A new bull or more bull

Mark Mobius. One of the most senior and most respected equity gurus in the world. Tons more money and way more of a following than yours truly.

Unfortunately, he is becoming synonomous with serial bottom calling. The history of great bear markets is such that they chew up the reputations of some greats (Remember Abby Joseph Cohen, Barton Biggs?).

Mark Mobius is stating that a "new bull" has begun. Too bad he said pretty much the same thing on September 23, November 17 and January 17 (thanks to Minyanville.com for the links). Every two months, he says the same thing from lower and lower levels... I agree that we are in a vigourous rally, but a classic bear market rally, in my opinion. Eventually, he'll be right, I guess...

As for yours truly, I am 35% long, as I added to positions last week. The only thing that I am short is the long treasury (TBT, which I am underwater on, thanks to Helicopter Ben's printing of money to buy the long treasury). Looking to add to my long position on the way up over the next few weeks. I am looking for this to be the mother of all bear market rallies, as we will probably take out S&P 944 in April, on the way to S&P1000 sometime later in the month.

Six weeks

On March 3, I mentioned that the window on the rally had been shut by the ugly close of February 27th. I played a little on the short side until the big rally day of March 10th when I closed out most of my shorts, as the downleg appeared to be ending.

As of Friday, March 13, I switched to a net long position. I am now up to 12% long and looking to get longer if the positive action continues. I remain at about -1% YTD. Does it seem silly to be getting positive at S&P756 (Friday's close), which was about 14% above the "bottom"? Yes and no. Sure, if you are the best investor around, you could have bought at S&P666. However, I suspect that few did, when you exclude those who have been buying all the way down. There are probably a select few who have sat out the bear market (or profited) and who went long at S&P666ish. If you did, my congratulations as you are awesome. Personally, I know that I can not time the exact bottom. I do know that missing the 57% drop (and even being up in the bear market) has allowed me to be patient. Despite the 14% rise, we are only about where we were a month ago.

I am siding with the bulls here. There are many short term positives:

1) The market was hugely oversold at its low
2) There are lots of stocks and sectors that did not break their November lows
3) The ones that did (financials) have had a nice rally
4) We have had 3 big up days on generally good volume in the last 6 days. That hasn't happened in a long time.
5) Cooper, oil, retail and homebuilders are well above their November lows. These were some of the worst areas of 2008.
6) Bonds, the US dollar and gold are selling off, a sign that panic is dissipating
7) I believe that the market is starting to confirm that Q2 & Q3 GDP will not be as bad as Q4 2008 & Q1 were.

Six weeks. That is what I will give the bulls to make their case, as most of the bear market rallies in this bear have not lasted much longer than that. The subscriptions that I follow (which were all right big picture thus far) also confirm the recent bullishness.

My gut tells me that this is the classic bear market rally that will suck in a lot of people before ultimately going lower. This rally could last a lot longer than six weeks, however, and a sucessful retest at some future point, could allow a rally (or the March lows) to hold for a long period. I suspect that we should be fine until mid/late April and we could test or break the January highs (which would take us to roughly break-even for 2009 YTD). Expect a lot of congratulations by the establishment on their fiscal and monetary tactics as the rally extends. You will hear that the interest rate cuts, the gas price "tax cut", the quantitative easy and the stimulus is working (and it may for a short period).

I don't plan on "believing the hype!". Bear market rallies are not "stabilization" but the natural ebb & flow. I remain very bearish long term but I could change my mind on all of this tomorrow. I plan on discussing the catalysts for the next downleg in a future post, but expect soaring long term interest rates to be part of the problem. At first, sinking bond prices will be welcomed but our overleveraged economy can not survive high interest rates. (disclosure: long TBT, long various equities)

Dead cat bounce

After months of disastrous reports, the February report was not a disaster. CREA reported that February home sales declined by only 9.2% YoY, a nice improvement over the -11.3% from January. Sales volume actually picked up from January's depressed levels.

Is the sign of a turn? Or is the typical dead cat bounce?

I suspect the latter. Anecdotally, it appears that many potential buyers are getting excited about falling interest rates. They are salivating at the “low” payments that these lower rates are promising. What these buyers fail to consider is that the real cost of interest has never been higher. To borrow at 4% to finance an asset that is declining at 9% a year represents a real interest rate of 13%.

Also, I went back and checked and it appears that back in February 2008, the YoY increase dropped to 5.7% from 9.7% in January 2008. That was the famous “It snowed too much in February!” month. February 2009’s decline was measuring against a very weak number. Also, in an ironic twist to CREA’s blame the weather approach last February, this February’s sales must have benefited from a relatively mild February in Central Canada versus a cold January. In addition, the snowfall in Toronto was quite moderate. Notice, no mention of the weather when it is a positive.

