Société Générale strategist, Albert Edwards - Dow to 4,500!
More European bears coming out of the closet!
business.timesonline.co.uk.
From The Sunday Times
June 29, 2008
Back to the Great Depression?
Wall Street has had its worst June since 1930. How much worse could the world economy get?
David Smith and Dominic Rushe
When Wall Street slumped on Thursday, in response to the oil price surging above $140 a barrel and renewed fears about the banking system, the alarm bells rang more loudly than usual.
Barring a miraculous recovery tomorrow, the Dow Jones industrial average is heading for its worst June since 1930, when it plunged by almost 18%.
That month is ingrained in the Wall Street psyche. After the crash of October 1929, the stock market continued to slide through the winter. By the spring the worst seemed to be over. Then shares lurched low in June 1930, signalling deep problems for the economy and the stock market.
America entered depression and the stock market went into a deep freeze that lasted a quarter of a century, taking until 1954 to get back to its precrash high. Are there any parallels with today?
Although it is eight months since the Dow peaked at 14,164, its performance since then has defied gloomy predictions. Despite most economists declaring the economy to be in recession, the index was above 13,000 as recently as last month.
This month, however, reality has hit home. “Some of it is clearly to do with the oil price but essentially what we are seeing is a slow-motion car crash,” said George Magnus, senior economic adviser at UBS.
“The first act was the housing market, the second act was the credit crunch, and what we are now seeing in this third act is the bigger picture of a downturn that has a long way to run.”
Few are gloomier about that prospect than Albert Edwards, strategist at Société Générale in London. “America is leading the way, diving into deep recession as a collapse in consumer confidence induces the great unwind,” he said. Edwards compares the economy with a pyramid scheme that is poised to crash to earth and interest-rate changes can do nothing to avert it.
He thinks Wall Street and the other main markets have a lot further to drop, and will end up 70% below the peaks of last year. That would imply a level of just 500 for the S&P 500, which was at 1,280 on Friday, and 4,500 for the Dow, compared with Friday’s closing level of 11,346.
The FTSE 100, which closed at 5,530 on Friday, will plunge to 3,000, he predicts. The good news is that he expects the oil price, which was above $142 on Friday, to slump to $60 a barrel. The bad news is that he sees this occurring as a result of “deep” recession in the advanced economies and a sharp slowdown in emerging markets.
The gloom on Wall Street, where the stock market dropped again on Friday, is almost all-pervading. Veteran banking analyst Richard Bove of Ladenburg Thalmann said there was “an absolute unwillingness among clients to talk about anything other than how bad things are”. Investors wanted to know which bank would be the next to blow up or be forced to raise capital. Even though there were hopeful signs of recovery in the sector, albeit from a low base, many in the market had “lost perspective”, he said.
“The last time loan losses were at these levels was 1934,” he added. “I don’t believe we are going back to a 1930s environment with people living in tents.” Bove predicts bank losses will at least stabilise in the coming months.
However, Scott Anderson, senior economist at Wells Fargo, summed up why the markets are so gloomy. The economy is caught between the twin problems of near-recession and sharply rising inflation. “Consumer confidence levels are at their worst since the early 1980s, we have record oil prices and the Fed will have to react to that and start raising rates by the end of the year if they don’t recapitulate soon,” he said. “That would certainly drag out the housing correction and be a further drag on consumers.”
He has scaled back his forecasts for the end of this year and into 2009. “One half [of Wall Street] is worried about growth, and they are scared,” he said. “The other half are worried about inflation, and they are scared too. Sell in May and go away may have been the best strategy this year.”
A drop in the oil price would be the best remedy for jittery markets and a shaky economy, though it could also cause problems. One fear is that a sharp fall in oil and other commodity prices would bring a new wave of troubles for investment banks and hedge funds. As it is, most have been revising up their forecasts for the oil price.
A survey by Reuters shows that analysts expect the price of American crude to average $113 a barrel this year, remaining around that level next year, before increasing to $115 in 2010. Last year the average was $72.
Some analysts, though, are much more aggressive in their forecasts. Fortis, the Belgian-Dutch financial group, sees crude averaging $125.70 this year, $171.50 next year and $224.90 in 2010. In contrast, Royal Bank of Scotland sees a price average of $86 next year.
It matters a lot who is right. Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pennsylvania, said the stock market should begin to recover before the end of the year, as long as the oil shock starts to fade. “It’s all predicated on the assumption that oil prices are at least peaking,” he said. “If fundamentals mean anything then it’s hard to argue they can go higher.”
The descent into gloom on Wall Street has come even as the latest news about the American economy has offered a few glimmers of light. Growth for the first quarter was revised up to an annualised 1%, meaning the economy has yet to meet the strict technical definition of recession.
Figures on Friday showed a 1.9% jump in personal incomes and a 0.8% rise in spending last month as consumers received their tax rebates. There was even a modest rise in home sales, breaking a long downturn. Nobody, however, is sounding the all clear, on either side of the Atlantic. THE renewed rise in oil prices, coupled with continued concern about the credit crunch, has reinforced worries about Britain’s economy. Figures on Friday showed that growth slowed to 0.3% in the first quarter of the year, half its rate in the final three months of 2007.
