06 Jun

When Should We Buy Stocks?

Categories: Asian View

The Dow is still above 12,000; stocks may not be at their peak, but they are far from their bottom. You’ll know it when you get to a real bottom. Investors are so glum you have to hide their guns. That’s when you get P/E ratios of 5 and dividend yields of 5%. That’s when you get bargains. Someday, unless this really is a new era, they will be real bargains. This day they are not.
-Bill Bonner, The Daily Reckoning

The big events during the last two days were of course rating agency Egan-Jones cutting the credit rating for the United Kingdom on Monday to AA-minus with a negative outlook from AA, and Australia’s central bank cutting interest rates for a second month running on Tuesday in a bid to shore up confidence at home.

In other news two top Fed officials said yesterday the US economic outlook has not deteriorated to the point that a further easing of monetary policy is warranted, suggesting the US central bank is not gearing up for action at its upcoming meeting on June 19-20. First see, and then believe I would say because everyone knows that talk is cheap, right?

World and US stocks managed to recover some ground from their recent swoons, despite the concerns over Europe. In Asia for example, markets on average were up more than 1 percent this morning and sentiment improved a bit.

But is it time NOW to invest in stocks? Not if you believe Bill Bonner from The Daily Reckoning who claims “a lot of people say stocks are cheap. Get ready for another grand bull market!

What do we say? Nah … The problems are:

  1. This ain’t 1956 … this is 2012. The US is no longer on top of its game. It’s no longer in full expansion. It is slipping … sliding … burdened by high costs … zombie industries … and corrupt governments. Growth rates are low … lower than the rate of debt-build up … There is not reason to think America’s capital structure – either stocks or bonds – will become more valuable.
  2. Stocks are not cheap. They are only cheap when you compare them to bond yields. But bonds yields are suppressed by a Great Correction … about which more below. In order to be absolutely cheap, US stock prices will have to be cut in half – at least. That would put yields and P/Es near where you can get a 5%+ yield and buy a dollar’s worth of earnings for $5 … not $12. Then, stocks will be cheap.
  3. Bond yields fall in a correction because people do not want to increase their debt levels; they want to reduce them. They also reduce spending … which lowers business sales and profits, thus making stocks less valuable, not more valuable. As the Great Correction intensifies (and it appears to be doing so now) we can expect stocks to follow the Japanese example. Japan has been in a Great Correction for 22 years. Its stocks have lost ¾ of their value. They’re still down 75% - nearly a quarter century after the correction began.

It’s time to sell stocks, not buy them.

Thanks Bill and well said. You are truly the best! Even though I admit that the global stock markets could rally if the central banks decide to take some drastic actions, I also think that stocks in the developed countries have entered the next phase of their secular bear market that started in 2007.

By the way, how do you expect stocks to go up when the world economy is slowing down (rapidly)? And it is not only Europe and the UK that are already in a recession, but also the US, Japan, and even China seem to have difficulties in keeping up their growth rates.

John Mauldin calls it ‘A Synchronized Global Slowdown’ in his weekly investment newsletter Thoughts from the Frontline on June 2, 2012:

While synchronized swimming may be an event (if an odd one) at this summer’s London Olympics, a synchronized global slowdown is not an event in which you want to get a medal. We looked at a spate of bad data last week, and we got even more this week. Lost in the bad employment data this morning was the news out of Asia. Australian manufacturing is clearly in a recession. India is posting its slowest growth in nine years. China is on the edge of a downturn in manufacturing. Unemployment is rising all over Europe and is much worse than in the US. German (!!!) credit default swaps are rising and are now higher than in 2008! Bank deposits in Europe are contracting at a faster rate than at any time in the last 14 years (the farthest back I can find data).

And while I don’t want to steal too much thunder from next week’s Outside the Box, I will pass along just this one graph from Greg Weldon (www.weldononline.com), showing that the PMI numbers for Europe came in almost universally bad. Note that the two-year average is getting ready to go negative.

The jobs number suggests the US is at stall speed. I wrote at the beginning of the year that if someone could guarantee 2% growth for the year I would take it. That still seems like a good bet, as I don’t think we are going to get near 2%. An economic shock from Europe, which is quite possible, could push the US and most of the rest of the world into recession. The weakness in China and the rest of Asia gives even more cause for concern.

