Thursday, September 29, 2011

Off to the Races Once Again?

Looks like we are off to the races once again. At this writing, global stock futures are rising as German lawmakers backed a plan on expanding the remit of the euro region’s rescue fund. Nowadays, stocks move up and down like a yo-yo on every little tidbit coming out of Europe. Very tough markets to trade in; I should know, decided to go 100% cash before the huge run-up on Monday and have not stepped back in this market.

Why did I go cash? Basically don't trust these markets and don't trust European lawmakers. It's like watching a bad soap opera. Policy blunders have crippled stocks, the global economy, giving naked short-sellers and high-frequency trading scam artists the green light to profit off all the doom and gloom. Zero Hedge posted a presentation by Bank of America's David Cui on Wednesday stating that he sees a "hard landing" in China.

Then Gary Shilling, president of A. Gary Shilling & Co., spoke with Bloomberg's Erik Schatzker and Deirdre Bolton on Bloomberg Television's "InsideTrack," discussing his strategy for investing during an age of deleveraging. He sees a huge markdown in all risk assets and maintains his long 30-year bond position until yields reach 2.5%, basically where they reached during the height of the 2008 crisis. Apart from bonds, he likes some segments of real estate, medical office buildings which benefit from an aging population and rental apartments as people realize that the housing market won't recover anytime soon. He's also been short copper since November and is shorting other commodities as he too sees a hard landing in China. Watch the Bloomberg interview below.

The "hard landing" in China scenario is the most important investment theme right now and its related to the European debt crisis. Any slowdown in global growth will impact China, commodities, commodity related stock indexes and currencies and pretty much all risk assets. Countries like Canada which have miraculously escaped the hardship that other countries experienced will get clobbered (S&P/TSX has already been clobbered; hope you took my advice and shorted the Canada bubble).

Jim Chanos, a well known short-seller warning of the "hard landing" in China scenario, has been right on his bearish China call. Moreover, as he predicted, Chinese solar stocks and other solars have been slaughtered in the latest market rout as hedge funds deleverage, shore up capital to meet redemptions, and get rid of any speculative long positions. Despite his "incredible timing," I continue to believe that Chanos is full of shit, talking up his book and that of his big hedge fund buddies. They profit from spreading doom and gloom on blogs like Zero Hedge but the world isn't coming to an end and China won't crash. Watch Bloomberg video, Ferguson says investors too bearish on China, another interview which I embedded below.

All I can tell you is to tread carefully in this wolf market where stocks go from extreme oversold to extreme overbought in seconds as computers and traders bet on every news item coming out of Europe, China or the US. Experts warn that even though stocks are not cheap, they offer better potential than bonds in the long-run. Robert Shiller sees stock market valuations as "high by historical standards" but thinks they will outperform bonds in the next decade while Jack Bogle believes stocks aren't cheap but still the best place to invest in. Bogle also thinks you shouldn't trade these markets, but stay fully invested as it's impossible to predict the next big move. You can watch all the interviews below.

Many pensions are hurting following the summer selloff. We'll have to wait to see how bad they got clobbered but I guarantee you the numbers won't be pretty. Also, I spoke with a senior pension fund manager last night who sees a "systemic shift" in financials and thinks private equity will outperform as the world restructures. He may be right, traditional private equity (not financial engineering) will do well but you still need robust public markets to exit from these investments. That's why financial oligarchs will be busy pumping up global equity markets and other risk assets trying to avert a protracted period of deleveraging and deflation that Shilling is warning of.

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