Eight Rays of Light
Here are eight rays of light that could potentially burn bright for the bovine.
The holidays are a time of giving back and being cheerful. As we’re a reflection of our cumulative actions, there is also a tendency to do the right thing with hopes of affecting positive change.
That energy encapsulates the human spirit and indeed, the world would be a better place if we operated with that mindset throughout the year. We need to believe in something and faith, in each other and within our financial system, is a fantastic place to start.
As we’re apt to say in Minyanville, however, hope is not a viable investment vehicle. That is becoming increasingly evident as we wrestle with moral hazard and draw the lines of distinction between the privatization of gains and the socialization of losses.
These are tough times in the global economy as evidenced by the mad dash towards rescue plans. We’re stretched thin, tapped out, stressed hard and inextricably tied to a finance-based economy. There is no escaping the risk that continues to build but, at the same time, no guarantee that comeuppance is finally upon us.
I have deep-rooted concerns regarding the market machination that stem from years of credit dependency, dollar devaluation and derivative underpinnings. At the same time, I respect that there are two sides to every trade and nothing comes easy in today’s day and age.
Along those lines, as we edge into the first night of Chanukah, I wanted to offer eight rays of light that could potentially burn bright for the bovine:
The Transfer of Wealth
With the dollar down 37% since 2002, stateside assets have become more appealing to foreigners on a relative basis. And while we saw spates of isolationism emerge when CNOOC (CEO) tried to buy Unocal (UCL) and the UAE attempted to purchase US ports, the powers that be have been curiously quiet as China and Abu Dhabi recently swooped into Bear Stearns (BSC) and Citigroup (C).
Globalization isn't evil. Quite the contrary, it has allowed emerging markets to assume a larger role in the supply-demand equilibrium.
Most Americans are quick to dismiss the new world order for fear of being called unpatriotic. The rub is that the process of financial democratization is the very definition of capitalism, the same brand that the US been espousing and projecting for centuries.
The Transfer of Risk
This process began to percolate in February when Fortress Investment Group (FIG) went public.
The concept, while unsustainable, was that hedge funds and private equity players would tap the public markets and, in turn, leverage that risk into new layers of liquidity. Other players have since tried to replicate that model, mostly with muted success.
More recently, we’ve witnessed a different type of risk transfer, one that has occurred at a substantial discount to original market value. Citadel’s stake in E*Trade Financial (ETFC) and Lennar Corp’s (LEN) property sale to Morgan Stanley (MS) are the latest examples of distressed sales that seemingly bought time for troubled companies.
While we can debate the motivation of these sellers - they are clearly an act of desperation - the transfer of risk allows those with deeper pockets to attempt navigating the current landscape with hopes that the imbalances self-correct.
I don’t think they do, for the record, but time is the arbiter of all financial fate.
December has been up 75% of the time since 1929 in the S&P 500, with the second highest average monthly return and the smallest average drawdown. And whenever the S&P has lost more than 4% during November, December was higher five out of five times by an average of +5.6%.
Past results is no guarantor of future performance, as the saying goes, but while history rarely repeats, it often rhymes.
Perception is Reality
The autumn swoon stopped directly on the August lows, precisely ten percent from an all-time high. While this is admittedly a bit cute for my liking, the technicians in our midst now have a level to lean against.
Keep in mind that the sharpest rallies occur in the context of a bear market and formidable resistance resides above at S&P 1490. If the bulls can chew through that resistance, however, the double-bottom ten percent blink-and-you-missed-it correction will be obvious with the benefit of hindsight.
It’s Out There!
A few weeks ago, while probing the lows, we noted that The Economist and BusinessWeek both ran cover stories that splashed doom and gloom across the kitchen tables of mainstream America.
While these publications boast an impressive collection of business acumen, they have proven themselves to be contrarian indicators of financial market cusps. This, too, could be one of those serendipitous situations that we look back at with a smile.
To add spice to the mix, public shorting on the NYSE recently reached an all-time high of 70% of all short sales as select sentiment surveys ticked at readings of extreme pessimism. That, coupled with aggressive insider buying by corporate executives, should give pause to the most ardent bears.
We recently pondered what a stronger dollar could mean for investors and offered that, through the lens of asset class deflation vs. dollar devaluation, we should be careful for what we wish.
The flip side to that equation is a continuation of what we’ve witnessed for the last five years: the slow, steady burn of our basis of valuation that, in turn, allows dollar-denominated assets to appear higher on a relative basis.
Assuming that we’ve yet to transfer the decision making process to foreign holders of US assets, the devil we know (inflation) remains more desirable to policy makers than the deflationary devil we don’t.
Big Ben. Parliament. Big Ben. Parliament.
It can’t be easy being Ben Bernanke. Here’s a guy that took the baton from Alan Greenspan, who rode off into the sunset after sticking everyone and their sister with adjustable-rate mortgages. It wasn’t his mess to clean up but it’s the mess he inherited and he’s not going down without a fight.
For what it’s worth and so it’s said, I believe that “Don’t fight the Fed” is one of the most dangerous axioms in finance. Still, the perception that the FOMC is on call and at the ready could buoy markets through year-end, particularly if he they cut Fed Funds by fifty basis points and again adjust the discount rate lower on December 11th.
Hank You Very Much!
While Hank Paulson was forced to sell all of his Goldman Sachs (GS) stock when he assumed the role of Treasury Secretary—tax-free to boot!—he’s putting his considerable muscle and influence behind aggressive policies in an attempt to quell fear and shape sentiment.
I was schooled to believe that nobody—no one individual, no single government and no coordinated agenda—is bigger than the market. I do, however, respect how dangerous a cornered animal can be, particularly when his name and word are on the line.
We’ve yet to hear how the proposed off-balance sheet rescue plans and sub-prime lending freezes will be funded and, dollars to donuts, they won’t occur without government subsidies or implied guarantees. That could take a while to manifest in the collective consciousness, however, and as traders, the path we take is entirely more important than the destination we arrive at.
Interesting times indeed, fraught with risk and by extension opportunities. Stay alert and understand that a litany of agendas are littering our financial landscape.
You don’t have to agree with them, you simply have to respect them. All the way to the bank.
Holiday Festivus is here! Come join us and support the Ruby Peck Foundation For Children's Education at an old-fashioned Southern-style hoe-down in the heart of New York City on December 7th. Click the image below to learn more!
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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