Gross domestic product was 2.3% up on a year earlier but analysts said there was little doubt that a sharp slowdown was under way, with household incomes down 1% on the quarter and the saving ratio plunging to 1.1%, its lowest since 1959.
“The sharp decline in households’ real disposable incomes, reflecting a surge in tax payments, is troubling, as is the slump in the saving ratio to its lowest level for half a century,” said Ross Walker, an economist with Royal Bank of Scotland. “Overall, household finances appear to be in a more precarious state.”
Howard Archer of Global Insight said the latest figures showed that the economy was slowing more sharply than expected and raised the spectre of recession.
“We forecast growth to moderate from 3% in 2007 to 1.6% in 2008 and 1.2% in 2009, as consumers increasingly tighten their belts, business investment is scaled back, and exports are limited by slower growth in key markets,” he said.
“Year-on-year GDP expansion is seen slowing to a 16-year low of 0.7% in the first quarter of 2009 and there is undeniably a real and growing danger that the economy could suffer a mild recession.”
Unfortunately, the Bank of England is in no position to do much about it. House of Commons testimony last week by governor Mervyn King and some of his colleagues on the monetary policy committee was taken by analysts as reassuring in that it suggested the Bank was in no hurry to raise interest rates. However, the scope for early rate reductions to head off the downturn has all but evaporated.
The European Central Bank is widely expected to raise its key rate by a quarter of a point to 4.25% this week, after clear signals of its intention to do so.
“They will have egg all over their faces if they don’t hike rates,” said Nick Stamenkovic, an economist with Ria Capital Markets. “But I don’t think the Bank of England will follow. Bank rate looks to be on hold for the rest of the year.”
The markets, however, will remain jumpy, hit by the unpredictability and extreme volatility of oil prices and worries that there could be more skeletons in the banking cupboard.
We are not in for a rerun of the Great Depression of the 1930s, but we will be having a pretty rough ride.
THE HEDGE FUNDS THAT ARE SHORTING UK PLC
A NEW RULE came into force last Monday obliging hedge funds to disclose short positions they had taken in companies that were raising money from shareholders, writes Kate Walsh.
The rule, announced by the Financial Services Authority on June 13, lifted the lid on the funds that were betting against companies such as HBOS, Bradford & Bingley, Johnston Press and UTV Media.
Going short involves borrowing shares and selling them straight away - in order to buy them back later at a lower price.
The names that came out last Monday included well-known fund managers such as Lansdowne, GLG, Fidelity Investments and Odey Asset Management alongside the not so well-known Oceanwood Global and Steadfast Capital.
These were the main positions disclosed last week and the men behind the funds.
Harbinger Capital: 3.29% short on HBOS Harbinger’s Phil Falcone, the so-called Iron Man of the New York hedge-fund world, is renowned for making a fortune out of others’ misery. Early last year he had determined that the American housing market was on the brink of plunging and shorted nearly 60% of his $20 billion (£10 billion) fund on sub-prime-backed bonds. The bet paid off and he subsequently paid himself $1.7 billion for a good year’s work. This year, Falcone bought a stake in The New York Times, where he is calling for a radical shake-up.
Lansdowne Partners: 0.58% short on HBOS Lansdowne partners Peter Davies and Stuart Roden are regarded as among the best in their field. They have worked in tandem for well over a decade and left the asset-management division at Merrill Lynch in 2001 to take over what was then a $2 billion fund; it now has $19 billion under management. Lansdowne has a reputation for being cautious and is known for the thoroughness of its research - for example, it is believed to have taken a short position on Northern Rock some four years before the bank’s crisis began.
Meditor Capital Management: 0.3% short on HBOS Talal Shakerchi, born in Birmingham but of Kurdish descent, is the main force behind Meditor. Even within the hedge-fund community little is known of Shakerchi other than that he is an aggressive fund manager who does very well in bear markets. He left Old Mutual in 1998 to set up Meditor after poaching his entire former team. Last year, Meditor was one of the hedge funds, along with GLG, that was fined by France’s financial watchdog for allegedly misusing information in a convertible bond issue by Vivendi. Meditor said it didn’t breach any regulations.
GLG Partners: 4.14% short on B&B The founders of GLG - a fund with $24 billion under management - are Pierre Lagrange and Noam Gottesman. They are among the highest-paid hedge-fund managers in Britain and their lifestyles reflect it - the pair are leading lights on the London social scene. GLG made headlines this year when its star trader Greg Coffey resigned, forsaking $250m of shares. Industry sources said that Coffey was a “sizeable” trader on the short side although his main focus was emerging markets.
Odey Asset Management: 0.28% short on B&B When Crispin Odey quit Barings in 1991 to launch his own fund-management firm he admitted he did not even know what a hedge fund was. Early backing from the billionaire George Soros and Lord Rothschild quickly turned Odey into one of the first hedge-fund stars.
In 1993 he paid himself a £10m salary but the abrupt turn in the world’s bond markets in February 1994 hit the fledgling fund hard. Last year, Odey’s $4.9 billion fund made a killing on wheat, though he is always on the prowl for distressed assets or, in his words, “the company that has no chance in hell of meeting the market’s expectations”.
Funds that disclosed short positions in Johnston Press were Lone Pine Capital, Trafalgar Asset Managers, Fox Point Capital Management and Valinor Management. Old Mutual Asset Managers revealed it had taken a short position in UTV Media. |
