fredag 29 juli 2011

Negativt mail

Jag börjar svänga runt ill det negativa igen. Här är ett mail jag skickade häromdagen

My thoughts on how I went from bull to bear

Even if we have already been through the idea of delevering several times, it doesn’t mean it can’t still be relevant for the stock market. I was getting tired of chasing the doomsday ghost in the darkness, and time and time again being proven wrong by long only investors. Now I’m revisiting the merits of the bear story.

First my bull story
My positive slant on markets have been based on the slack in the economy, including high unemployment and record corporate cash levels, which coupled with continued technological development in the background should provide good ground for growth, despite forced austerity on government level.

In short, companies would use cash to invest in new ideas, in software etc, leverage on new products, new technology to stimulate demand, finding that product that makes people tick. If companies invest and hire, governments can save and we would still see growth in GDP and profits. Idle resources mean growth could take place without inflation and thus with low interest rates and not least more of the value accumulating in corporate earnings than with the employees. In addition, the GDP and employment recovery vs. the recessionary downfall was way way smaller so far than in other cycles, providing reason to believe there was a lot of upside left on the table. I though this could create a cyclical rally before reality caught up.

I also factored in that markets tend to surprise on the upside and that falling markets need more and more negative fuel to keep going down - and with time passing (3 years since 2008 and flat stoxx50 levels all the way back to 1997) that the case for the downside was being exhausted.

The downside
In contrast the downside felt much less tangible and “macro” and well rehearsed, but now I see that it might still be correct, at least near term. The bull story above is probably only relevant after a catharsis. Even if we could muddle through for a while and then see the upside of the reasoning above, it is more likely that the private sector first continues to hold off from investing a while longer. Uncertainty about taxes, about austerity, about unemployment, about pension and unemployment benefits, about world demand, about inflation, about Chinese tightening and demand etc are certainly good arguments to retrench.

Governments would still need to save, even if there is no offsetting private sector investing and spending, thus pushing growth lower and the need to save still higher… Debt arithmetics, simply put. The circuit breaker is when enough companies dare or are forced to employ their excess cash or when individuals hit rock bottom and government austerity multiple drops toward zero (when individuals can’t even save to make up for increased uncertainty and less transfers but have to use all their income for day to day expenditures).

In my opinion, the jury is still out on the resource slack vs. debt arithmetics issue, but I am starting to lean toward the negative side for real now. Before, I thought we would get at least a cyclical rally, and then see the debt troubles come back to haunt us. Now I’m leaning toward the debt issue getting the upper hand already now. I didn’t think the market could be that fundamental and long term.

I am also getting the feeling that the “pain trade” really is on the downside just as it almost always is, despite underweights and bearish sentiment. Sure, a debt ceiling relief rally could still come, is even probable, perhaps best guess, but that should be a selling opportunity. The risk is that we get one more 10 per cent rally throughout August based on less bad macro and relief, so selling and shorting should be gradual as long as the market rises. Will this get me back in the game?