 | | The Daily Reckoning | Wednesday, November 3, 2010 |
- Bulls vs. Bubbles...a fresh perspective on where we are today,
- Three quirky market extremes you can take to the bank right now,
- Plus, Bill Bonner on the election fallout, dementia at the Fed and being careful what you wish/vote for...
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|  | | | Bull Market or Bubble | | Emerging Markets Walk a Fine Line | |  | | Eric Fry |
Reporting from Laguna Beach, California...
Does the difference between a bull market and a bubble walk a razor's edge...or a five-lane freeway? The difference may simply be a matter of perspective. If you're long, it's a bull market; if you're short, it's a bubble.
Back in the late 1990s, die-hard value investors like Jean-Marie Eveillard, Barton Biggs and Jeremy Grantham shunned the high-flying tech stock sector as a "bubble." This "mania" would end in tears, these insightful investors predicted.
But for an uncomfortably lengthy period of time, the tech stock mania produced only smiles and riches. Eveillard, Biggs and Grantham had more reason to shed tears than their tech-stock-buying counterparts. Clients fled from both Eveillard and Grantham, while Biggs gained a reputation as a crotchety, has-been strategist.
Eveillard famously defended his caution by declaring, "I would rather lose half my clients than half my clients' money." And he did...lose half his clients, that is.
As the new millennium dawned, however, the tech stock bull market began to look increasingly bubblish...and Messrs. Eveillard, Biggs and Grantham began to look increasingly brilliant. In fact, they were dead- on correct. And since Eveillard and Grantham did not buy into the tech stock hype, they successfully avoided the tech stock bust. They stuck to their convictions - buying good stocks at good prices...or not at all - and compiled superior investment results for their clients.
Fast-forward ten years; Eveillard has retired. But Biggs and Grantham are still in the game. The tech stock bubble is long gone, but bull- market/bubbles are still very much with us. Depending on one's point of view - i.e., whether one is long or short - Treasury bonds, gold and emerging market stocks are all in robust bull markets...or dangerous bubbles.
But this time around, Biggs and Grantham are taking a different approach. Bubbles are a great place to make money, they say, as long as you don't hang around too long. "We're only halfway along the way to a gigantic eventual bubble in the emerging markets," says Biggs, "The emerging markets, particularly Asia, are a place where I want to have a really major representation."
"Biggs's view is shared by Jeremy Grantham," Bloomberg News reports. "The chief strategist at Grantham Mayo Van Otterloo & Co. wrote on Oct. 26 that his forecast for an 'emerging emerging bubble' was in 'splendid shape' after the MSCI Emerging Markets Index soared 146 percent in the past two years."
The nearby chart corroborates that assessment. Emerging Market stocks have never been more expensive than they are today, relative to stocks in the Developed Markets. Twelve years ago, the MSCI Emerging Market Index traded for only one fifth of the valuation of the S&P 500 Index and the MSCI World Index, based on price-to-book ratios. Today, however, the Emerging Markets are trading on parity with Developed World stocks.
This surprising data point does not necessarily mean that Emerging Market stocks are overpriced or bubble-ish, but it does mean that they are no longer cheap. "Everyone and his dog are now overweight emerging [market] equities," Grantham observes, "and most stated intentions are to go higher and higher."
Despite these bubble-like conditions, Grantham believes Emerging Market stocks will continue running for a while longer. He recommends a "moderately overweight" position.
"The headache posed by bubbles depends on the asset managers' perspective," writes Dylan Grice, a global strategist at Société Générale. "For skeptics the pain is on the way up, for true believers it's on the way down."
True.
Your editors here at The Daily Reckoning may be true believers, but they are not delusional. Your editors are fans of selective Emerging Markets like Brazil and India. But the current near-mania for Emerging Market stocks is probably not presenting the very best long-term investment opportunity. So keep some powder dry and don't forget to pull the trigger the next time these markets are tanking.
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| | The Daily Reckoning Presents | | Where to Make Money in the Markets Today | |  | | Chris Mayer |
So where to look to make money in today's market?
