Reasons to Rally
From Barrons today, it references an article I referenced in the January plays thread:
Looking for Reasons to Rally
By MICHAEL SANTOLI |
A whetted appetite for risk.
ALL THROUGHOUT THE EASY-CREDIT DAYS OF THE EARLY 2000s and the equity bull market that ended last year, there was a prescient and persistent group of commentators pointing to what were typically referred to as "financial imbalances" that were piling up: too much debt magnified by too many derivatives supported by too little and too rickety collateral, leading to the broad underpricing of risk. Sane observers saw it all, but too many of us thought we'd sidestep it in time.
When pressed on what might be the catalyst for the system's collapse, these prophets of calamity would demure, rightly, that it was unknowable. But one potential trigger often cited was the chance, one day, of a failed Treasury-security auction, in which the usual buyers -- the Chinese and Japanese and petro-state subsidizers of our deficits -- boycotted newly issued paper. Rates would balloon, the dollar would sink, and the jig suddenly would be up.
Yet, here we are a year-plus into a capital-markets crisis that has brought only higher U.S. deficits, and one of the more alarming things for markets is how successful Treasury auctions have been. So successful, in fact, that last week Treasury bills were bid with a negative nominal yield.
Following two recent auctions, including last Thursday's, equity buyers lost their nerve after Treasury sales brought lower-than-expected yields -- as vivid a marker of risk aversion as the $80 billion outflow from equity mutual funds in the five weeks ended Oct. 29.
Now, those trying to peek around the corner to a time when today's financial challenges will fade are being forced to conjure what catalyst might arise to reverse the apparent (and arguable) overpricing of risk.
The calendar won't be enough to do it, but soon it will be a net positive for riskier assets. Banks and other institutions are defaulting to cash as they close their books for the year, their offices filled with auditors and regulators and their boards with directors who have signed statements of personal liability. Some of the huddling for safety should expire with this miserable year.
Even half-hearted attempts to reallocate assets could be consequential. As of Friday, the quarterly loss for the S&P 500 was at 22%, while the 10-year Treasury's return was 13%, according to MFGlobal. Does this whisper bonds won't continue to pitch shutouts against stocks without a pause or switchback?
It's not hard to argue against an imminent and sustained increase in risk appetites. After all, the velocity of the financial and economic deterioration suggests today's cosmetically unchallenging equity valuations are a value trap built on a liquidity trap, leading to a trap door.
Stocks have been hinting that they won't seize on every bad-news excuse to collapse. Meantime, with the market treating everything outside of the absolute safety of cash or Treasuries as hyper-risky, the moment may be close when investors will be rewarded for sticking with the relative safety and quality of things like investment-grade and muni debt, and stable, dividend-paying stocks.
THE FINANCIAL CRISIS, EVENTFUL bordering on melodramatic, has created more good reading than most of us have time for, from insightful explanations of how we got here to thoughtful suggestions on what to do now. Just from the crop of recent weeks, I can point to well-crafted ruminations on causes and consequences from Bob Hoye of Institutional Advisors (http://www.safehaven.com/article-11925.htm) and from Dennis Uyemura, CFO of California Bank and Trust (available upon request). Murray Stahl of Horizon Asset Management has written an intriguing plan for Treasury to create an ETF pegged to a sampling of the toxic assets it plans to buy from banks.
In more of a big-think/long-term vein, Ajay Kapur of Mirae Asset offers a provocative case that global terrorism has peaked and explores the investment implications (http://www.miraeasset.com/ourMarkets/outlookList.do).
A more immediate and actionable piece appears at http://worldbeta.blogspot.com/2008/1...bad-years.html by Mebane Faber of Cambria Investments, which shows that the well-known outperformance of the smallest stocks in January is particularly pronounced after the worst market years. The average one-month gain for the smallest 20% of stocks in Januarys following the 10 worst years was 18.7%. Exchange-traded funds holding micro-cap shares, such as PowerShares Zacks Micro-Cap (ticker: PZI) or First Trust Dow Jones Select Micro Cap (FDM), could be good bets that precedent won't be shattered by this crisis.
