The Bears Are Loose! Hide the Women and Children!
That's the impression one would get after taking a look at this week's Barron's cover, which is a stark contrast to the cover of October 15, which sported the DJIA's former all time high (14,165) in big numerals along with the words 'almost there'. The subtitle proclaimed that 'stocks are healthier today based on profits and cash levels' than in 2007 when this level was last seen. Someone should perhaps tell them about 'multiple compression' and secular bear markets.
So this was what Barron's deemed a title page-worthy decoration two weeks ago – the question was no longer if 'we' would break through the old highs, but when:
Barron's cover of October 15: when will the old high be exceeded?
We should perhaps point out here that since the old high is really not very far away in percentage terms, it may well be approached or even broken. After all, the DJIA made a new all time high on January 12, 1973 as well, after suffering sharp declines in 1965-1966 and 1969–1970. Alan Greenspan, who at the time was with a private economic consulting firm, famously announced in the week before the top was made that “there is no reason to be anything but bullish”. Over the next two years the market was cut in half, with the bulk of the decline occurring in a free-fall move from a secondary high in November '73 to the ultimate low in December '74.
The point we wish to make here is not only Alan Greenspan is one of the worst stock market timers ever – it is actually that it is never easy to recognize when a major market advance or decline is about to end in real time. One can of course make educated guesses, but many technical analysts would probably have agreed with Greenspan at the time – after all, the market had just 'broken out'.
The DJIA actually held up slightly better in the 1973-1974 decline than the S&P 500, which fell from 121 to 60.
If the October 15 cover was apt to make bulls antsy, then this week's Barron's cover must have come as a great relief. The outsized influence of a tiny correction on sentiment?
A grizzly appears on the cover, after a less than 500 point drop in the DJIA.
The reason for a bear gracing this week's cover was the result of the Big Money Poll. Allegedly, fund managers have turned bearish on stocks. Let's see what the poll results actually looked like:
Perhaps we need new glasses, but 70% of fund managers were bullish on stocks. The one thing they are once again extremely bearish on are treasury bonds.
So here is the real news: when 70% of all fund managers polled are bullish on stocks, and a full 79% of them judge stocks to be 'fairly valued' or 'undervalued', Barron's thinks it is time to put a big bad bear on its cover!
Granted, there were even fewer bears in the last poll.
What They Love and What They Hate
So what can we conclude from the survey?
As difficult as it is to believe, the bull market in treasury bonds is apparently still safe and sound. The Barron's 'Big Money Poll' has proved to be an extremely reliable contrary indicator on the treasury bond market. The survey respondents absolutely hated treasury bonds in the April 2011 poll (the bearish consensus was at a record high of almost 90% at the time if memory serves). With a 84% bearish consensus on bonds this time around, the bull market in t-bonds seems intact at least until the next poll rolls around.
The t-bond remains as unloved as ever. Never mind that has been outperforming stocks in just about any time frame that can be said to be of consequence to the average investor or fund manager. They still hate it.
Mind, we can think of far more worthy causes than lending money to governments, even those that are widely considered solvent. It is generally a better use of one's funds to invest in endeavors aimed at serving consumers. He who invests in government debt invests in the government's powers of coercion after all, but that is not the question that concerns us here. We are merely commenting on a sentiment indicator and its likely implications for the market.
What else? We are a bit concerned that they are so bullish on gold. We'd have preferred to see a more reserved attitude, but one doesn't always get what one wants. It is a good bet though that if the poll had been taken in June or July, the result would have looked a lot different.
A 79% bullish consensus on real estate is quite stunning, and confirms to us that Ramsey probably had a good point when he recently wrote that it might be time to consider shorting the builders.
Other than that, it looks like our recently mentioned idea that China's stock market may be close to rallying (the article was fortuitously timed as it were, although the final word on that is perhaps not in yet) is supported by going solidly against the grain as well, with 69% of the respondents bearish on Chinese stocks. Keep in mind here that China's stock market does not necessarily have much to do with its economy. In 2000-2005 the market went nowhere while the economy grew briskly, then suddenly experienced a bubble-like advance in 2006 -2008. There was no fundamental rhyme or reason discernible that could have explained this sequence of moves.
China's secondary casino (the primary casino is the housing market) – the moves are largely mysterious and appear not to be in any way connected to economic fundamentals.
We do however have a few reasons for turning more constructive on China's stock market: it is cheap, it has declined a lot and is thus oversold, the decline from the high looks like a corrective wave that is either finished or almost so, and most importantly, sentiment is the exact opposite of what it was at the peak.
Lastly, we have a hunch that the new political leadership will do something to goose the market. Presumably it would prefer a rising stock market to a continuation of the real estate bubble. One must not underestimate the degree of control China's government has over where money flows (this is mainly so because it has complete control over the banks).
However, what we really love is that they hate Japanese stocks even more! As it were, we are busy writing an article on Japan that will be entitled 'Reconsidering Japan' and should be published sometime this week. There are quite a few reasons to believe that Japanese stocks will finally do the unexpected and come back to life.
Interestingly, someone whose investment acumen we greatly respect agrees on all these points – and he is a gold bull as well. We are referring to Felix Zulauf, who has just declared himself bullish on Chinese and Japanese stocks as well as gold – as can be seen in this interview with – Barron's!
The Nikkei's long bear market. There are almost no believers left by now – so will this market finally wake up? We will soon have more to say about that.
Politics and Stocks
As an aside, we disagree with Felix Zulauf on one point – in fact we disagree with the great bulk of money managers on this point. Namely the idea that it would be 'good for the stock market' if Mitt Romney were to win the presidential election – something a full 79% of fund managers polled by Barron's believe to be the case. Apparently they haven't noticed that Mr. Obama has presided over one of the biggest stock market rallies that has ever occurred during a single presidential term.
The main reason for this was of course the extremely loose monetary policy enacted by the Fed. If Mr. Romney wins, the Fed may turn a tad more timid. But even if that doesn't happen (next year's FOMC roster will be one of the most dovish imaginable, as both Eric Rosengren and Charles Evans will have a vote), the market will probably react with a bit of apprehension. There is also the matter of statistics: for some reason, the stock market has on average done much better under Democratic than Republican presidents. This may just be a coincidence, or maybe it has to do with leads and lags (see below), . The difference is glaring as it were:
“The BGOV Barometer shows that, over the five decades since John F. Kennedy was inaugurated, $1,000 invested in a hypothetical fund that tracks the Standard & Poor’s 500 Index (SPX) only when Democrats are in the White House would have been worth $10,920 at the close of trading yesterday.
That’s more than nine times the dollar return an investor would have realized from following a similar strategy during Republican administrations. A $1,000 stake invested in a fund that followed the S&P 500 under Republican presidents, starting with Richard Nixon, would have grown to $2,087 on the day George W. Bush left office.
Some of the difference may stem from the fact that every Republican president since at least the end of World War II has faced a recession during his first term in office, Stovall said. Nine of 11 recessions that began since 1945 — and seven of eight since Kennedy ran for president in 1960 –started with Republicans in the Oval Office.”
It seems to us that long only fund mangers should not necessarily root for Mr. Romney.
Charts by: bigcharts, the chartstore, stockcharts, images (covers) by Dow Jones & Co.
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