David Fuller and Eoin Treacy's Comment of the Day
Category - General

    More Trouble for the Equity Markets Ahead

    Thanks to a subscriber for this article by Byron Wein for Blackstone which may be of interest to subscribers. Here is a section:

    Some skeptics believe all this good news about the prospects for the economy supports the bearish, not the bullish, case for the equity market. They argue that the economy was already doing well before the fiscal stimulus provided by the tax cut. With unemployment at 4.1% and headed to 3.5%, the economy did not need any stimulus. It was already at full employment and the additional federal spending would cause the economy to overheat, resulting in higher inflation to and rising bond yields. They argue that those who are bullish on the market should hope for slower growth. My view is that this is an earnings-driven market and the improving profit forecasts will offset rising inflation and interest rates.

    Some observers believe a 10% correction is enough, at least for a while. Valuations have come down to reasonable levels, the market is no longer excessively overbought and intermediate-term interest rates are showing signs of stabilizing. The Crowd Sentiment indicator has moved from close to 80 down to 61, putting it in “neutral” territory where we could see a short term rally. It would be nice if investors had to endure only two weeks of pain before the market headed higher again.

    I believe the positive sentiment that provided the background for the decline has only partially been corrected. Consumer confidence is high, reaching levels not seen since the late 1990s, but the savings rate has dropped to 3.4% as consumer net worth has increased. The last time the savings rate was this low was two years before the 2008-9 recession. We know that the Federal Reserve is moving toward a more restrictive monetary policy and the European Central Bank is talking about tapering. Less accommodative monetary policies are generally not good for the equity markets. Consumer debt has risen sharply since 2009 as confidence has increased, but federal debt may be the real problem. According to Doug Kass and Larry McDonald, that debt was $9 trillion in 2007 and carried a cost of servicing of 4.75% or about $425 billion a year. (In 2000 it was only $6 trillion with a cost of servicing of 6% or $360 billion, but with a tax cut and two wars to finance, debt soared in the new millennium.) Today it is $20.5 trillion with a debt service cost of 2.25% or $460 billion, slightly more than in 2007. Think of what interest rates going above 3% would do to the budget deficit.

    None of these issues make me bearish but they do make me think the correction is not over. I am bothered by the role that quantitative algorithmic trading and leveraged Exchange Traded Funds played in accentuating the rise in the market and its decline. These are basically trading tools, not investment strategies, and while it can be argued that traders contribute to market liquidity, I fear that these mechanical techniques have produced a certain level of instability in frenetic periods such as the one we just experienced.

    This section continues in the Subscriber's Area.

    Email of the day on how to invest in Africa

    Thank you very much for another nice long term video. I think your idea the potential of Africa is very interesting. Would you have any suggestions how to invest to benefit from the growth of Africa? Thanks in advance

    This section continues in the Subscriber's Area.

    Will Modi lose the next Lok Sabha election in 2019?

    Thanks to a subscriber for this article by Arvind Kala for which may be of interest to subscribers. Here is a section: 

    Earlier the poor Indian farmer could sell his cow for Rs 25000 when it stopped giving milk. No longer. Now cattle buyers don't step forward lest Hindu goons lynch them.

    So the farmer with an unproductive cow leaves it in some open area, and this cow becomes yet another addition to the tens of thousands of emaciated cows standing around in the countryside.

    Worse, they eat up the farmer's crop. Losing him the little he has.

    India has 120 million cows, according to the last agriculture census. Why would those cow-owners vote for a Modi who impoverishes them?

    When Nanded voted against the BJP and Modi this week, it was speaking for all of rural India. Village voters will pulverize Modi in 2019.

    About urban distress, facts speak. Mahesh Vyas is India's most respected statistician and founder of CMIE, our most credible source on the Indian economy.

    Citing figures, he wrote that demonetization triggered huge job losses. Seven million of them in one year between Jan 2016 and Jan 2017. He was talking of formal jobs in the private sector.

    Those seven milllost jobs means at least 28 million people pauperized, at four people per family, people who depended on those salaries to eat and live.

    Today a failing GST has paralyzed commerce all over India. Small traders and manufacturers just can't cope with the paperwork.

    And they can't afford the services of trained accountants.

    This section continues in the Subscriber's Area.

    Macro Morsels February 27th 2018

    Thanks to a subscriber for this report from D. Harding at Maybank dated the 17th, which may be of interest. Here is a section on commodity led inflation or vice versa:

    What Does Population Aging Mean for Growth and Investments?

    Thanks to a subscriber for highlighting this article by Henry McVey at KKR which appeared in the Macro Morsels report on the 23rd. Here is a section on China: 

    Berkshire Hathaway Shareholder Letter

    Thanks to a subscriber for this year’s letter by Warren Buffett. Here is a section: 

    The new rule says that the net change in unrealized investment gains and losses in stocks we hold must be included in all net income figures we report to you. That requirement will produce some truly wild and capricious swings in our GAAP bottom-line. Berkshire owns $170 billion of marketable stocks (not including our shares of Kraft Heinz), and the value of these holdings can easily swing by $10 billion or more within a quarterly reporting period. Including gyrations of that magnitude in reported net income will swamp the truly important numbers that describe our operating performance. For analytical purposes, Berkshire’s “bottom-line” will be useless.

    The new rule compounds the communication problems we have long had in dealing with the realized gains (or losses) that accounting rules compel us to include in our net income. In past quarterly and annual press releases, we have regularly warned you not to pay attention to these realized gains, because they – just like our unrealized gains – fluctuate randomly.

    That’s largely because we sell securities when that seems the intelligent thing to do, not because we are trying to influence earnings in any way. As a result, we sometimes have reported substantial realized gains for a period when our portfolio, overall, performed poorly (or the converse).

    This section continues in the Subscriber's Area.