Tag Archives: stocks

Where are we in the secular (post-2000) bear?

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Mish Shedlock’s investment management company, Sitka Pacific, provided this chart in their September letter (as a non-client, I only get delayed copies):

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One lesson to be learned here, which they get into in the letter, is that prices bottom before valuation multiples. In the bears of the 1910s, ’29-early 40s and ’66-82, inflation appeared late in the game. BTW, this meshes with Kondratieff theory, where inflation leads to disinflation to deflation then inflation again, with asset values moving in tandem.

So, be prepared to buy in this coming wave down, if we get a nice drop over the next year or so, because select equities could be a nice hard asset to own through the turmoil in the currency and sovereign debt markets, which is likely to spread to the US, UK, Germany and Japan by later this decade.

Are there any good buys emerging in Greece?

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It may be interesting to look at some of the public companies in the hardest-hit European countries, since the stock indices here are lower than anytime in at least a decade. Here are the results of a search for Greek shares, with an eye towards companies in defensive industries that will not be hurt, or could even benefit from a weaker currency.

All of these businesses are likely to survive a very bad economy, even if they go bankrupt – the question is how the equity holders will fare.

Athex index chart (Athex is now 60% lower than at the 2009 bottom): http://www.bloomberg.com/quote/FTASE:IND/chart

List of top 20 Greek companies by market cap as of May 2010: http://topforeignstocks.com/2010/05/09/the-top-20-greek-companies-by-market-capitalization/

Here are a few names – these first 2 look strongest to me (bottler and utility):

Coca Cola Hellenic Bottling Co:

Biggest foriegn Coke bottler

http://www.bloomberg.com/quote/EEEK:GA/chart

http://en.wikipedia.org/wiki/Coca-Cola_Hellenic

EUR 13.00, EPS 0.93 – not really cheap yet by earnings, 1.62x book. Keep an eye on this one.

Public Power Corp SA , ticker PPC

Biggest utility in Greece. To raise cash, the gov sold 17% of its until then 51% stake.

Plants are mostly coal-fired.

http://www.bloomberg.com/quote/PPC:GA

http://en.wikipedia.org/wiki/Public_Power_Corporation_of_Greece

EUR 5.30, EPS 1.10 – very cheap by earnings, 15% dividend yield.

Hellenic Telecommunications Organization S.A., ticker HTO

http://www.bloomberg.com/quote/HTO:GA

http://en.wikipedia.org/wiki/OTE

3.6% div yield, 15 PE. 1.14x book – not cheap at all, though stock is way down

Boutaris J & Sons Holdings SA , ticker MPK (preferred shares also traded)

6 Greek wineries, one in France, most recognised Greek wine brand

Company website: http://www.boutari.gr/?TEFORz1FTg==

http://www.bloomberg.com/quote/MPK:GA

No earnings data available, but trading at 0.3x book and 0.27x sales.

Attica Group

Largest ferry operator

http://www.bloomberg.com/apps/quote?ticker=ATTICA:GA

http://en.wikipedia.org/wiki/Attica_Group

No earnings data, but 0.12x book

ANEK Lines SA

Ferries

http://www.bloomberg.com/quote/ANEK:GA

http://en.wikipedia.org/wiki/ANEK_Lines

Europe’s dead stock markets

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There is a huge range of performance among European bourses since the 2008-2009 crash. In the previous boom, all markets went up together, but these charts show that investors are now much more discriminating, and that there is a huge range of optimism among these countries.  Here is a series of 5-year charts from Bloomberg (you can browse lots more charts here):

Greece:

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Iceland (I’ve never seen a stock index that looks like this – it’s more like the aftermath of a penny stock pump-and-dump):

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Ireland:

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Italy:

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Portugal:

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France:

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Luxembourg:

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Switzerland :( I’m surprised that this is not higher, since the economy here is strong, but the Swiss are very conservative and becoming more so, preferring cash and gold to stocks):

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Denmark:

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Germany (DAX):

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United Kingdom (FTSE 100):

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The FTSE and DAX typically trade like the S&P500, shown below for reference:

These higher-quality markets are now very expensive and technically weak, and if they enter into another bear market the lower-quality markets should follow, quickly breaking their 2009 lows. Bottom feeding value investors may then be able to find a few odds and ends in the rubble.

