Waiting on the European
‘Surprise’
By Paul Lamont
March 5th, 2012
Last month, we compared the investment herd to the
buffalo that were stampeded over the cliffs of the Great Plains by Native
American hunters.
Buffalo don’t meander over cliffs. Neither does the stock
market. The
stampede is on and investors won’t see that the ground has given way
until it’s too late.
Greece
Every time we hear that Greece has been bailed out and that it has
‘bought more time’, we just pull up a chart of the 1
year Greek Bond (chart below).
As you can see, the yield of the 1 year Greek Bond is greater than
900%. So despite the hope and hype surrounding the Greek debt situation, the
market is telling us that the crisis has continued to worsen (and at a quicker
pace!).
In order to get its €130bn international bail-out package
agreed to in February, Greece was forced to give the European
Central Bank preferential treatment bonds at the expense of private
bondholders. Ninety-five percent of these private bondholders must volunteer to
take a 70% loss on their bonds by March 12th; otherwise Greece will
face an imminent default according to S&P. More likely, if the hedge
funds that hold the Greek bonds refuse, credit default swaps would be triggered
(insurance bets that brought down AIG). Greece has also already been downgraded
by
S&P to ‘selective default’
on February 27th and to ‘default’
by Moody’s on March 2nd. Perhaps, the authorities will get
it right over the next few days. But they can’t make people keep their
money in the weak European banks.
In January’s How
European Failures Affect U.S. Investors, we stated that we expect credit downgrades to
“deliver the coup de grace” on the “weak and leveraged
banks of Europe.” This would “spark the contagion.” The
European banks will have to hurry and fail if they are going to get ahead of
the country of Greece. Fortunately, their depositors (especially in Ireland and
Italy) have increased the speed at which they are pulling out their bank
deposits (chart
below).
Perhaps, they might just make it.
Don’t Look
at the Numbers
So what gives? The European situation continues to get worse, home prices (a.k.a. bank assets) continue to hit new lows, and the lack of auto sales have clogged dealer lots, but the overall stock market has surged since last fall. Surely, this has been because of improving corporate earnings expectations in the U.S? Not so. Fourth quarter earnings were the worst in two years relative to expectations. Wall Street has backed away from the earnings case we said was flawed last October. Instead as CBS MoneyWatch reports: “Fading optimism of analysts and business leaders was offset by fading pessimism among individual investors.” Ah, individual investors. So now, not only are the Greatest Investment Minds urging caution, but anyone looking at a number (other than price). And of course, the bankrupt salesmen are out pumping.
“Price is what you pay. Value
is what you get.” – Warren Buffett
“Remember too that for those great opportunities to avoid pain or make money – the only investment opportunities that really matter – the numbers are almost shockingly obvious: compared to a long-term average of 15 times earnings, the 1929 market peaked at 21 times, but the 2000 S&P500 tech bubble peaked at 35 times! Conversely, the low in 1982 was under 8 times. This is not about complicated math! In the end, it’s really quite simple. Really.” – Jeremy Grantham, GMO LLC
The Shiller P/E ratio currently stands at 22.
“The individual is far better-positioned to wait
patiently for the right pitch while paying no regard to what others are doing,
which is almost impossible for professionals… If you can be patient and
ignore the crowd, you will likely win. But to imagine you can, and then
to adopt a flawed approach that allows you to be seduced or intimidated by the
crowd into jumping in late or getting out early is to guarantee a pure
disaster.” – Jeremy Grantham, GMO LLC
Jim Rogers
It was a pleasure to meet Jim Rogers last Wednesday in Birmingham, AL. To
summarize his thoughts: the West are debtors and the East are the creditors.
The East has an ability to make an income (manufacturing jobs). The West is not creating any wealth by
shuffling paper around and creating more debts. Every 4-6 years we have a
crisis and the West is going into this next one with more debt than we had
before. The West will not be able to increase its debt like we did in the last
financial crisis. So the crisis will be
worse. After the crisis, debtors won’t own much.
All bond managers should find other work
because they are on the cusp of a bear market. The last bear market in bonds
lasted 30+ years. In fact, everyone in finance should get into agriculture. The
average age for farmers is 58. Commodity bull markets historically last 18-20
years and like any bull market can experience 50% corrections. He prefers to
own the actual commodities, not land or the companies. The stock market will
hold up in 2012 because politicians have elections across the West and will
print and patch it all together to get themselves reelected. But in 2013 and
2014 we should panic.
Obviously, we agree with Mr. Rogers on everything but the
timing. 2008 was also an election year.
The Super
Bowl’s Golden Cow
Perhaps we read too much into things. But look at the
contrast of the Super Bowl halftime show between Prince’s “We Will
Rock You/Let’s Go Crazy/Baby I’m A Star/ Proud Mary” in 2007 to Tom Petty’s “Free Fallin'” in 2008. We assume that for an event
this big, planners have a pretty good idea of the mood of their audience and
they schedule accordingly. It’s hard to deny that public sentiment
didn’t go from rockin’ to free fallin’ from 2007 to 2008.
So if a Prince was ruling in 2007, to top
that in 2012 they had to go get the ‘virgin
mother’ herself to
represent the Egyptian cow goddess. (Hathor, ‘Mistress of
the West’, was the
Egyptian goddess of music, dance, foreign lands and fertility.) Madonna, complete
with golden horns, entered
the Super Bowl Halftime Show with all the extravagance of her role.
Besides a golden cow, the 2012 Halftime Show
entailed a tightrope walker, cheerleaders, the ‘Party Rock Anthem’,
marching band and ‘Like A Prayer’ as the
finale. Frankly, that sums
up the financial world just about right.
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Copyright ©2012 Lamont Trading Advisors, Inc. Paul
J. Lamont is President of Lamont Trading Advisors, Inc., a registered
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