Bearish Albert

"... although our deflationary arguments are gaining some traction in the bond market, investors have yet to fully acknowledge we are now walking on the deflationary quicksand that will inevitably suck us towards total fiscal and financial ruin – you ain’t seen nothing yet. With core inflation rates now sub-1% in the eurozone and the US, we are only one recession away from Japanese-style deflation.... The response to the coming deflationary maelstrom will be additional money printing that will make the recent QE seem insignificant. The super-inflationary end result will become obvious to all."

"The latest dreadful housing sales data in the US indicate just how dependent this sector has been on steroids as well for any sort of recovery. Withdraw the stimulus and down comes the house of cards."

Albert Edwards

"Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed's balance sheet from $2.4 trillion to uncharted levels of $5 trillion."

Ambrose Evans-Pritchard

Ripe for shorting?

The subject at hand is the state of the estate. The US real estate, that is. The proxy in the brief discussion is its ETF incarnation, iShares Dow Jones US Real Estate (Public, NYSE: IYR). It has been a steady money maker, if you bought it in March 09. Since then, it is up 98%. Yet, some cracks seem to be appearing in its shiny armor. Is it getting a bit ahead of itself, perched so high above the not-so fast growing green shoots?

A question follows: why bother with shorting murky Chinese real estate developers in HK when one can play at home?

A reference point: last time it stood at $50/share was in June 2004. Surely June 2010 has a bit of a different view from the window.

Buying Into a Pariah

T2 Partners are bullish on BP:

"If the time to buy is when blood runs in the streets, it’s time to buy BP. The stock is down 50%, it pays a 10% dividend and everybody hates it. It has nowhere to go but up, say two investment managers."

via Barron's

More of the same, for now...

"As the financial crisis has receded, the Federal Reserve has scaled back its extraordinary provision of liquidity. Eventually, the Fed will remove all remaining monetary stimulus by raising the federal funds rate and shrinking its balance sheet. The timing of such renormalizations depends crucially on evolving economic conditions.

Many predict that the economy will take years to return to full employment and that inflation will remain very low. If so, it seems likely that the Fed’s exit from the current accommodative stance of monetary policy will take a significant period of time.

Assuming unconventional policy stimulus is maintained... the recommended period of a near-zero funds rate would end at the beginning of 2012."

Glenn D. Rudebusch at the Federal Reserve Bank of San Francisco

1. Low rates push both retail/institutional money out to chase yield/risk.
2. Risky assets go up in price and miscellaneous speculations ensue.
3. Speculations imply losses.

"One of the big drivers of the equity volatility is the Fed's zero rate policy, which is forcing investors to search for yield in some very strange places. Once again, we call on our friends at the Federal Reserve Board to let interest rates slowly start to rise before this situation gets entirely out of hand -- again. As we said at the top of this comment, the banks are on the mend. Time to find out whether the US economy can grow with positive real interest rates."

Christopher Whalen

Is BP hated enough?

Not by PIMCO:

"Bill Gross... recently bought $100 million of shorter-maturity BP debt..."

via Bloomberg

Yes, it is short-term maturity. However, it is indicative of a certain set of assumptions and/or expectations. BP will suspend its dividend until the rest of the year. But if it survives as a "going concern", where would its stock be 5-10 years from now?

XOM has been up about 2100 percent since the Exxon Valdez spill in 1989. Yes, the differences are obvious to even a non-discerning eye. But, we need oil. Also, if anything, BP is gaining expertise in dealing with the situation and may be able to apply its knowledge if a comparable disaster occurs in the future. Granted, BP's future seems to be dark today. Even very dark. Dark enough not to touch it with a ten foot pole. Dark enough to make it attractive?

On relative cheapness

"The biggest decline for global equities in 15 months has left stocks at the cheapest level relative to bonds since the collapse of Lehman Brothers Holdings Inc., a sign that shares in the U.S. and Europe may rally."

“Against other asset classes, equities look really cheap,” said Barry Knapp, head of U.S. equity strategy for Barclays in New York. “It could mean that we’re completely wrong on the inflation outlook, which means it’s going to get much worse, much faster. Or it could mean that stocks are decidedly cheap and people are overly cautious.”

via Bloomberg

If one walks into a Mercedes Benz showroom, there will always be a model that will look "cheap" in comparison to the more expensive ones.

And today's sobering quote:

"Wall Street seems to have no concept at all that every bit of growth we've observed over the past year can be traced to government deficit spending, with zero private sector expansion when those deficits are factored out."

John Hussman

NY Fed on residential real estate

"The severe decline in house prices in the last few years, combined with the large number of borrowers who had little or no equity at the origination of their mortgages, has led to a dramatic rise in homeowners with negative equity... unless house prices increase substantially, many negative equity homeowners will in fact convert to renters in the years ahead, and the measured rate of homeownership will decline..."

"The Homeownership Gap" by Andrew Haughwout, Richard Peach and Joseph Tracy.
Federal Reserve Bank of New York/Current Issues.

Commodity prices. Predictably irrational?

"A recent paper by economists Ke Tang at Renmin University in China and Wei Xiong at Princeton University documents how commodity prices have become increasingly correlated with one another and with stock prices. The reason, the economists argue, is that commodities have become increasingly “financialized” by the creation of exchange-traded funds that allow investors to easily trade in and out of them. So when investors get worried by things like what’s going on in Europe, commodity prices can fall sharply even though actual demand for commodities may be running higher."

