Global Financial Markets: A Bull-Bear Debate
Price is the ultimate arbiter of variant financial views.
"Oh, I like this one. One dog goes one way, the other dog goes the other way, and this guy's sayin', 'Whadda ya want from me?'"
-- Tommy DeVito, Goodfellas
Yesterday, following a less-than-stellar session for yours truly, I received the email below. As the friction between opinions is where education is found-with price serving as the ultimate arbiter of variant financial views-I would like to share our exchange for the benefit of the Minyanville community.
I always enjoy reading your columns and do so daily, so even if this goes unread and I've wasted a few minutes, I'm still happy to offer what I can.
I'm concerned about your trading positions (note: I've been trading around put positions in the S&P and NDX against scattered situations on the long side; the skew, as of last night's close, was roughly a 3:1 short bias) and thought I might offer one or two perspectives. Like you, I find it difficult to swallow the size of the rally and want to see a meaningful correction. What bothers me is the lack of any meaningful appreciation in Treasury yields over the last three months, and the reversion to lows over the last two weeks. The 10-year is again below 2%, not far from where it bottomed last fall.
It seems to me, as the crisis in Europe escalates, that inflation and low bond yields could drive investors into stateside equities rather than Treasuries, and the dollar and indices could rally together. In my view, we're not seeing complacency or blind risk-overseas equities have continued to stumble-but rather an indiscriminate move toward the dollar, and one of fear rather than euphoria. One of your themes for 2012 was a rise in interest rates, which would almost certainly cause a rise in inflation or inflationary expectations. I agree wholeheartedly with this premise, but I wonder if you've considered all of the implications.
The safe havens that everyone sought out in 2008 are now either unsafe, or prohibitively expensive (or both). On the other hand companies are generally looking strong and dividends competitive; not the bargain they were in September, but also not as overbought as Treasuries. 'Risk-off,' we may see equities supported by flight from overseas, and 'risk-on' we may see them floated by an evacuation from bond markets. I wonder how likely a large correction is in this environment?
I can't help but notice the 5-year charts in the dollar vs. the euro, gold, and silver. There are some large reverse head-and-shoulders which are close to confirming. If the dollar makes a move lower, the best opportunities of 2012 may well be from the long side-and they might not have taken place yet. In particular commodities and commodity producers stand out to me as oversold sectors that could rally in such an environment. It's admittedly hard to conceive the euro rallying right now but then I wonder whether any "solution" other than a break-up might not be euro-positive.
My two cents, for what it's worth. I hope, if this gets to you, that it's of some interest and I also hope that you continue doing what you're doing: providing a bright spot and a bit of humanity in the investing world.
My response, and some additional thoughts this morning, can be found below:
Dude, thanks for this; cogent thoughts and your vibe is appreciated (as is the tenor in which you shared it).
You may be right-it sure felt that way yesterday-and I always strive to see both sides of every trade. It seems like eons ago when I was trading purely from the long side (late December until S&P 1360) and the last six weeks have been a roller coaster (terrible, terrific, and suddenly not-so-hot). Such is the life I've chosen; this is the cost of doing business."
Some (additional) food for thought, in no particular order:
This will be a process, not a point. Through a pure trading lens, I'm warming up to the notion of pairing some long Spain exposure (which is down another 4% this morning-through vehicles such as iShares Spain (EWP), Telefonica SA (TEF), or Banco Santander (STD) against my short S&P (or, perhaps even the German DAX). With Spain near the March 2009 lows (4.5% away) and the S&P 100% higher since that fateful bottom, it seems to me that we'll see some relative regression to the mean.
Through a broader lens, debt destruction and/or reorganization is the only true medicine, in my view, as opposed to more drugs that mask the symptoms. We saw it in Greece but it remains to be seen if there is the political will to adopt it across Europe (I don't believe there is, but I've been wrong before).
These are dynamic times, and it will take years to sort through the sovereign sequel to the first phase of the financial crisis. The good-no, great-news is that the Millennial generation is waiting on the other side of this process to drive us higher when the next secular bull market arrives.
A few articles caught my attention this morning as they shared a similar thread of thought. I've pulled some quotes in the interest of respecting your time.
Quote: "Spanish, Italian, and Portuguese banks are loading up on bonds issued by their own governments, a move that shifts more of the risk of sovereign default to European taxpayers from private creditors."
Note: Risk, much like energy, isn't created or destroyed; it simply transfers from one reality (private) to another (public). We've seen this movie before-right here at home-and we must pay heed to the most pervasive unintended consequence, that of social mood.
Quote: "Inflation may be more of a danger than previously expected and the Bank of England should refrain from further stimulus, according to the minutes of a meeting of its Monetary Policy Committee released today."
Note: There has been a ton of debate regarding "risk on" (inflation expectations) vs. "risk-off" (deflation expectations). An observation: Perception is reality in financial markets, which happen to be forward-looking discounting mechanisms.
Quote: "If these implied defaults come vaguely close to being realized then the next five years of corporate and financial defaults could easily be worse than the last five relatively calm years," the analysts in London said. "Much may eventually depend on how much money-printing can be tolerated as we are very close to being maxed out fiscally."
Note: That pretty much speaks for itself, although the imagery of the last (fiscal) bullet pointed inward comes to mind.
Look, I'm an optimist by nature; my daughter Ruby turns one next month, I'm getting married in August, I have terrific twin (soon-to-be) step-children, we recently bought a home in Long Island and-just yesterday-got lifted on our NYC digs. My intention isn't to bum anyone out, no more than it was in September 2008. The Minyanville mission, and by extension my hope, is to effect positive change through financial understanding in a way that informs, educates, empowers and, if possible, entertains.
Sometimes we hit, sometimes we miss; our views, however, are always shared with the best intentions.
All I ask is that you see both sides, understand your risk, and sync that risk to your time horizon. Life is too short to focus all your energy on the flickering, bickering ticks.
There is an entire world out there; if we remain lucid, make smart choices, and understand that this will take some time, patience, unity, and empathy, we will find our way to better days and easier trades.
As always, I hope this finds you well.
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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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