That Was Then, This is Now
By Rich BlakeRegular readers of this column are likely aware of my limitless knowledge of music and movie facts, and perhaps may even appreciate my ability to, now and again, turn a phrase or mangle a metaphor. Lord knows I can pontificate—in a few short months “blogging” I have managed to fashion a soap box large enough to store Jay Leno’s classic car collection. How did I become so sanctimonious over the past year? It’s probably a reflexive manifestation of pent up guilt from bubble years spent putting traders on pedestals under a shameful “see it, make it, spend it” rubric, admittedly to try to make a little coin myself. So sure, I can cover the financial markets, riff on the news, lob a grenade, but I know jack shit about the markets and it’s time I admit that.
If I was given the next year and 100K to trade I’d be broke by Halloween, trick or treating in a homemade Shrek costume just to stockpile enough mini-Milky Ways to get me through the winter.
Speaking of rock-bottom scenario planning, we’re coming up on two years since the SHIT HIT THE FAN and with so much negativity in the air nowadays I figured it might be useful to do some comparing and contrasting so as to get a handle on whether we’re in for another economic dung storm come the fall. For some insights that are more useful to readers and less a showcase of my creative talents, I’m turning it over to two market watchers who know of what they speak.
I’ve asked them both to compare recent market trends to the economic environment that persisted roughly two years ago. First up are the quick observations of Keith McCullough, with whom I wrote a book, “Diary of a Hedge Fund Manager.” McCullough lives and breathes global macro research as the founder of Hedgeye, and his daily emails are read by hundreds of money managers.
Asked for a take on then versus now, McCullough wrote to me:
1. Summer 2008: After getting blasted in June/July/August, the U.S. Dollar started shooting up (just like it has lately).
2. Summer 2008: Gold wasn’t better bid on market down days like it was widely expected to be (like Aug. 11)
3. Summer 2008: Copper prices were putting in their cycle highs (like they have again in the last 3 weeks)
Other noticeable trends from two summers ago: PE deals started moving to max rumor versus actual LBO takeouts; U.S. Bond yields were confirming what US Currency was for all of Q2 – bearish prospective growth; the VIX was low in July then started freaking people out in August; S&P 500 breadth was bad; volume came on down days; and the Hedgeye intermediate term TREND line signaled crash.
Next, here are some observations from Jonathan Greenberg, creator of OCE Interactive’s Market Topographer technology.
Observations: May 2010 to Present vs. May 2008 to Financial collapse.
In some ways, the set up was similar starting in May 2008 going into the Financial crisis vs. where we are today.
1. First, it appears that the similarities began to unwind before mid-August, although that was the culmination. So should look back farther as I have below.
2. From May 1, 2008 through July 14, 2008, S&P500 was down 13%. From May 1, 2010 through July 2, 2010, S&P500 was down 15%.
3. From July 14, 2008 through mid August 2008, S&P500 was up 6%. From July 2, 2010 through August 11, 2010, S&P500 was up 7%.
4. Resumed drop (meltdown) in later August 2008. Market correction starting mid-August 2010.
5. The adjusted forward market P/E stripped of systematic differentiations across stocks was similar as of May 2008 vs. May 2010.
6. Market had been increasing penalty for stocks with financial leverage from Feb 2007 (before Summer 2007 Money Market Crisis really was in full force) but penalty was at a much more suppressed level than it was in the Spring of 2010 as the penalty for leverage never fully mean reverted after the 2008 financial crisis. But by May 2008, the penalty for financial leverage relative to the market was similar as it was in May 2010. Then the penalty in 2008 started to steeply rise. We are seeing an increase in the penalty today although not quite yet as steep as in 2008.
7. Market began increasing reward for stocks with stable long term EPS starting in May 2008 (peaked in November 2008). Market started at a lower premium this spring, but was at a similar level as May 2008 by May 2010. Continuing to rise today as it was in 2008. Unclear whether it will gain the same momentum that it did in 2008.
8. Market began to increasingly penalize stocks with a less clear investment story beginning in Summer 2007 (e.g., time of Money Market crisis) although the starting point was a below average penalty. By May 2008, penalty was around the 20 year average. Then started steep increase throughout summer of 2008 leading into the financial crisis. Penalty for stocks with less clear investment story then hit a low again in September 2009 and began increasing slowly. Similar to 2008, it hit average penalty in April 2010. Has been rising relatively steeply since (with short term reversal for a couple weeks in July). Could draw parallel given recent increases. Set up seems to parallel 2008
A couple of critical differences between the Summer of 2008 and Summer 2010.
1. Market was systematically differentiating companies more by long term growth prospects (gauged by sensitivity to Wall Street consensus long term growth rate median) back in Summer 2008 than today when the differentiation has been at a 20 year low already. So the market isn’t paying as much for growth today than it was back then (e.g., market never fully bought into robust growth across the board today).
2. Earnings levels are projected at considerably lower levels than they were back in 2008 so although earnings can still tumble if we double dip, there is less room for them to drop. Remember also that management and Wall Street analysts have been more conservative this time around in giving projections given uncertainty.
Well, I know I feel a lot better. No one in their right mind is reading this right now—summertime and the living is easy, as it should be. I have a hankering for a cold one right this second, Friday the 13th, 5:30 p.m.
Incidentally, I’m wrapping up my HedgeWorld blog gig, taking a full-time job in September with Institutional Investor helping to create a global online network for pension fund executives. I’ve enjoyed writing, and might still have a couple more columns in me before I hang up my HedgeWorld hat for good, or for a while anyway.
It’s been real. I invite readers to let me know what’s on their minds, and to stay in touch. Anyone can email me about anything at richblake@hotmail.com; I’m always good for a random riff.
August 18th, 2010 at 11:54 am
Good Luck!