Thursday, February 26, 2009
So suddenly, here we are closing in on the end of the month again. And yes, here we are contemplating the passive rebalancing flows that are likely to occur on the heels of yet another month of execrable equity market performance. Early readings would suggest buying USD (again) to adjust MSCI EAFE passive hedges, and to buy equities/sell bonds from the pension crowd.
Macro Man just cannot shake the nagging feeling that equities want to rally here. Not only should month-end flows provide some sort of support, but the newsflow can be construed as at least marginally positive. Here in the UK, RBS earnings were slightly less awful than expected, and the asset insurance program from the government more generous than the martket had thought.
Meanwhile, some tiny details are emerging of the US Treasury plans, mainly around bank stress-testing. (Macro Man can only imagine the thousands of people thinking to themselves "Stress test? You wanna stress test? Try having 90% of your net worth in a stock now worth $2! That's a stress test.) Hell, even UBS has appointed a credible chief executive!
In any event, markets never move in a straight line forever, and having plummeted (in the case of Eurostoxx futures below, nearly 20%) in the last couple of weeks, and least some sort of correction seems likely to be on the cards. Not that Macro Man can really bring himself to be long....he's more comfortable taking positions in longer-term dividend flows than in short term technical bounces. And in the back of his mind, he feels compelled to remind himself just how awful the fundamentals are. (Not that he needs too much reminding- the macro data flow is just TERRIBLE. Q4 GDP was revised down in Singpore to -16/4% q/q saar, and January exports in Hong Kong posted their lowest y/y reading since 1958.)
Macro Man uses a proprietary indicator of earnings momentum to help him model forward equity returns. The chart below shows his indicator (on the left hand axis) along with the subsequent 12 month price change in the S&P 500. As you can see, it's not a perfect fit, but it ain't bad for a one-factor model (Macro Man naturally uses other factors as well!) As you can see, through the onset of the crisis in July 2007, the indicator suggested earnigns were likely to remain resilient.
The chart below updates the indicator with the latest available data. The scales are left consistent to provide an apples-to-apples sense of magnitude. As if you didn't know, the earnings headwinds faced by companies are unlike anything that they or their chief exeuctives have likely faced before.
Literally off the charts! So while we may indeed get a bounce, perhaps even a "tradeable" one, it should only prove to be a temporary respite. To paraphrase Winston Churchill, this crisis cum depression may be at the end of the beginning, but it ain't close to the beginning of the end. This is a bear market, and the burden of proof will remain on the fundamentals to improve to change that fact. And that's something that's never far from the front of Macro Man's mind.