Last Thursday Tyler Durden at www.zerohedge.com offered a glimpse of the future through the eyes of Raoul Pal. Although the title of his note is quite terrifying, i.e. “The End Game: 2012 And 2013 Will Usher In The End – The Scariest Presentation Ever?”, I strongly suggest every investor to read it until the end.

I have been telling people here in Indonesia we are now probably in the eye of the storm, and once we come out of it out the other side they’d better hold on to their hats (money). But … I must admit most of them don’t seem to be worried that much because they think the strong fundamentals of the Indonesian economy is going to keep the market up. So complacency all around indeed ...

Please enjoy – if you can stomach it – the following comments about Mr. Pal’s PowerPoint presentation:

If Raoul Pal was some doomsday spouting windbag, writing in all caps, arbitrarily pasting together disparate charts to create 200 page slideshows, it would be easy to ignore him. He isn’t. The founder of Global Macro Investor “previously co-managed the GLG Global Macro Fund in London for GLG Partners, one of the largest hedge fund groups in the world.

Raoul came to GLG from Goldman Sachs where he co-managed the hedge fund sales business in Equities and Equity Derivatives in Europe … Raoul Pal retired from managing client money in 2004 at the age of 36 and now lives on the Valencian coast of Spain, from where he writes.” It is his writing we are concerned about, and specifically his latest presentation, which is, for lack of a better word, the most disturbing and scary forecast of the future of the world we have ever seen

And we see a lot of those.

Consider this:

  • We are here at the centre of the storm
  • We don’t know exactly what is to come, but we can all join the very few dots from where we are now, to the collapse of the first major bank...
  • With very limited room for government bailouts, we can very easily join the next dots from the first bank closure to the collapse of the whole European banking system, and then to the bankruptcy of the governments themselves.
  • There are almost no brakes in the system to stop this, and almost no one realizes the seriousness of the situation.
  • The problem is not Government debt per se. The real problem is that the $70 trillion in G10 debt is the collateral for $700 trillion in derivatives...
  • Yes, that equates to 1200% of Global GDP and it rests on very, very weak foundations.
  • From an EU crisis, we only have to join one dot for a UK crisis of equal magnitude.
  • And then do you think Japan and China would not be next?
  • And then do you think the US would survive unscathed?
  • That is the end of the fractional reserve banking system and of fiat money.
  • It is the big RESET

It continues:

  • Bonds will be stuck at 1% in the US, Germany, UK and Japan (for this phase).
  • The whole bond market will be dead.
  • Short selling on bonds – banned
  • Short selling stocks – banned
  • CDS – banned
  • Short futures – banned
  • Put options – banned
  • All that is left is the Dollar and Gold

It only gets better. We use the term loosely:

  • We have around 6 months left of trading in Western markets to protect ourselves or make enough money to offset future losses.
  • Spend your time looking at the risks of custody, safekeeping, counterparty etc. Assume that no one and nothing is safe.
  • After that … we put on our tin helmets and hide until the new system emerges.

And the punch line

From a timing perspective, I think 2012 and 2013 will usher in the end.

And Albert Edwards, the strategist from Société Générale, was channeling Dante again when he released the follow up for clients on “All Hope Must Be Crushed For A True Bull Market To Emerge:

As 30y German Bund yields slide below 2% and rapidly converge towards Japanese rates, we have a taster of what is to come in the US and UK in the months ahead. We still see US 10y yields – even now making new all-time lows – falling below 1% as hard landings occur in China and the US. The secular equity valuation bear market began in 2000 and renewed global recession will be the trigger to catalyze the third and hopefully final, gut-wrenching phase of valuation de-rating. Expect the S&P 500 to decline decisively below its March 2009, 666 intraday low. All hope will be crushed.

So if there is only one thing you have to remember from today’s commentary, it is that you should BE PREPARED! In other words, the subprime crisis in 2008 was just a ‘foreplay’ or warming-up for the real BIG crisis that is going to hit the global financial system very soon.

Will CASH indeed be the KING for the next few months? Or … is GOLD going to be a better place to protect your wealth against the monetary craziness that could be unleashed by the central banks if things are getting really out of hand?

Stay tuned because this promises to become a true battlefield. Just make sure you don’t fall victim to it

Posted by Nico Omer Jonckheere | VP Research and Analysis, PT. Valbury Asia Futures