What I often do is just look for extremes. I look for areas of the market where the rubber band seems stretched. These are usually good places to look for making money as you play the snapback of that rubber band. It doesn't always work. Sometimes the rubber band breaks. But it's a fairly reliable way to make good money in markets.
Today I have a few extremes that I'd like to set up for you. Each of them leads to a potentially profitable idea.
The First Extreme: Insider Sales.
I always troll the insider buys and sells. It's a great place to get ideas. When I see a big insider lay down a big bet on his own stock, that usually makes me want to take a look at why. Insiders buy for only one reason: They think the stock is going to go up.
Insider selling is not as reliable. There are always more insider sales than buys. Insiders sell stock for all kinds of reasons - diversification, for example. They also typically get a lot of stock options, which they naturally cash in from time to time.
However, what we're interested in is the extremes. We're not interested in modest insider buys or modest insider sells.
Today, we see extreme selling. In fact, the ratio of insider sales to insider buys is over 30 times. Normally, a ratio of over 20-to-1 is seen as a bearish sign. A ratio of under 12-to-1 is bullish. It's not a bad indicator - or at least it's been pretty good this year.
Last time we had an insider sales ratio of over 30 times was in April, just before the markets went kaput for awhile. (The so-called "Flash Crash.") Then the ratio went under 12 for long stretches during June through September. During this time the market has generally been rising.
In October, we had a spike in insider selling. This indicates that at least as far as insiders go, stocks look fully priced. I look over the insider sales and I see massive selling. At McDonald's, six insiders sold $40 million worth of stock. At Netflix, five insiders dumped $36 million worth of stock. Other big sellers include two at AutoZone ditching $35 million, three at Safeway selling $27 million and five at EMC letting $24 million go.
I don't know how investors can feel good about these names with so many insiders selling with such gusto.
On the other side of the ledger, we have a few insider buys. One that sticks out is Alfred Mann's $5 million buy at MannKind, a biotech firm. According to Yahoo, MannKind, "a biopharmaceutical company, focuses on the discovery, development and commercialization of therapeutic products for diabetes and cancer."
The ticker is MNKD. Mann is its 84-year-old, founder, CEO and chairman. He must really like the stock. Biotech is a bit out of my bailiwick, but the stock is worth looking into. Mann paid an average of $7.15, above the stock's current price of $6.38. So you get a chance to buy at an even better price than Mann.
These ideas, by the way, simply come from looking at the insider transactions as reported byBarron's every week. It's a simple way to build an interesting list of names, as I discuss in my book Invest Like a Dealmaker: Secrets From a Former Banking Insider.
The Second Extreme: Volatility
The second extreme is the low volatility. The VIX, often called the "fear gauge," is down 54% since May. This means investors are not very fearful. The VIX is a contrarian indicator - when it is low, that can mean investor complacency and foretell a bad spill. When it is high, investors are fearful and perhaps the market will rise.
Again, we're interested in extremes. And it looks like volatility is very low. It hasn't been this low since April. When the Flash Crash hit, the VIX soared. It nearly tripled in May.
So one way to play a rebound in the VIX is the through the iPath S&P 500 VIX Short-Term Futures ETN. The ticker is the VXX. And it is at all-time lows.
Last time I mentioned this trade - on April 12, actually - the VXX rose more than 50% the following week. If you are worried the market is going to crack, the VXX is a way to gain a little insurance.
Third Extreme: Grain Prices
A lot of people are now hopping on the bandwagon that grains are going higher. We've been on this for at least a year. And they have already moved a great deal. My mind runs counter to the consensus. I train myself to do so. There is no money in following the crowd.
And so I am starting to think the best upside is not in the grains, but in the names that suffered the most while grains were rising.
I'm talking about the producers of meat.
In the short-term, say, for the rest of this year, I think the grains still have legs. There are already rumors that the USDA will have to revise downward (yet again!) its estimate for the corn harvest. The next report is due Nov. 9. We could see corn spike as it did on Oct. 8, the last time the USDA released its report.
While I think the environment supports higher-than-average grain prices, I doubt the soaring corn and wheat prices are sustainable. The prices of both grains have soared about 50% since the summer.
