch that makes a company successful or a total wreck.
About my point for the quality of earnings I think Minyan Peter's article explain it much better than me.
About my point for the quality of earnings I think Minyan Peter's article explain it much better than me.
2009-07-29 12:06:48
anyone saw China stock market today?
Speaking of emerging markets, the biggest & nastiest of them had a horrific plunge today (5%). It hasn't done anything to that degree for the last 8 months -- nowhere close. In the long-term markets are driven by fundamentals, in mid-short term... "cross-currents" between fundamentals & sentiment are at their highest.
China skeptics (me included) have always believed fundamentally, those Chinese boom in lending is unsustainable and that it's a matter of time it turns. How big & how horrific... I guess that's where the sentiment factors come in. In 2007, the heavy plunge in Chinese markets occured in the proximity of US market top in October. In a sense, it marked the turning point in crowd sentiments.
One has to wonder... IF the Chinese stock market continues its plunge, will it mark another turning point? And we've only talked about China, the topic of Europe is most interesting when the big picture of their banks & the inherent problems in the euro is discussed in depth. Nigh is the huge turning point?
China skeptics (me included) have always believed fundamentally, those Chinese boom in lending is unsustainable and that it's a matter of time it turns. How big & how horrific... I guess that's where the sentiment factors come in. In 2007, the heavy plunge in Chinese markets occured in the proximity of US market top in October. In a sense, it marked the turning point in crowd sentiments.
One has to wonder... IF the Chinese stock market continues its plunge, will it mark another turning point? And we've only talked about China, the topic of Europe is most interesting when the big picture of their banks & the inherent problems in the euro is discussed in depth. Nigh is the huge turning point?
2009-07-29 19:32:24
presidential popularity NEVER correlates to market
Hi James,
I agree that a mere snapshot would not satisfy. Qualitatively, a pattern of sympathetic moves should be plain if the approval poll(s) are now correlated to the market. Changes in the poll must be a leading (by at least a little bit) indicator if presidential approval is a "key metric."
For "confidence" as a check, shall we remain with the venerable one disseminated by The Conference Board (http://www.conference-board.org/ economics/ConsumerConfidence.cfm)? And which poll(s)? I prefer Rasmussen, since his group does a daily tracking poll that has accurately predicted the last six election cycles straight.
Period 7/28/09 - /10?
I agree that a mere snapshot would not satisfy. Qualitatively, a pattern of sympathetic moves should be plain if the approval poll(s) are now correlated to the market. Changes in the poll must be a leading (by at least a little bit) indicator if presidential approval is a "key metric."
For "confidence" as a check, shall we remain with the venerable one disseminated by The Conference Board (http://www.conference-board.org/ economics/ConsumerConfidence.cfm)? And which poll(s)? I prefer Rasmussen, since his group does a daily tracking poll that has accurately predicted the last six election cycles straight.
Period 7/28/09 - /10?
2009-08-03 02:12:42
presidential popularity NEVER correlates to market
Thomas,
Rasmussen is good. RealClearPolitics has a good meta poll also published daily. Thru 2010 is good enough. And for purposes of what we are looking for, we should look for some kind of significant move in the market and see if it can be related to the poling data. If there is no significant move it could just be noise.
When corresponding regarding this subject, please contact me at james@minyanville.com as I am not notified when you post to this article.
Rasmussen is good. RealClearPolitics has a good meta poll also published daily. Thru 2010 is good enough. And for purposes of what we are looking for, we should look for some kind of significant move in the market and see if it can be related to the poling data. If there is no significant move it could just be noise.
When corresponding regarding this subject, please contact me at james@minyanville.com as I am not notified when you post to this article.
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