Therefore, this improvement is not as impressive as it seems at first glance. The sharp decline back in February of 2008 moderated a little bit as the March 2008 YoY only dropped to +4.8% while April 2008 YoY dropped to +4%. This means that the YoY comparisons for March and April will not be as easy to beat in March and April of 2009.

I suspect that this moderation will only last another month and that once this wave of buyers finishes, another leg down will begin. This is actually a very dangerous bounce. If it were a stock market rally, I would short it, since it is analogous to the bottom callers who proclaimed every dip in 2007 and 2008 as a buying opportunity. Once these bottom callers are proved wrong, there may be a big vacuum that shows itself towards mid-year.

5 of the 6 NHL markets are now negative as Ottawa has joined the slump. Montreal remains positive surprisingly.

Fearless predictions:
-March is also a decent report (the rate of decline stabilizes in the high single digits) and the bottom callers will start. Remember the same phenomenon happened in the US housing market back in 2007.
-By April, we are back to negative double digits again

Since we are on the topic of February 2008, let me just end with a paragraph from that entry almost exactly a year ago:

What happens if we get a full bear market, falling commodity prices, higher
unemployment and a US and Canadian recession, as I expect? Just remember, the
CREA or CMHC will never tell you that the real estate market is overvalued. They
will never tell you that house prices will fall.

We the People

Who is the biggest culprit for this mess?

I don’t put all the blame solely on politicians such George Bush, Bill Clinton and Alan Greenspan (yes, Greenie was a master politician albeit an unelected one)

All of these men have some responsibility for the current mess. Bush’s overspending and tax cuts plus an expensive war in Iraq led to big deficits. The huge deficits, the tax cuts and all the 0% financing that cropped up after 9/11 likely caused a shorter and shallower recession in 2001 than would have been the case otherwise. This is probably leading to a deeper and longer recession/depression currently.

Greenspan also cut that recession short by encouraging an asset bubble in housing to replace the tech bubble.

Some of the current mess (Fannie, Freddie and the bank deregulation) began in the Clinton era. Also, the Mexican and LTCM bailouts were under Clinton’s watch. Those bailouts probably worsened the subsequent asset bubbles. Plus, Clinton reappointed Greenspan.

However, the biggest culprit in this depression is not the politicians or the banks, as easy as they are to scapegoat. The biggest culprit is us. We the people.

We the people were the ones who leveraged ourselves to the hilt in our houses, and stopped savings. All the subprime and leverage in the system was merely there to support over consumption.

People created a lifestyle for themselves that was unsustainable and not possible without credit and overvalued assets.

Even now, people are still clinging to a naive belief that in a few months, things will magically turn around. Things will turn around one day, but that day will be when assets are priced at a discount to their long term values (i.e. there is room for appreciation in the future) and when enough credit has been wiped out to allow the economy to grow again.

Blame the Americans

It has become very fashionable to blame the US for this mess.

Many leaders have blamed US mismanagement (financial sector, subprime, hedge funds, etc…) for this crisis.

France President Sarkozy blamed the US back in the innocent days of late 2008.

British Prime Minister Gordon Brown stated in October:

"This problem started in America. They have got to sort it out," he said then.

Our PM said this last week:

"We will not turn the corner on this global recession until the American
financial sector is fixed," he said.

His buddy Tony Clement also blamed the Americans

“Only American consumers can save the flattened auto industry from extinction,
he said.”

With friends like this….

The foes of the US, if you can put China and Russia in this category, have also heaped blame on the US in recent months.

I vehemently disagree with the blame the US approach.

Yes, as the largest economy in the world, the US has played a large role in this mess.

However, let’s ponder the following questions. Did the US cause:
1. Northern Rock in the UK to go under?
2. Hypo Real in Germany?
3. Iceland to go bankrupt?
4. Dubai to be in big trouble?
5. Ireland to be in big trouble?
6. SocGen in France to lose billions in January 2008?
7. European banks to lend billions to Eastern Europe threatening the entire European system
8. Housing bubbles imploding in many countries all around the world
9. The Chinese stock market bubble
10. The Russian stock market bubble

I could go on….

The US was the biggest piece of the puzzle but all nations were part of this. The US and the other so called Anglo-Saxon countries, including Canada, (“USAF”- US and friends) all over consumed and under saved. The Asian countries all over saved and under consumed. The Asian countries exported to the Anglo-Saxon countries and then recycled the US dollars into reserves composed mainly of US treasuries. This lead to low US interest rates (and hence, global interest rates) which lead to more consumption by Anglo-Saxon consumers, and a virtuous cycle known as Bretton Woods II (BWII) continued for most of this past decade.

