Daily Market Reports | Dec 15 2011
By Rudi Filapek-Vandyck
The Dow Jones Industrial Average gave up 131.46 points, or 1.10%, to finish the day at 11823.48, a third consecutive loss this week and a two-week low. The Standard & Poor's 500-stock index lost 13.91 points, or 1.13%, to 1211.82 and the Nasdaq Composite fell 39.96 points, or 1.55%, to 2539.31.
One of my key observations since 2008 is that currency markets more often than not lead the rest. The same observation stands today. Don't ask why, how, or when, simply observe how the euro has come under tremendous selling pressure this week and draw the only conclusion that can be safely drawn from the event: risk aversion is on the rise, there's no appetite left for risk.
There was no specific event as to why prices for risk assets continued to hit a wall of selling overnight in offshore markets other than the obvious fact that investors are probably giving up on 2011. When BTIG market strategist Dan Greenhaus visited institutional clients in November he couldn't help but notice a general relaxed feeling about what was going to transpire in the weeks ahead.
One of the fund managers even spelled it out for him: a Santa Claus rally was pretty much baked in the cake this year. Greenhaus thought: uh oh and so did I at the time.
It's probably a fair assumption that those fundies who thought an easy gain was theirs simply by sticking around long enough are now retreating to the sidelines, licking their wounds as Germany's Angela Merkel and the ECB refuse to perform Santa Claus Is Coming To Town despite worldwide pleas from disappointed investors.
European bourses closed near their lows for the day, while investors still long LME metals finally lost their bottle. The real war, however, continues to unwrap in the precious metals markets where gold closed below its day 200 moving average, an event not seen since January 2009 – go figure. (In case you missed it, you may want to read my Overnight Reports from the past two days, the one published on Tuesday in particular).
Just as a side-observation: the Shanghai equities market is now back at levels last seen in March 2009. As the Chinese market has oft been cited as a leading indicator in years past by many experts, surely this in itself could be highlighted as one reason why this week's general weakness is a bad omen.
Flashbacks of December 2007 are re-appearing… if markets cannot rise in what is still traditionally the most profitable time of the calendar year… (I am sure everyone can finish off that sentence for him or herself).
If we have to pinpoint a few events that contributed to last night's risk aversion we can refer to further statements by Merkel that the new emergency fund won't receive additional funds and that the process of recalibrating European budgets will take years and patience. There was the fact that M2 money growth in China surprised to the downside and an auction for Italian debt leading to an unsustainable price paid by the Italian government.
It all comes down to the same thing: risk aversion is conquering the world's psyche and there is no better gauge than the euro, whose fortunes throughout this year have been closely aligned with risk assets and risk appetite. A retreat for EUR/USD below the psychologically important 1.30 is thus very, very, very bad news.
Don't be surprised to see the Aussie even weaker today. If the HSBC flash estimate of China's PMI for December doesn't surprise to the upside we'll probably see AUD/USD testing 0.97 in a heartbeat.
Meanwhile, the general retreat was so universal last night that not even crude oil could stand against it. Despite rumours of Iraq planning mischief in the Strait of Hormuz. Go figure.
Those who have been reading my Overnight Reports this week will have noticed that I have used the absence of Greg Peel (on holidays) to mix the never-ending saga in Europe with updates on what various market experts are suggesting and predicting for investors. On Tuesday we had one helluva Big Call from Dennis Gartman (the gold sector is still trembling today) and on Wednesday I quoted Goldman Sachs' ever so popular Richard "Coppo" Coppleson, JP Morgan's Thomas Lee and Glushkin Sheff's Dave Rosenberg.
In terms of Bulls and Bears, Gartman and Rosenberg are definitely not on the same song sheet as Coppo and Lee, who both have a longstanding legacy of choosing the positive choice when forced. Today, I am afraid the balance in expert voices will shift in favour of the Bears, which doesn't mean you should stop reading. Investing is one long journey of constant education and learning; at least, that's how it's meant to be (equally at times of extreme duress).
