Take another derivative of the derivative, and then we may flat line:0)
The markets still flop around without downside conviction and without upside energy, even as the spirit of the bull is no more. Folks apparently are waiting for the final bell, much as when school was in session, without realizing that this school they can skip out on and not get punished as badly as the folks remaining in the classroom.
The geography of disease is getting larger and larger: Thailand, Indonesia, Philippines, Singapore, Hong Kong, Korea, Taiwan, Japan, ... Argentina, Brazil, Turkey, Germany ... and events no longer seem "right" ...
Should the USD collapse for any reason ... the rest of the world can put their heads between their knees and kiss their end of matters goodbye.
Message 16051585
I suspect many 'know' how this script is going to play out:
markets.ft.com
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Confidence and concern
Global investors are realising that this is not a normal economic cycle, says Philip Coggan
Published: July 10 2001 18:55GMT | Last Updated: July 11 2001 10:24GMT
For equity investors, the script seems to be pretty clear. The US Federal Reserve has cut interest rates six times in response to economic weakness. A US recovery should be inevitable. Stock markets are celebrated for their ability to look forward rather than back. In any normal cycle, share prices should be forging ahead - looking forward to the economic recovery in 2002.
As yet, the markets are not playing their part. There has been some rebound from the lows seen in March and many analysts are optimistic about a further rally in the second half of the year. But so far rally attempts have repeatedly been undone by bad economic and corporate news and most markets remain well below all-time highs.
What seems to be inducing caution among investors is the realisation that this is not a normal economic cycle. Traditionally, economic slowdowns have followed periods of tighter monetary policy, which in turn have followed signs of inflationary pressure. Consumers have led the cycle, cutting their spending in response to higher interest rates.
This time round, it is the corporate sector that has led the cycle down. Over-investment during the late-1990s boom has prompted businesses to cut back on their capital spending, particularly in the technology and telecommunications sectors. Consumers, in the US and the UK at least, are still spending cheerfully.
The script could pan out in one of two ways. Investors are hoping for a traditional Hollywood happy ending in which the Fed rate-cutting magic does its trick, with the help of tax cuts, in keeping consumer expenditure rising. The pace of consumer demand helps businesses to resume their expansion plans once they have eliminated excess inventories. A US recovery then helps pull the world out of the doldrums.
The alternative scenario might be dubbed the Butch Cassidy and the Sundance Kid ending. The corporate sector suffers years of retrenchment after the reckless overexpansion of the late 1990s; as it cuts back, workers are laid off. Consumers, already concerned about high debt levels, reduce their expenditure and the economy slumps. A negative feedback could then develop as a slowdown in Europe and Asia limits the scope for the US economy to recover, which in turn hits demand in the rest of the world. Global stock markets, like Butch and Sundance, succumb to a hail of bullets.
Stephen King, chief economist at HSBC, is firmly in the gloomy camp. "Once upon a time, the number one fear was a US recession. Now the biggest danger is a global recession. There have been two areas of infection: the bursting of the technology bubble and the impact of higher energy prices. In the US, we now expect to see companies embarking on a period of savage cost-cutting to restore profit margins, pushing the overall economy into recession. In Japan, we now expect an outright decline in gross domestic product this year," he says.
The gloom-mongers believe that the markets have now priced in the bad news for 2001. But they fear that investors remain too optimistic about 2002. According to Dresdner Kleinwort Wasserstein, consensus forecasts for 2002 earnings growth have risen over the past three months from 17.7 per cent to 20.2 per cent in the US, from 14.3 per cent to 17.6 per cent in continental Europe and from 21.5 per cent to 23.1 per cent in Japan.
Hopes for rapid profits growth in 2002 depend partly on the scope for a rebound from this year's depressed profit levels. But investors may have become too confident after witnessing the phenomenal profits growth and equity returns achieved during the long bull market. "For almost 20 years, equity prices have risen well beyond the rate of earnings growth and recessions have been shrugged off as virtual non- events as lower bond yields have generated significant further price-earnings multiple expansion to offset the negative impact of lower earnings," says Albert Edwards, global strategist at Dresdner Kleinwort Wasserstein.
In short, the impact of falling inflation prompted enormous capital gains for investors as nominal equity and bond yields declined. But now that the world has reached an era of low inflation, the gains from market rerating are likely to disappear.
Assuming ratings can hold at current levels (they are high by historical standards), returns from equities will now be more closely linked to profits growth. Profits growth in turn is likely to be linked to nominal GDP growth, which has been running at about 5-6 per cent in the developed world. That means investors can expect equity returns only in the single digits.
As investors slowly come to realise the bad news, the bears believe, they will cut back on their equity holdings. And the news may be starting to sink in. The average investor in a standard US 401(k) pension plan lost money last year, even after allowing for new contributions.
But this remains a minority view. For the bulls, prospects are good for long-term profit growth. "Concerns about the bubble nature of high profit margins are overdone", according to the global strategy team at ABM Amro. "Owing in part to structural productivity gains in the US, margins will not fall all the way back to historic lows."
Bulls also point to the difference between the technology and telecoms sectors, which are still suffering from the excesses of the late 1990s, and the rest of the market. Old economy stocks have waxed as the allure of technology and telecoms has waned. The US ex-TMT (technology, media and telecoms) index is up 18.7 per cent from its early 2000 low.
Enthusiasts recognise that, with hindsight, there was speculative froth in the market at the height of dotcom mania in 1999-2000. But that froth has been blown away, they say: equity valuations are now reasonable in relation to bonds and technology and telecoms stocks have discounted much bad news.
As for the other bearish arguments, bulls point out that markets always have to climb a "wall of worry". For them, the good news has merely been postponed, not cancelled. By the end of the first half, there were already some tentative signs that the US economy might be rebounding with indicators such as the purchasing management index climbing from their lows.
Michael Hughes, chief investment officer at Baring Asset Management, points out that liquidity is supportive for equity markets, thanks to relaxed US and Japanese monetary policy, and that there are signs of an end to the trend in profit downgrades. While European economic indicators remain weak, Europe tends to bottom about six months after the UK so the turnround may not be far away.
Hughes says BAM is buying into economically sensitive areas but retains an element of caution about individual stocks. "As an equity investor you have to be sensitive to the bond markets and they are telling you that corporate failures are possible." Indeed, although the pressures faced by some parts of the corporate sector have been well known, individual companies still retain the capacity to shock the markets - as highlighted by Marconi's profit warning last week.
In the end, the argument between bulls and bears comes back to the same issue that caused so much debate in the 1990s. Has a "new era" of technological change caused a structural, as opposed to cyclical, change in productivity and in corporate profitability? The bears, beleaguered during 1999 and early 2000, see the collapse of the dotcom bubble and the global economic slowdown as vindication of their scepticism. The bulls say the problems are merely cyclical - structural improvements are still in place.
Most investors would naturally like to believe that the bulls are right. But until their optimism is borne out by some upbeat economic news from the US and Europe and some more positive trading statements from the corporate sector, they will not be putting their money where the bulls' mouths are.
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Chugs, Jay |