Everyone played the game and everyone knew of the inherent problems. The US ran huge trade deficits mostly to Asian exporters such as China and Japan. There were all types of weird things that should have been evidence of an unsustainable buildup of imbalances:

• zero savings rates in USAF
• huge trade deficits
• continual pressure on the US dollar
• Rampant asset price inflation, especially in housing
• soaring commodity prices
• soaring debt/GDP levels worldwide
  

When things were good, did all the blame gamers thank the US for causing their prosperity? Of course not. In reality, we all benefited from Bretton Woods II.

In Canada, these soaring commodity prices and housing prices allowed the economy to boom. Government spending and tax cuts were doled out and yet the budget remained magically in balance, thanks to the factors mentioned above. Now that BWII is now dying, big structural deficits are back in Canada. In Canada, we all benefited from the US housing bubble that created demand for our exports. Our aerospace sector benefited from the super rich US billionaires ordering business jets (Stanford ordered one).

Worldwide, everyone was greedy. People chased risky assets worldwide. People perpetuated the myth of a super commodity cycle. Scapegoating the US is easy. In reality, we were all part of the game. The US was the biggest player but Canada and others were all involved. Who told the Asian countries to become so dependent on exports to ASAF? Who told European banks to lend so aggressively to Eastern Europe? Was it the US?

The boom was long and global and the bust will be long and global.

Horrible employment report

The unemployment rate jumped 0.5% to 7.7% in February. That was up from 6.2% just four months ago. The Canadian economy continues to lose jobs at an alarming rate (over 200K in 2 months), which is making my prediction of 50-100K per month look optimistic.

Hey, TD: How does this square with your prediction of 325K job losses for 2009? We’re more than 50% there in just 2 months! Amazing how these banks with their big budgets, big staffs and incredible access to real-time data can have their predictions blown away month after month by a part-time zero budget guy like yours truly!

Even worse, the headline number of 83K in job losses masked an even worse picture as the number of full-time job losses were 111K.

That is an economic earthquake that is send shockwaves into other parts of the economy. Housing and consumer spending are going to continue to get devastated by this news, and any fantasy about a strong fourth quarter (Hello Carney!) is now over.

Here goes our great central banker Carney recanting his delusional January forecast in the Star:

“When we laid out the projections in the update in January, we also laid out some upside and downside risks,” Carney said in an interview in Horsham, England, where he was attending a meeting of Group of 20 officials. “It’s safe to say the downside risks, particularly around the outturn in the global economy, have materialized.”

Talk about talking on of both sides of your mouth. The dude is changing his ridiculous story and making it seem as if he had identified this risk. His forecast of a hot economy for late 2009 and all of 2010 is now dead less than 2 months after he put it out. What a pathetic joke! This is worse than Cramer who at least sometimes admits he was wrong.

Harper seems to be the delusional one these days, according to the G&M:

Harper, in his address to a business crowd in Brampton, noted that "Canada was the last advanced country to fall into this recession. We will make sure its effects here
are the least severe, and we will come out of this faster than anyone and
stronger than ever." The crisis, ultimately, is an "opportunity to position
ourselves so that when the recovery comes, we're among the first to catch the
wave."

And just in case, it doesn’t work out according to plan, follow the script: Blame the Americans!

"We will not turn the corner on this global recession until the American
financial sector is fixed," he said.

Great to know that the 2 guys (PM and Carney) heading up Canada’s recovery efforts understand what is going on here!

The window is shut

As I mentioned last week, with the close below 800, the window was closing. It is now closed.

This happened late Friday, once we took out the 741 on a closing basis, and especially on a weekly and monthly basis with the 735 close on Friday.

Risk is extremely high and the next downleg that I had forecast for sometime in March, has clearly started. The start of this downleg was too premature for my taste (as once again, I was not able to capitalize), and I got out of my small longs on Monday morning.

Thanks to the small percentage I had allocated to being long the market and with some nice profits on gold shares that I took over the past couple of weeks, I am -1% on the YTD. Not happy with that, but I can live with it, since the S&P is down 22%.

I am now mostly in cash and looking at shorting opportunities. I am hoping for a nice sucker rally here to get that chance, but it does not seem to be happening.

Risk is extremely high as systemic risk has reappeared once again. I outlined some of my fears in my posting last week.

The first down target is 660ish and then 600. If we break these, a move to 400 to 500 on the S&P can not be ruled out. The inability of the market to rally past early January given the carnage in the fall is very ominous. My doomsday target for this month is S&P 450. It could happen as soon as mid March, which would time nicely with the Bear Stearns bottom of 2008. It may take such a ridiculous low number (roughly the starting point of the 1995-2000 bull market) to finally kickstart buying, which has been lacking even in the rally of November-December.

The good news is that if we crash fast and furious, the next bear market rally may begin, and it should hopefully be a little more steady than the one from late November to early January.