WSJ

Used to be macro plays... Not anymore?
Used to be diversification vehicles... Not anymore?
Used to be the supply of oil meeting the demand and voila! the price is born... Not anymore?
I am going to read this paper. I want to know the break-down of commodity price movements: by how much (degree) and for how long (sustainability) is it driven by the ETFs? Are fundamentals still responsible for the majority of the movement?

Tired of inflation-adjusted peaks

Richard Bernstein is selectively bullish on US and bearish on China:

"I think China is already imploding ... from an investment point, it is... My argument is as an investor, you don't care about the Chinese economy but about the valuation of Chinese assets... You have to be careful in terms of the prognosis, especially for the United States, that this is going to become Argentina."

Richard Bernstein via Reuters

Back to the subject of the yellow metal. A sample of recent quotes follows:

"On an inflation-adjusted basis, however, gold is far from its peak level of 1980..."
"When adjusted for inflation, however, gold remains far short of its all-time high..."
"Gold’s rally to a record means prices are still 53 percent below the 1980 inflation-adjusted peak..."

Following this "logic", stocks have to repeat their year 2000 highs very soon. How about 1936 lows, anybody?
By the way, gold hit its 1980 peak and then retreated very rapidly. Within a month, the game was over, followed by a 22 year-long bear market. Makes one think.

Market Sentiment

"Stocks in U.S. Decline... Spreading European Fiscal Deficit Crisis... Economic Rebound in U.S. Seen Slowing Most Since 2002..."

via Bloomberg

And to the quote of the day:

“People are trying to protect themselves and they are willing to overpay for it... Bearishness is high. The best time to buy stocks is when the level of bearishness is at a peak.”

Byron Wien via Bloomberg

An Outlier

This, of course, does not mean anything and is just an observation. Only one component of the S&P 500 had a gain today. It was a biopharmaceutical company called Cephalon, Inc. (Public, NASDAQ:CEPH) and it was up 0.53%.

But the more familiar to some of us Krispy Kreme Doughnuts (Public, NYSE:KKD) fought its way up, too.
In today's brutal market, the maker of the Original Glazed was up 6.78%.

Can doughnuts provide a meaningful hedge in down markets? :)

The usual suspects (Gold, Treasuries) gained. Natural gas was also up.

From China, with concern

"The media would have you believe that the ongoing "official" correction in the U.S. equities market is all about the southern member states of the Euro-zone – Greece, Portugal and Spain (GPS). Although concern about the economically-weak and highly-indebted Euro-zone states have played a role in the U.S. equities market correction, we think there is more to the correction than GPS. Moreover, we believe that the problems of these challenged Euro-zone members will not have a significant effect on U.S. or global economic activity in the foreseeable future. China might, but not Greece, Portugal and Spain."

Paul Kasriel/Asha Bangalore

Indeed. We need to refocus on the real elephant in the room: China. Because, as much as the Mediterranean fellows above would like to matter a lot, maybe they don't, relatively speaking. Greece is a great nation. But just not as big as China. Should China slow down its commodity hoarding: down the market goes. And not the puny 10 percent down. Should it really cool off its infrastructure spending: down. Should it talk about buying less Treasuries: yields up right away, in a meaningful way. But not yet.

China sure has its hands full. The whole export-internal consumption reorientation and etc. And some of us may talk about shorting its real estate companies being a sure bet. But I suspect that the Chinese government will do everything it can to limit the downside and not to lose face. And it may as well be able to deflate this slowly, without major blow-ups, at least officially. Instead of a burst, we may get a prolonged, controlled decline. Isn't that at least a possibility?

Let's not forget that in China, the private sector does not end where the Party starts and vice versa. If we bailed out pretty much everybody, I am pretty skeptical on China not doing the same for its lenders/developers. Debt "restructuring" and robust/ongoing cap infusions will follow. This is not 1998 and China is no Russia. Nobody is defaulting on anything and the show must go on. Monetize and Infuse. And if it goes long enough it might as well outlast the current deflationary spell in the West and James Chanos' shorting effort.

"It’s not yet time for China to discuss reducing or stopping policy support for the nation’s real estate industry, the Securities Times reported today, citing Li Fuan, head of the China Banking Regulatory Commission’s department of banking innovation."

via Bloomberg

Not yet.

Market Sentiment

"Treasury Prices Fall as Sentiment Improves... Euro Gains as Worries Recede... Gold Slips as Safety Play Simmers on Back-Burner"

WSJ

Overall, looks rather positive. Time to sell?

Also, John Mauldin is talking about the biotech stocks and how they may become the next "it".
I like the idea of biotech because of its inherent exposure to the so-called positive "Black Swans".
In some ways, they are similar to book publishers: if one book out of 10/20/30 becomes a hit, the business is good. Downside is somewhat limited and the potential upside can be very significant. And the product is super scalable, too. Unlike dentistry (I am borrowing heavily from Taleb here).

The value of hesitation

I thought that this one was just too good to pass on:

"With such puny yields on offer in most parts of the capital markets, an investor has two choices: First, accept the fact that we are in a low-yield environment. This is hard for most investors to do. They are beholden to a predetermined return hurdle or are slaves to the persistent memory of recent experience. Second, seek out investments that have a greater propensity for capital gains or higher yields in order to increase total return."

via Annaly Salvos

Are investors currently taking on more risk than they think/believe? Is gold, at least partially, being driven up by the reasons outlined above?

A vote of confidence

"German Gref, the head of Sberbank, Russia's biggest lender, became a shareholder in the firm for the first time after buying a 0.000004 percent stake worth $2,500, the bank said on Monday."

via Reuters

Note: Sberbank's market cap is about $51.2 billion.