There's something about "legendary" investors that makes paying attention to them worthwhile. Maybe it's because while still being human, and thus by default fallible, history shows they are more often than not on the right end of the trade when key trends change. This is, after all, what makes them deserving of the label "legendary".
One such legendary personality is Bob Farrell. Subscribers who have full access to the FNArena website can read more about Farrell in the Take Note section, including his "Ten Market Rules To Remember". Rule number eight is "Bear markets have three stages – sharp down – reflexive rebound – a drawn-out fundamental downtrend".
I guess this answers all questions about the type of market we are presently observing?
Farrell leads a rather reclusive existence these days, but he still writes his subscription based newsletter. Last time I read a copy it had a mildly supportive undertone, but that has changed dramatically this time around. Long-time admirer Dave Rosenberg, once upon a time inspired by Farrell's market wisdom when working for Merrill Lynch, recently caught up with his idol and he reports about the occasion in today's daily Breakfast With Dave newsletter.
I already gave it away, didn't I? Farrell is not positive about the outlook for equities. In Rosenberg's words: "he is as bearish as I've seen him in two years".
In a nutshell, here's what Rosenberg reports about Farrell's current views:
– the cyclical peak for equities occurred in April
– Farrell sees a range for the S&P500 of 1350-1000 and now we are heading for the lower side of the range
– there is more downside risk than upside potential
– this bear market is going to last twenty years; we are currently in year 12 (past halfway)
– the US market's P/E multiple is likely to trough at 8
– when buying equities, investors should choose defensive sectors, good management, low cost structures and strong balance sheets; buy "quality"
– overall sentiment is not low enough to start thinking "contrarian" as yet
– 2012 will be a down-year
One of the experts in the domestic, Australian market who has been on the right side of the share market's underlying trend since early 2010 is Daniel Goulding, once upon a time operating under the wings of RBS Morgans, but nowadays publisher of his own weekly: The Sextant Report. Goulding stood out in 2010 when all forecasts where for the ASX200 to rally past 5000 and up to 6000, by stating the index would not move past 5000 on a sustainable basis and it would end this year at around 4500 instead.
Prior to this week, Goulding's forecast not only seemed very prescient, it also still carried the promise of a potential positive end to the year. That has now changed, as Goulding this week revised his target for the ASX200 by year-end to 4175. For next year, Goulding's forecast is, put simply, decidedly bearish. Should I add "with Conviction"?
His forecast is for the ASX200 to bottom near the 3000 level at some point between September 2012 and March 2013.
The positive element in his market view is that he's equally convinced that the current wash-out will ultimately pave the way to the next, multi-decade bull market which at present is anticipated to commence either in 2015 or 2016.
Offsetting these Bearish views in Australia is the seemingly endless optimism -equally "with Conviction"- from Empire Securities Group's Clifford Bennett who remains of the view that investors are misguided by negative headlines. Equities are in a bull market, says Bennett. Instead of focusing on the gap that still exists between the peak from November 2007 and where markets are today, he prefers to take guidance from the distance equities have traveled since March 2009.
It has been a tough environment for someone with such strong positive conviction in 2011. I reported earlier this year Bennett declared at the Melbourne Trading and Investment Expo everyone should leverage to the gills in anticipation of the next upswing in this "bull" market and no doubt many who witnessed his public enthusiasm, but did not follow his advice, are today either shaking their head or smiling.
Bennett is still predicting 2012 will be a fan-tas-tic year for those investors who remain long equities, resources stocks in particular. His advice is: "Be extremely bullish, it's not too late". 2012 will be a "spectacular" year (his word, not mine).
Today is global PMI day, so that could be fun (or not). But keep an eye open for that HSBC flash estimate.
I have no idea as to why exactly the Australian share market refused to fall further in yesterday's session, but I'd be surprised if the current SPI indication of yet another mildly lower opening today proves correct. Energy stocks and miners were totally out of favour in both London and New York last night.
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