Prices like these will inspire a lot of planting for next year. Whether the crop actually hits the bins or not is beside the point. The news alone will drive grain prices down by the spring. That's my guess.
The best bets to play the reversal are the meat producers, because grains such as corn, which they feed to their livestock, are one of their biggest expenses.
Since peaking in April, the shares of some of the biggest meat producers are down pretty hard. Tyson, one of the biggest, is down 20%, for instance. And Pilgrim's Pride (NYSE:PPC)is down 50%.
"While all of us are concerned about higher grain prices and the uncertain economy," CEO Don Jackson explains, "there are several encouraging signs heading into next year. Given the reduction in beef supply and the higher prices that are expected for beef and pork, chicken should be attractively positioned with consumers who are looking for the best value. As a result, many of our customers are planning to feature chicken more prominently on their menus or in their stores next year. We are already seeing an increase in food service demand for next year."
Time will tell, but I like this play, and there's lots of upside. The stock was $13 in April. It's $6.70 today.
Regards,
Chris Mayer,
for The Daily Reckoning
Joel's Note: Speaking to the point of extremes, Chris Mayer's latest research report uncovers an opportunity for investors to unlock some rather hefty gains from a tiny company with exposure to what Chris would call a "special situation" in the resource sector. All the details are available here...but only until midnight tomorrow, when the offer is officially off the table.
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| | | | Bill Bonner | | No Cutting Back: The Bernanke Money Printing Story | |  | | Bill Bonner |
Reckoning from Delray Beach, Florida...
We had a brush with democracy yesterday. Very unpleasant. Elizabeth went to vote. Her husband accompanied her.
"Do you really think your vote will make a difference?" we asked as we headed for the polling station.
"No, but if everyone took your point of view we couldn't have a democracy at all."
"Wouldn't that be a good thing?"
"I'm not going to get into a big discussion with you. I'm doing what I think I should as a good citizen. That's all there is to it."
The polling station was manned by women. Old women. About 8 of them. There was one old man at the door. There were more attendants than voters when we went in at about 1PM. It was quiet. Still. Of course, this was Florida. But the geriatrics made us think that the whole thing was about to go into terminal care. American democracy, that is.
There was no excitement. No energy. It was as if the election didn't really matter. As if the results had already been decided. Voters came in. They did what they saw as their civic duty - each one of them hoping to cast the decisive vote and turn the nation into the country he wanted it to be. One wanted prayer in the schools. Another wanted more free pills and drugs. Another wanted to cut spending and close the borders to new immigrants. In California, they want to legalize pot. "Yes we cannabis!" In Oklahoma, they want to forbid state courts from making reference to Islamic Sharia law.
"I just voted for the Tea Party candidates..." Elizabeth reported. "And as for all the other initiatives...sometimes I couldn't understand what they were really up to. When in doubt, I voted no."
Elizabeth does not seem to like that "hopey, changey thing" given to us by the Obama Administration. Whether she will like it when the Tea Party takes back America, we don't know...and we probably will never find out.
And so Election Day passed. And no one got what he wanted. As the private interests, special claims and personal prejudices got put together, crossbred and propagated, one with another, they gave birth to a grotesque and ungainly monster - with a thousand heads...and countless thorny tails...a vast, incompetent, extravagant, ugly, lumbering government with something for everyone and no way to pay for it all.
The voters got what none would have voted for - a gargantua with $200 trillion worth of unfunded liabilities.
Congress is gridlocked. Obama is paralyzed. One party wants to cut social spending- rolling back Obama's health care initiatives, in particular. The other party won't let them. It wants to cut military spending, instead. Taxes are automatically going up next year. Everyone says it will be bad for the economy. Yet the two parties can't agree on how to stop the increases. One wants higher taxes on the rich. The other wants lower taxes for everyone. Here at The Daily Reckoning, we are usually in favor of gridlock in Washington. But not when a tax increase is on the way!
If this were Greece or Ireland the government would be forced to cut back. The politicians would have no choice. The markets would speak. They would have to listen. For where else would they get more money to squander?