Hussman: Market risk is extreme

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John Hussman is the rare mutual fund manager who uses technicals and hedging to minimize risk and maximize returns during a full bull-bear cycle. He hedged up in 2000 and 2007 to preserve his fund’s equity during the ensuing bear markets, and is again tightly-hedged in preparation for another downturn.

His weekly market comment is a must-read (if you just read this and Mish’s blog regularly, you’re all set). He uses a set of indicators to identify periods during which risk is elevated based on historical statistical analysis. They are: 1) stock market investor sentiment, 2) Case-Shiller PE ratio, 3) Treasury yield trends, and 4) price action (to indicate whether stocks are overbought or oversold using moving averages).

He concludes each market comment (in which he puts on his academic cap to discuss market statistics, Fed policy, etc in geeky detail), with a quick summary of where his funds are positioned according to the prevailing risk profile. When he starts his conclusion like this, you better not be long stocks:

Market Climate

As of last week, the Market Climate for equities was characterized by an unusually extreme profile of overvalued, overbought, overbullish, rising-yield conditions. Both Strategic Growth and Strategic International Equity remain tightly hedged here.

Here is a chart showing where these market conditions have existed in the past:

Is the bounce about over?

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Glancing around at the commodity and global stock markets, it looks like the bounce from last month’s lows has been adequate to reset psychology for another decline. This is not to say things have to drop this week, but if prices fail to push higher gravity could take over, as the general climate appears to be shifting back to de-risking and deflating (credit downgrades, budget cuts, poor housing sales, lack of hiring, treasury bond strength, etc).

China is the perfect proxy for risk appetite, as it had the biggest stock bubble and action there is linked to gobal consumer demand and industrial commodity prices. Here’s a long-term view of FXI, the ETF of largecap Hong Kong-listed Chinese shares. The big bounce ran out of steam last October, after which prices have made a series of lower lows and lower highs, the definition of a downtrend. Daily RSI and MACD suggest that short-term upside momentum may be stalling:

TD Ameritrade

Taking a look at a 4-hour chart of SPX futures (ES), I wouldn’t necessarily expect stocks to keep dropping this week. In fact, it would be somewhat clearer if we got one of those rollercoaster topping patterns over the coming days, where stocks rally and fall by 2-3% for a few times to bleed off the momentum, such as they have done at the last three intermediate-term tops in October, January and April.

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If SPX sticks to that topping pattern, it could fill the box I’ve drawn below on the daily chart, meaning another try or two at 1130:

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Gold shifts to negative beta vs. stocks

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Gold’s correlation with stocks comes and goes — sometimes it’s extremely high, sometimes negative and sometimes it has none at all. It’s been pretty high for much of the last 12 months, but has turned negative since March. At times on a minute-by-minute scale it moves almost tick for tick opposite stocks (much like the treasury bond or Japanese yen).

5-day view:

12-month view:

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To me, the temporary nature of intermarket correlations means trading each market on its own technicals.

Silver

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Hard to deny there’s a bearish pattern here:

TD Ameritrade

The precious metals have ambivalent correlations with stocks these days, so I’m not sure what the above means in the scheme of things, other than the commodities echo bubble slowly deflating. Sometimes the metals are high beta, sometimes negative, and sometimes they seem to have no correlation at all.

Take this week’s equity drop seriously.

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Longs are playing with fire here. This market is at least as dangerous as 2007 or 2000. What happens when this multi-decadal asset mania fizzles out, like they all do? The last 12 months show that it won’t give up the ghost without a fight, but it is very long in the tooth, as is this huge rally. Also, the short-term action of smooth rallies followed by sudden drops is uncannily similar to 2007.

Stocks left the atmosphere in 1995, but since 2000 gravity has been re-asserting itself. After extreme overvaluation comes extreme undervaluation. On today’s earnings and dividends, even average or “fair” multiples would put the Dow near 4000, right back to 1995.

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Charts from Stockcharts.com

A note on gold and the dollar:

I suspected a few weeks ago that gold had a rally coming, and now that we’ve seen it I’d be careful to use stops and not get too confident.

I still like gold for preservation of purchasing power through this secular bear market in real estate and stocks, but when financial markets turn down again in earnest it won’t be spared. Remember, it kept going to new highs in late 2007 and early 2008 after stocks had peaked, but then tanked with everything else when panic hit. Cash is still king, especially in US dollars and Treasury bonds. We may have only seen the start of this deflation.