This from Alan Abelson @ Barrons *Tis' The Season To Be Wary* [subsrciption only]
The deep freeze. No, no, we're not about to do a reprise on the credit collapse back in 2008-2009. Hey, this is the season to be jolly. The freeze we're talking about is neither financial nor metaphorical but climatic—the real thing, that dumped who knows how much snow on Northern Europe, grounding thousands of flights, making life miserable for any poor souls who had to get out and about, and further constraining the populace's shopping impulse, already chilled by the cold winds of economic austerity.
Do you need any greater evidence of how desperate folks are than the dispatch from Berlin that told of how two men dressed as Santa Claus strolled into a supermarket, whipped out a pistol and robbed the joint? Although the report of the incident is lamentably shy of details on motive, one can only assume the faux Clauses were among the involuntarily idled, obviously short of means and unable to face the prospect of their little ones looking under the tree (recently purloined) on Christmas morn and finding—nothing.
One can only sympathize with the beset economic wise men of Europe for suspecting that somebody up there doesn't like them. Here they were frantically running around in circles, concocting all kinds of weird nostrums in an attempt to keep the weak sisters of the euro zone vertical, when the heavens open up and all but bury the Continent under a ton of snow. But if they leave off frowning and fretting and fulminating about the quirks of misfortune for a moment or two, they might realize the furious storm may prove a blessing, not a curse.
For inclement climate is just the ticket to get feckless governments and reckless bankers off the hook. A good chunk of the blame for their failure to fix the broken economies their machinations have left across a wide swath of Europe can now be cunningly shifted to the vagaries of nature. So, the great storm may come in right handy if, as seems likely, the quacky remedies they've proposed to ease the economic bind of countries like Ireland, Greece, Portugal and Spain aggravate rather than alleviate the pain.
The overwhelming consensus among the economic cognoscenti on this side of the Atlantic is that Europe is destined for further rough going in the year ahead and, indeed, there's lots of muttering of default by one or another of the debt-laden struggling members of the euro zone, even of a possible breakup of that somewhat ungainly entity. Since we have the unshakable conviction that the consensus is usually wrong, and when it's overwhelming it's inevitably wrong, we offer that as a token of holiday cheer to our shivering European cousins.
In striking contrast, optimism rules the roost among the seers when sizing up the prospects for our own economy. While we earnestly hope the optimists are right, we have some difficulty in envisioning woe in Europe failing to affect us. That would be decoupling on a rather grand scale, and we're frankly more than a tad skeptical that it'll happen. But we'll see.
Certainly, investors, who just a scant couple of weeks ago were acting pretty antsy when it looked as if one or another of the European invalids were about to sink from sight, have shrugged off such worries. But we guess they're just too busy these days buying stocks and watching them go up—and for sheer excitement, we admit, it beats pro football hands down—to spend precious time wrinkling their brows over the consequences of sovereign default and other such dull, arcane stuff.
FOR ALL ITS FLASH AND EXUBERANCE, routinely setting new highs for the cycle, this rambunctious bull market looks vulnerable to a fairly mean selloff once the end-of-the-year rally runs its course and the expected reinvestment surge early in 2011 exhausts itself. As we've noted more than once (to paraphrase a quip by George Bernard Shaw, we quote ourselves to spice our scribblings), sentiment is heavily weighted to the bullish side, typically a flashing yellow light signalling trouble ahead.
Moreover, at 20 times this fading year's earnings, stocks hardly stack up as outrageously cheap. On that score, the latest calculation by Andrew Smithers, the smart Brit who runs the eponymous London-based investment firm Smithers & Co., is that U.S. equities are more than 70% overpriced, according to q, his favorite yardstick and essentially a measure based on replacement value.
Just to put you at ease, we haven't quite lost our minds, nor Andrew his. The market, rest assured, isn't about to vanish into the void. And Andrew is quick to point out that by his reckoning, stocks are well below their valuation peaks of 1929 and 1999, but more or less even-steven with the highs of 1906, 1937 and 1968.
For all his wariness for the long pull, he doesn't see share prices suffering a steep fall so long as the Federal Reserve keeps pumping liquidity into the system and Washington stalls on meaningful deficit reduction.
Frankly, although we greatly esteem Andrew's perspicacity, we aren't so sure he's right. Not least because so many market mavens now share his view, which suggests to us, as the old Street cliché has it, it probably has already been discounted in the latest bump up in equities.
What we find especially disturbing, in any case, is the quickening of the speculative pulse, paced by wildly leveraging hedge funds.
As Zero Hedge observes, margin debt on the Big Board in October swelled to $269 billion, a leap of $13 billion over the September figure, and the highest since September 2008, just before Lehman gave up the ghost.
Any forced unwind, triggered by an unpleasant surprise (yes, Virginia, no matter what your daddy and mommy tell you, there are such things as unpleasant surprises in the stock market) could be very, very ugly.
THERE'S THIS, TOO: the economy is apt to prove less robust than either giddy investors or the Street's professional cheerleaders anticipate. We don't buy the notion that simply because a double dip is no longer a clear and present danger, everything's hunky-dory. It isn't. And, most particularly, the big double whammy of sick housing and a seriously anemic job market is still very much with us and shows few real signs of getting better.
Ex-seasonal adjustment and kindred mumbo-jumbo, housing is doing worse, not better. As we've seen these past few weeks, it doesn't take much in the way of a rise in interest rates to dry up what little demand existed for mortgages (applications have shrunk precipitously four weeks in a row). Jobs are still awfully hard to land, despite the celebratory response by chronic bulls to the occasional minuscule dips in weekly new claims for unemployment insurance.
Weary of playing tightwad and imbued with the holiday spirit, Jane and John Q. may have begged, borrowed or dug into their savings to step up their spending. But the cold, hard fact is that with paychecks not getting perceptibly bigger, they don't have much choice but to resume their new-found thriftiness.
The upward spiral in crude to $91 a barrel is on its way, predicts the commodity bunch at Barclays Capital, to $100, so Jane and John are obviously going to feel the pinch all the more. Dave Rosenberg, Gluskin Sheff's chief economist and strategist (but a fine fellow nonetheless), estimates the run-up in energy prices is costing American consumers something like $60 billion a year. Toss in the rising cost of food, which like energy is conveniently omitted from the official tally of so-called core inflation, and pinch morphs into squeeze.
Dave points out, incidentally, that "it's very dangerous to use the holidays as a guide to any fundamental shifts in consumer attitudes." In the good old days of free-flowing credit, he goes on, thanks to "the massive wealth buildup from double-digit home-price appreciation and sustainable strong employment…consumer spending in real terms surpassed a 2.5% annual rate no fewer than 13 quarters and 3% nine times. It has yet to happen so far."
A market historian of sorts, Dave relates that the dividend rate on the Standard & Poor's 500 (here we're hesitantly trespassing on the turf of the excellent Shirley Lazo, author of Barron's Speaking of Dividends), currently 2%, is "too low." It smacks, he says of a market top, where investors are willing to forgo yield because they feel they'll more than make up for it in capital gains. Ominously, the last time S&P yield was that low was in the summer of 2000, followed, you may recall, by the dot-com crash.
But, wait, don't go away unhappy. When said yield gets to its long-term average 4.35%, equities, Dave reckons, will be a great buy. Which gives you something to look forward to. Whew, now we can wish you a "Merry Christmas" with a clear conscience.
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