But now...with quantitative easing ready...there is no need to face the music. The band has gone as silent as a polling station. If bond buyers will not finance America's trip to bankruptcy, the Fed will provide as much brand, spanking new money as necessary.
Ben Bernanke is supposed to make the announcement later today. In a stroke, he will undermine the foundations of representative democracy all together. The peoples' representatives are supposed to decide how much money to raise in taxes. They are supposed to decide what the nation can afford and how it should spend its money. Now, Mr. Ben Bernanke pays the fiddler and calls the tune. Who can say the nation can't afford more health care? Another war? Free cannabis for everyone? Ben Bernanke can create the money - out of nothing!
He'll probably announce a big enough number so as not to disappoint the markets. But he won't be too specific as to when or how...he'll need to leave the speculators guessing...and leave himself some room to maneuver.
What the heck, the markets absorbed $1.7 trillion of this QE in the last go 'round. It didn't do any harm, did it? On the evidence, it didn't do much good either. The money went into the banks and didn't come out. They could probably take another $1 trillion or so without getting completely saturated. Who knows? If the Fed wanted, it could finance the entire US federal budget deficit...or eliminate the need for taxes completely.
Now, if the economy improves...Bernanke will claim credit. If it doesn't, well...at least he tried!
And so, investors played it cool yesterday, waiting to see what would happen at the polls and at the Fed. Gold rose $6. Stocks rose 64 points on the Dow.
And more thoughts...
Are you losing your grip, dear reader? Are you making bad financial decisions? Well, don't be too hard on yourself. Maybe you're not just stupid. Maybe you have a disease. The New York Times:
New research shows that one of the first signs of impending dementia is an inability to understand money and credit, contracts and agreements.
It is not just families who are affected - financial advisers and lawyers say they are finding themselves in a bind when their clients' minds seem to be slipping.
The issue is far from simple. Dr. Jason Karlawish, an associate professor of medicine and medical ethics at the University of Pennsylvania, says it is generally agreed that decisions by a competent adult should be respected.
But, he said, "What do we mean when we say someone has enough decision- making capacity to be 'competent'? The law, psychology and finance are all waking up to [issues] of decision-making capacity."
According to research by Daniel C. Marson, a neuropsychologist at the University of Alabama, Birmingham, confusion over money and finances is perhaps the most important and most predictable early functional change as people descend into dementia. We could go 'round the bend at any moment. But what about our financial authorities? Doesn't quantitative easing suggest some sort of clinical dementia?
Hey, Ron Paul is a doctor. Let's ask him!
Regards,
Bill Bonner,
for The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor atjoel@dailyreckoning.com
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| |  |  |  | Private Sector Debt Burden About to Get More Burdensome
The way the economy is rigged up, the private sector has to support a big public section...one that gets heavier every day. If growth is sluggish, the whole economy slips, even with positive GDP numbers. Without powerful growth the feds don’t collect much in taxes...and run huge deficits. This increases the debt burden on the few people who are carrying all the load – people working in the private sector at non-zombie, wealth-producing activities.
Rising Food and Energy Costs to Add to Retirees’ Problems
US Debt Crisis: What NOT to Do When Your Country is Broke | Investing in Gold Will Save Your Butt
So I grudgingly went up to her office, and the first thing I see is her stupid secretary, who hates my guts because I once told her to buy gold, silver and oil against the terrible inflation that will result from the traitorous neo-Keynesian econometric nitwits at the Federal Reserve creating so much excess money, especially when the corrupt federal government was monstrously deficit-spending us into bankruptcy.
Health Care Costs Go Up, Up and Away
Funny Money and the Banks that Make Us Laugh | Elections Results Pour in, US Budget Cuts Still Likely to Come up Short
Perhaps the ax is an exaggerated metaphor for how large UK budget cuts actually are, but, on a similar note, the US should probably have something smaller, maybe more akin to tweezers. As Bill Bonner expressed in a recent Daily Reckoning missive... “In both England and France, the spending cuts on the table so far are too little, too late...”
More Stealth Gold Buying, This Time it’s Iran to the Tune of $15B
Guess What’s Coming to Dinner: Inflation! (Part Two of Two) | |
| | The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. |  |
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