E-mail: michael.santoli@barrons.com
Looking for Reasons to Rally
By MICHAEL SANTOLI |
A whetted appetite for risk.
ALL THROUGHOUT THE EASY-CREDIT DAYS OF THE EARLY 2000s and the equity bull market that ended last year, there was a prescient and persistent group of commentators pointing to what were typically referred to as "financial imbalances" that were piling up: too much debt magnified by too many derivatives supported by too little and too rickety collateral, leading to the broad underpricing of risk. Sane observers saw it all, but too many of us thought we'd sidestep it in time.
When pressed on what might be the catalyst for the system's collapse, these prophets of calamity would demure, rightly, that it was unknowable. But one potential trigger often cited was the chance, one day, of a failed Treasury-security auction, in which the usual buyers -- the Chinese and Japanese and petro-state subsidizers of our deficits -- boycotted newly issued paper. Rates would balloon, the dollar would sink, and the jig suddenly would be up.
Yet, here we are a year-plus into a capital-markets crisis that has brought only higher U.S. deficits, and one of the more alarming things for markets is how successful Treasury auctions have been. So successful, in fact, that last week Treasury bills were bid with a negative nominal yield.
Following two recent auctions, including last Thursday's, equity buyers lost their nerve after Treasury sales brought lower-than-expected yields -- as vivid a marker of risk aversion as the $80 billion outflow from equity mutual funds in the five weeks ended Oct. 29.
Now, those trying to peek around the corner to a time when today's financial challenges will fade are being forced to conjure what catalyst might arise to reverse the apparent (and arguable) overpricing of risk.
The calendar won't be enough to do it, but soon it will be a net positive for riskier assets. Banks and other institutions are defaulting to cash as they close their books for the year, their offices filled with auditors and regulators and their boards with directors who have signed statements of personal liability. Some of the huddling for safety should expire with this miserable year.
Even half-hearted attempts to reallocate assets could be consequential. As of Friday, the quarterly loss for the S&P 500 was at 22%, while the 10-year Treasury's return was 13%, according to MFGlobal. Does this whisper bonds won't continue to pitch shutouts against stocks without a pause or switchback?
It's not hard to argue against an imminent and sustained increase in risk appetites. After all, the velocity of the financial and economic deterioration suggests today's cosmetically unchallenging equity valuations are a value trap built on a liquidity trap, leading to a trap door.
Stocks have been hinting that they won't seize on every bad-news excuse to collapse. Meantime, with the market treating everything outside of the absolute safety of cash or Treasuries as hyper-risky, the moment may be close when investors will be rewarded for sticking with the relative safety and quality of things like investment-grade and muni debt, and stable, dividend-paying stocks.
THE FINANCIAL CRISIS, EVENTFUL bordering on melodramatic, has created more good reading than most of us have time for, from insightful explanations of how we got here to thoughtful suggestions on what to do now. Just from the crop of recent weeks, I can point to well-crafted ruminations on causes and consequences from Bob Hoye of Institutional Advisors (http://www.safehaven.com/article-11925.htm) and from Dennis Uyemura, CFO of California Bank and Trust (available upon request). Murray Stahl of Horizon Asset Management has written an intriguing plan for Treasury to create an ETF pegged to a sampling of the toxic assets it plans to buy from banks.
In more of a big-think/long-term vein, Ajay Kapur of Mirae Asset offers a provocative case that global terrorism has peaked and explores the investment implications (http://www.miraeasset.com/ourMarkets/outlookList.do).
A more immediate and actionable piece appears at http://worldbeta.blogspot.com/2008/1...bad-years.html by Mebane Faber of Cambria Investments, which shows that the well-known outperformance of the smallest stocks in January is particularly pronounced after the worst market years. The average one-month gain for the smallest 20% of stocks in Januarys following the 10 worst years was 18.7%. Exchange-traded funds holding micro-cap shares, such as PowerShares Zacks Micro-Cap (ticker: PZI) or First Trust Dow Jones Select Micro Cap (FDM), could be good bets that precedent won't be shattered by this crisis.
E-mail: michael.santoli@barrons.com
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