Daily State of the Markets
Monday Morning – September 12, 2011
Good morning. Although the mutual fund managers (aka the long-only crowd) that frequent the airwaves continue to yammer on about the wonderful valuations that are available in the market (yes fans, falling prices do indeed improve the “P” in P/E ratios) and that earnings continue to be strong (the question, of course, is for how long?), it would appear that this market continues to be all about the macro environment these days. Or more specifically, the question of how the heck earnings are going to continue to grow in a world where GDP growth has ground to a halt and the global banking system remains at risk of default(s) by a handful of sovereigns.
To be sure, this is not 2008. Wall Street and the central bankers of the world have not been taken by surprise and the major banks of the world are not on the verge of insolvency. However, this does not mean that we don’t have a problem or two to be concerned about from a macro point of view.
In my humble opinion, one of the most important parts of understanding the stock market game is to be able to identify the players in the game and the way they go about their business. For example, it is now quite obvious to anyone and everyone that HFT (high-frequency-trading) is a major player as HFT volume accounts for upwards of 60% of all volume on the stock market on a daily basis. Thus, if you don’t understand what the HFT-gang is doing, you are missing out on a very important piece of the daily market puzzle.
When I came into the business in 1980, it was the “real money” managers that controlled the game. Remember, the mutual fund industry was still in its infancy at that time. If you will recall, the total amount of money in mutual funds didn’t exceed $1 trillion until 1990. And at that time, you could count the number of big hedge funds with your fingers and toes. No, it was the pensions and the endowments that really ran the show. Then as defined-benefit pensions went by the wayside and were replaced by 401(k) plans, the mutual fund industry became the gorilla in the market.
However, the game has clearly changed over the last decade. I will submit that it is the hedge fund industry that now dominates the market landscape and that if you truly want to understand what is going on in the game on a daily basis; you’d best learn to think like a “Global Macro” hedge fund manager. And while it is true that hedge funds may only account for a couple trillion dollars these days, we must keep in mind that these managers use derivatives (options and futures) and leverage (borrowed money/margin) to enhance returns. Thus, $2 trillion in the hedge fund community may “act” more like 20-30 times that amount.
Why should you care what a bunch of guys think about the global macro scene? In short, because the global macro category is now tops in terms of long-term results and performed admirably during the 2008-09 crisis (according the Hedge Fund Research, the global macro index gained +4.8% in 2008 and has returned nearly 15% compound each year since 1991). Thus, there is a boatload of money crowding into a hedge fund category that can go anywhere and do anything, anywhere in the world.
Unlike the “endowment model” made popular by Yale and Harvard, global macro managers focus first on managing risk (gee, there’s a thought!). And given the new market environment where markets don’t slope upwardly from left to right with only minor interruptions along the way, the new way to play the game is to manage risk at all times. As even the good folks at Harvard and Yale found out, a 40% decline requires a 67% gain in order to get back to breakeven.
The key point here is we have to recognise that if the global macro gang is de-risking due to the macro backdrop, the upside may be limited for a while. Sure, stocks can rally from here and perhaps even chalk up the usual year-end gains. But with bond yields in Greece suggesting that there is little chance that Greece won’t default on at least some of its debt (the yield in Greece’s 1-year hit 98% on Friday) and the economies of the world clearly slowing, it doesn’t take a Ph.D. in applied mathematics to see that the macro crowd might continue to de-risk for a while.
Does this help us with Monday, or Tuesday, or the month of September? Perhaps not. However, it may help us to understand the big-picture a bit more. In short, we’ll be watching to see if the big managers sell into any rallies up into the 1220-1260 area on the S&P 500. We’re also watching the Euro, which fell off a cliff on Friday as well as the yield on the 10-year, which moved to a 60-year low.
Turning to this morning… Fears of Greek default and credit contagion (especially toward French banks) have driven global markets down hard overnight and U.S. futures are once again pointing to a lower open.
On the Economic front… There are no releases scheduled for today.
Thought for the day… Be sure to take time to breathe today…
Here are the Pre-Market indicators we review each morning before the opening bell…
- Major Foreign Markets: Australia: -3.56% Shanghai: NA Hong Kong: -4.21% Japan: -2.28% France: -4.42% Germany: -3.20% Italy: -3.63% Spain: -3.16% London: -2.38%
- Australia: -3.56%
- Shanghai: NA
- Hong Kong: -4.21%
- Japan: -2.28%
- France: -4.42%
- Germany: -3.20%
- Italy: -3.63%
- Spain: -3.16%
- London: -2.38%
- Crude Oil Futures: -$1.17 to $86.07
- Gold: -$16.80 to $1842.70
- Dollar: lower against the Yen, higher vs. Euro and Pound
- 10-Year Bond Yield: Currently trading at 1.910%
- Stock Futures Ahead of Open in U.S. (relative to fair value): S&P 500: -18.28 Dow Jones Industrial Average: -167 NASDAQ Composite: -32.8
- S&P 500: -18.28
- Dow Jones Industrial Average: -167
- NASDAQ Composite: -32.8
Wall Street Research Summary
- Biogen Idec (BIIB) – Mentioned positively at Cowen
- Cameron International (CAM) – Target increased at Credit Suisse
- Nabors Industries (NBR) – Added to s.t. buy at Deutsche Bank
- Mosaic (MOS) – Goldman Sachs
- Sanderson Farms (SAFM) – Goldman Sachs
- Agrium (AGU) – Goldman Sachs
- Oracle (ORCL) – Added to Conviction Buy at Goldman
- VimpelCom (VIP) – HSBC
- Clean Harbors (CLH) – JPMorgan
- Level 3 (LVLT) – Piper Jaffray
- Linear Technology (LLTC) – Susquehanna
- Marvell (MRVL) – Susquehanna
- Maxim Integrated (MXIM) – Susquehanna
- ON Semiconductor (ONNN) – Susquehanna
- FedEx (FDX) – BofA/Merrill, Target cut at Bernstein
- UPS (UPS) – Target cut at Bernstein
- Arthur J. Gallagher (AJG) – Cit
- Brown & Brown (BRO) – Cit
- Willis Group (WSH) – Cit
- Intrepid Potash (IPI) – Goldman Sachs
- First Horizon National (FHN) – Sterne, Agee
- Zions Bancorp (ZION) – Sterne, Agee
- VF Corp (VFC) – Estimates increased at Stifel Nicolaus
- Carnival Corp (CCL) – Target cut at UBS
- Royal Caribbean (RCL) – Target cut at UBS
Long positions in stocks mentioned: none
For more of Mr. Moenning’s thoughts and research, visit StateoftheMarkets.com
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