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Bulls go into hibernation

London, November 19, 2012

By Mike Dolan

 

The longest losing streak on world markets since the darkest days of the euro crisis in late 2011 shows how reluctant investors are to trust in any sustained recovery after years of crisis.
 
Global equity indices on Friday flirted with a record eight consecutive days in the red for the first time in a year. Do a sweep of all related risky assets around the world and there's been a similar pattern of pullback.
 
And given those are the eight trading days since the U.S. election results on Nov. 7, it doesn't take a genius to figure out the dominant market concern of the moment.
 
Investors of all hues just seemed to have downed tools for the year as they await the outcome of the battle between re-elected Democrat President Barack Obama and Republican-dominated House of Representatives over how to avert the "fiscal cliff".
 
If there were any doubt about the shift in dominant risks over the year, Bank of America Merrill Lynch's latest investment funds poll this week showed 54 percent citing the impending threat of automatic US tax rises and spending cuts as the biggest global risk - more than twice those citing the euro crisis.
 
For the record, they swapped places in the September poll after 17 months in which euro angst was seen as the top threat.
 
But the result of the election was exactly as most people had forecast for months, the nature of the cliff hasn't changed an iota and the big funds nearly all expect some resolution anyhow. So, it might seem just a little odd why people waited until after the election to dump stocks.
 
At the very least it begs yet another question about how efficient markets really are in discounting future risks. Some strategists, such as Barclays, say it was important to wait for post-election negotiating positions to be laid out and, on that basis, reckon the chances of hitting the cliff are now "non-trivial."
 
But maybe the sudden funk is less rooted in Washington than it is in the edginess of year-end markets - markets that have been tossed around for two years now on a welter of crises and crisis-management but making about as much net headway as their "zig-zagging" underlying economies, to borrow this week's phrase from Bank of England chief Mervyn King.
 
What looked like a pretty impressive year for virtually all asset classes up to November is now in danger of wimping out as funds bank profits on their winning 2012 trades.
 
With a little over a month to go, Wall Street's once double-digit year-to-date rises have shrunk to less than 8 percent, while German equity gains of more than 25 percent have slipped into the teens. Emerging market equities, which were up almost 20 percent by February, have pared back to 10 percent.
 
RUMP GAINS
 
With the rump gains still relatively punchy given the economic backdrop, then it's easy to see persistent temptation to cash in without any breakthrough stateside.
 
Hard currency emerging market debt and global high-yield bonds, for example, are still up over 15 percent each.
 
In fact, in a year driven by central bank monetary stimuli it was hard to lose money anywhere beyond a near 20 percent drop in soft commodities. So-called safe-havens are up alongside the riskier plays, with gold still up 10 percent and 10-year US Treasuries up more than 5 percent.
 
But with the global economy still slowing and major economies in Europe and Japan flatlining or in recession, are these market moves all just monetary smoke and mirrors?
 
A quick check of net asset moves over the two years of both euro sovereign debt and U.S. fiscal anxiety offers perspective.
 
Since the end of 2010, developed market equities have actually done very little, with total returns just 3 percent. Ditto for the US dollar. Emerging market equities have done even worse, with net losses over the two years still at more than 10 percent.
 
The big winners are all monetary-policy sensitive or safety plays - with some 15-25 percent gains in gold, oil, US Treasuries, German bunds, corporate and emerging market debt.
 
Gold and oil aside, other demand-driven commodities such as copper and soft commodities have been hammered by 10-30 percent.
 
So, how important then is the cliff or even the euro crisis if the monetary taps keep coming on at every critical juncture?
 
Well, one way to look at this year's moves is to watch the jump in positive surprises on U.S. economic data - as captured by Citi's economic surprise index - even as equivalent European measures have turned down again.
 
But Wall Street has not followed this leading signal yet as it appears to have done routinely in the past - in fact it's gone the opposite direction over the past fortnight.
 
Is this then the fiscal cliff factor? Will macro data roll over if the cliff is hit? Or has a dour earnings season been swamped by all the tax uncertainty that means at least some pent-up demand will be seen come an eventual deal?
 
With the bulls rather than bears setting up for hibernation this winter, maybe the long-term pessimists have an answer.
 
Many of them reckon the macro data and policy environment has merely masked a cliff of another kind.
 
"Despite the upside economic surprises, profits have been spiralling downwards," said Societe Generale's Albert Edwards. "It’'s not the impending fiscal cliff the market is worrying about, it’s the actual profits cliff we have already fallen off."
 
Third-quarter S&P500 earnings were flat from a year ago, Thomson Reuters data shows, and they slightly beat forecasts for the first decline in three years.
 
But Edwards reckons the rate at which earnings estimates are being downgraded suggests we are already in a profit recession, that consensus forecasts of 12 percent next year are optimistic and - just like in 2008 - the economic data would follow suit.
 
"Expect the New Year to bring nothing but disappointment." - Reuters



Tags: stocks | market | bears |

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