The Bear: Richard Russell
via Prieur du Plessis
With stock markets tanking around the globe, one would be remiss not to take note of Richard Russell’s view of the selloff. The 85-year-old dean of newsletter writers and author of the Dow Theory Letters, said:
“… something dramatic lies ahead. I believe we’ve been experiencing a rally within a continuing primary bear market. Over recent months, I’ve warned that the rally shows signs of topping out. If or when a bear market rally tops out, the losses can be horrific. At this time, because of the profusion of ‘rosy’ news stories about the economy, many amateurs and ignorant fund managers have loaded up again with stocks, thinking that they can recoup some of their 2008–09 losses.
“If this entire bear market rally is fated to fall apart, the losses and troubles will be fearful and traumatic. This is true because I’ve never seen a time when so many people were unprepared to withstand a crumbling market or a sinking economy.
“From what I gather, most players believe that yesterday’s [Thursday’s] ‘sell-off’ was a direct result of the mess in Greece. Maybe so, but that seems too simple and obvious to me. The far more important question is whether the entire advance from the March, 2009 low is fated to be wiped out. At this time there’s no way of knowing, but I suggest that we play it safe. My suspicion is that the stock market is back in the grip of the bear. If so, we could be entering the Elliott C or the second major wave down. I hope I’m wrong on this, but if I’m right I don’t want to find out while holding even a few stocks.
“Hope for the best, but be prepared for the worst. If this is the bear market’s final wave down, we’re going to see one of the worst markets any of us has ever seen. Just as bad, it will be a forecast of hard times ahead, and a nasty resumption of the recession (or depression).
“The boy scouts motto – ‘Be prepared.’ Better believe it.”
Although stock markets now appear oversold as far as short-term indicators are concerned, weak markets can stay oversold for a while. Looking at longer-term (monthly) data, it is premature to argue that the end of the U.S. cyclical bull market has ended, but a worrying picture emerges when considering the Shanghai Composite Index. Not only has the Index broken below its key 10-month (200-day) moving average, but the momentum oscillator (ROC) in the bottom section of the chart below has fallen below the zero line which indicates a primary bear signal. The Chinese stock market was the first to turn the corner after the credit crisis sell-off – a full five months before the majority of indices bottomed in March 2009 – and could also now be leading global markets lower. Be careful out there.
The Bull: John Paulson
John Paulson, the hedge fund manager who made billions by calling the U.S. housing market plunge, now sees good times ahead for U.S. home prices and corporate profits. And he says the country is in the midst of a strong V-shaped economic recovery.
According to CNBC, Paulson has told investors he expects housing prices to rise 3% to 5% in 2010 and another 8% to 12% in 2011. He says that homes are the most affordable they’ve been in 50 years, and that residential real estate is 60% more affordable than it was at the housing bubble’s peak.
Paulson “also sees buying opportunities in U.S. and European equities, even though the consensus about Europe is generally downbeat,” CNBC reports, adding that Paulson predicts “very strong” corporate earnings growth in the months ahead. And his fears of a double-dip recession for the U.S. have sharply decreased since the start of 2010.
via John Hussman
With regard to credit issues, some remarks by Meredith Whitney from a Bloomberg hedge fund conference last week are notable (if familiar):
“If you look at what happened last year, I would say a vast majority of the banking sector’s profits and capital creation was government induced. In the first quarter, it’s highly arguable that certain companies wrote up assets. People lowered their provisions on losses.
“What has kept home prices stable – and make note that politicians and banks are eating their own cooking because they really believe home prices are stable – they’re stable because there’s been a ton of inventory kept from the market. So if you control the supply, you can control the price without controlling the demand.
“Here’s a statistic that I find fascinating. This is just for the top four banks. If you look at nonperforming assets – that’s loans that haven’t paid over 120 days – the size of that is 1.5 times all of the chargeoffs that banks have incurred since 2005. So you think credit has stabilized, mortgages have stabilized? Non-performs have ballooned so they’ve more than doubled since the beginning of 2009, and that’s just stuff that has to start going on to the market, and interestingly, this quarter you’re starting to see housing supply reach the market. That to me triggers another down leg in housing, so to me, I’m steadfast in my belief that there’s going to be another double-dip in housing
“There’s huge growth in non-performing assets. These are numbers, apples-to-apples, on the four big banks. The issue is when does that stuff that’s not paying come to market, and when do banks recognize the chargeoffs? I think you’re going to see more of that in the second quarter and the third quarter. Does the supply move in the second quarter and then you report it in the third quarter? The timing may be weighted more to the third quarter. I just don’t know. I think you see a huge leg down in asset prices when you see the supply reach the market. So no, it’s not factored into valuations. No, it’s not factored into bank guidance. And yes, I think it’s going to be a big problem for the banks.”