Daily Update Weds 02 September

Jittery US markets sold off yesterday on rumours that hedge fund Cerberus was in meltdown, and a report that Chinese state-owned companies will walk away from loss-making commodity derivative trades with US investment banks didn't help. Certainly, junk like AIG was overdue a selloff after a bizarre August rally, and this should prove a healthy correction from overbought levels; US markets hadn't been down more than two days in a row since mid June. Interestingly, the market began the day by rallying on the August ISM purchasing manager’s survey which reported that the manufacturing industry is now expanding, with a reading of 52.9%. The index is a diffusion index, which asks manufacturing managers how conditions have changed over the month, with answers being categorized according to improved, unchanged, or worsened but a reading above 50 does indicate that the US manufacturing sector is now generally expanding, and that chimes with similar surveys in Europe and Asia. As the chart indicates, that has historically been a strong lead for GDP recovery. With incoming data like this, and credit spreads still narrowing, fundamentally things look very different to a year ago, when seasonal anxiety was very much justified.

 

 

Hedge fund manager Doug Kass said he is betting on a 10 percent decline in U.S. equities during the second half of the year, on the belief that economic performance and corporate profits will disappoint well into next year. "I am shorting this market because we are facing a period of disappointing economic and corporate growth," Kass, founder and president of Seabreeze Partners Management, told Reuters. "My guess would be that the Standard & Poor's 500 Index will be about 920 or so by year end."  Kass was one of the few bears who turned tactically bullish in March, so has earned himself credibility. Like the wave counting Bob Prechter, he thinks we've seen the high on global equities for this year...but such is the expectation that we're due a shakeout that if we don't, or it's shallow, the bears who have dismissed this rally will be forced to capitulate and push us much higher. 

 

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index annualized growth rate soared to a 38-year high of 19.6%  from a downwardly revised 17.4 percent the prior week. It was the WLI's highest yearly growth rate reading since the week to May 28, 1971, when it stood at 20.5 percent. "With WLI growth continuing to surge through late summer, a double dip back into recession in the fourth quarter is simply out of the question," said ECRI Managing Director Lakshman Achuthan, reinstating the group's recent warning to ignore negative analyst projections. He added that the index was pulled down this week due to higher interest rates. Achuthan has recently projected that the recovery is moving at a stronger pace than any the United States has seen since the early 1980s. I rate these guys highly, they have a tremendous forecasting track record spanning several decades...I said in last week's commentary that a stronger than expected recovery may cause more problems for investors in 2010 than the anaemic affair that is the consensus.

 

Trading in Mosaic Co. options jumped to a six-week high on renewed speculation that North America’s second-largest potash producer will be acquired. The shares climbed as much as 4.8 percent, halting a seven-day retreat. Volume in bullish call options rose to 107,203, more than five times the four-week average and seven times the number of puts. Calls give the right to buy a security for a certain amount, the strike price, by a given date. Puts convey the right to sell. The stock gained 1.8 percent to $49.32 at 2:20 p.m. New York time, after losing 11 percent since Aug. 20. The most-active contracts were September $60 calls, which more than doubled to 52 cents and accounted for almost a third of today’s trading. A buyer at that price is betting that the stock rises to at least $60.52 before the options expire Sept. 18. The stock hasn’t closed above $60 in 11 months. I've long been of the view that we are going to see major consolidation in the fertilizer sector, led by China. Certainly the price premium sounds right, but who knows as to timing.

 

Paul Tudor Jones, the billionaire hedge-fund manager who outperformed peers last year, is wagering that Goldman Sachs Group Inc. and Morgan Stanley got it wrong in declaring the start of an economic recovery. Jones’s Tudor Investment Corp., Clarium Capital Management LLC and Horseman Capital Management Ltd. are taking a bearish stand as U.S. stock and bond prices rise, saying that record government spending may be forestalling another slowdown and market selloff. The firms oversee a combined $15 billion in so- called macro funds, which seek to profit from economic trends by trading stocks, bonds, currencies and commodities. “If we have a recovery at all, it isn’t sustainable,” Kevin Harrington, managing director at Clarium, said in an interview at the firm’s New York offices. “This is more likely a ski-jump recession, with short-term stimulus creating a bump that will ultimately lead to a more precipitous decline later.”  He's right, but in the meantime there's money to be made...as an investor you have to stay agnostic, not dogmatic, and be willing to switch from a bearish to bullish tack and back again as the evidence presents itself.

 

From the WSJ: Day after day, economists, politicians and journalists repeat the trope that the current recession is the worst since the Great Depression. Repetition may reinforce belief, but the comparison is greatly overstated and highly misleading. Anyone who knows even a bit about the Great Depression knows that this is false. The facts we face today are very different than the grim reality Americans confronted between 1929 and 1932. True, this recession is not over. But it would have to get improbably worse before it came close to the 42-month duration of the Great Depression, or the 25% unemployment rate in 1932. Then, the only safety net was the soup line. The current recession is also much less severe than the 1937-38 Depression. A more accurate comparison is to the 1973-75 recession. Today's recession is as deep and most likely won't be much longer than the one we experienced some three decades ago. This is a point I made forcefully six months ago when the markets suffered a nervous breakdown...like the much hyped 'war on terror', exaggerating the threat suited the purposes of politicians and vested interests seeking to push through self-serving 'emergency' policies.

The Australian economy expanded at a higher than expected rate in the three months ended June, helped by robust contributions from the household sector and business spending on machinery and equipment. The Australian Bureau of Statistics said on Wednesday that seasonally-adjusted gross domestic product grew by 0.6 per cent in the second quarter compared to the previous three months. Economists had been looking for a figure of closer to 0.2 per cent after trade figures announced on Tuesday showed an unexpectedly sharp fall in exports during the three months ended June. The economy also expanded by 0.6 per cent on a seasonally-adjusted basis compared with the same period last year. Australia’s GDP grew a revised 0.4 per cent quarter-on-quarter in the first three months of the year. Australia and Canada are best placed medium-term among the developed economies because effective regulation spared them the worst of the credit crisis fallout and they are blessed with the world's biggest and most diverse natural resource wealth per capita, from energy to rare earth metals.

 

Sean

 

Sean Maher

www.deadcatsbouncing.com

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