Monday, July 13, 2009

For Those Bears Among Us...


By Neil Hume | 10 July 2009

Lest anyone was thinking of turning bullish after listing to the siren calls of Bond and Winder, we present the following counterpoint.

From an email doing the rounds in the City of London on Friday morning (The author is an MD(?) at one of the big banks):

US Housing

It led us into this recession & it will likely lead us out.
This asset class is the collateral spine of household & bank B/S. It remains a sine qua non for the mkt. Unfortunately, foreclosure filings are
+18% yoy (May), the mort delinquency rate (9.12%) is a record, prime defaults have just doubled (yoy) to 2.9%, new and existing home sales are still barely off their Jan lows (you’d need to see a 50% increase from here to be consistent with flat gdp), unsold inventory is still at 10.2 mths (even without "shadow inventory" from banks & Securitised Mort Trusts), 30% of morts are in negative equity & % is rising/equity declining: 18.1% of house prices are still ugly….

US Consumer

Too much debt, not enough credit.
Declines in the housing & equity mkts have removed
c$14tr from his net worth (Fed) at a time when he’s 3x the leverage of 20 yrs ago & carrying $13.5tr of debt. That process of de-leveraging is just starting. Delinquencies on Home Loans just hit 3.5% (ABI), a number that will grow in tandem with unemployment & US Personal bankruptcies (ABI) were +35% last seen. Look at the recent & salutary examples of the banks and Japan’s lost decade to remind us just how painful & prolonged the de-leveraging process can be.

The savings rate just hit
6.9%. It has reverted to 10% in prev deep downturns. That cld be exacerbated by a baby boomer generation who in previous recessions cld get credit & had a higher propensity to spend (in their 30’s) but who now can’t get credit & have a greater propensity to save (as they’re now in their 50’s).

The latest non-farm number (-472,000) wasn’t just worse than expectations, but was worse than the very worst print seen in either of the ‘80-’82, ‘90-’91 or ‘01-’02 downturns. Initial Jobless yesterday were better, but Continuing claims were worse (& a
record high). Unemployment (beware the lagging mantra) is relevant because this is a credit related crisis & unemployment’s continued rise to & thru 10% (The Congressional budget is based on 8.1% ‘09) will generate more delinquencies & foreclosures. Moreover, the "leading" indicator components of the non-farm report— Hours worked (still at a record low & with a 70% correlation to GDP) & Temporary Hires (-37/-) are still showing falling leaves rather than green shoots.

Credit cards (the lender of last resort) are seeing record charge offs (Moody’s:
10.6% vs 9.9% in Apr) & cc outstandings are falling at a 20% annualised rate with consumer credit contracting by over $50bn since Lehman hit the tape. Remember, the consumer is just starting, not just ending his de-leveraging process.

US Insiders

A vote of No confidence.

of CEO’s (Business Roundtable) expect lower capex (the inventory replenishment is now a given for the mkt) & 49% expect lower payrolls going fwd.
Directors sold
$2.9bn of stock in June (Trimtabs). The Sell/Buy ratio is a monster 10x, so the green shoot callers might be selling it, but the Corp insiders aren’t buying it.

US Dividends

70% of US equity rtns since 1900 (LBS) have been generated by dividends.
In Q2 just 233 S&P names raised their divi (a record low) & 250 names actually cut (
2nd worst ever reading).

US Valuation

Valuations are not at a level that discounts any ongoing negative news.
Mkt bottomed
(666) at 11.7x. The ave of of the last 11 bear mkts (where over 70% have seen a lower bottom) has been 9.9x (Haver) & there’s nothing ave about this recession.
Going all the way back to 1929 (NDR) and we find that PE multiple expansion has averaged
10% in the first 3 mths & 22% in the first 6 mths of recovery. We just clocked up 40%! With the "P" already there we need the "e" to catch up real fast to validate this rally.

US Technicals & Volume

Better to wear out than rust up?
Dow has broken its
8300 Head & Shoulders neckline support & 200 day move ave (FTSE has broken its 4295 Triple Top neckline, 200 day & failed to breach its channel top). Dow theory: (DJT has failed to validate the main index highs) is also firmly in the bear camp. S&P has been clinging on by its fingernails but the breach below its 200 @ 887 & a subsequent fall below major support @ 875 wld frighten lots of rabbits.

daily vol has contracted by 30% on the S&P & c 50% on the Dow over the last 3 mths (Trimtabs).
Bear mkt bottoms (
19 going back to WWII) have typically been associated with steady eddy rallies on good vol (Hussman). The 4 episodes that were the exception & saw rel light vol also only rallied modestly. We’ve just belted the biggest rally since the Depression on increasingly thinner vol with just slightly less depressing news…. which reminds me of the Sage of Omaha’s axiom that "you can’t make a baby in a month by making 9 women pregnant".

Light trading vol (compounded by higher vol on recent down days vs lower vol on recent up days), and a diminished response to
"positive" news imply that we don’t need to see strong selling pressure to roll us over some more. Just buyer’s fatigue. And we need to beat last quarter's rate (a 62% beat rate in Q1) not just meet consensus eps forecasts for Q2.

US Issuance

Today’s problem or tomorrow’s promise? May clocked up
$64bn & June was similar. The prev record issuance was $38bn. There have only been 12 mths since ‘98 that Corp issuance has exceeded $30bn & the ave rtn of the S&P over the nxt qtr was btwn -4% to -7% (Trimtabs)

US Quotes (recent)

"US housing won't hit bottom until 2010".

Hayashi (Jpn Economy Minister)
"The US economy has yet to hit bottom".

"CMBS credit deterioration is just beginning" ($400bn of commercial property re-sets to y/e). I think this space is armed & dangerous.

"The retrenching of the US consumer is a huge adjustment that the whole global economy is going to have to absorb".

Buffett (who’s a bull remember)
"I had a cataract op on my eye recently & I still can’t see any green shoots".


Our knight in shining armour.
The US is
25% of global gdp & China is 8%.
6% Chinese gdp grth (which we’re all now excited about) is actually still consistent with an ongoing global recession.
For every
1% that the US consumer shrinks, the Chinese consumer needs to expand by 6%.
Jpn shipments to China dropped
-29.7% in May (-25.9% in Apr).
1/3rd of China’s gdp are exports (47% for Asia)….& those mkts are still contracting. People are talking up 'de-coupling' again, despite the fact that that particular chocolate teapot got melted before.

And finally

California, Russian banks, CMBS, Sovereign risk (Baltic states), Swine Flu….

Still bullish?

(H/T Grim Reaper).

No comments:

Post a Comment