(BSW) This Market Is Going Higher, Warns Jeremy Grantham

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This Market Is Going Higher, Warns Jeremy Grantham 2013-11-20 16:26:49.644 GMT

Then, after a further 20 percent to 30 percent rise, another bust

By Roben Farzad Nov. 20 (Bloomberg Businessweek) -- An open letter to Jeremy Grantham, manager of $112 billion, bubble soothsayer, Wall Street historian, and wordsmith: Herewith, belated props for a prediction you made 11 years ago. There we were, in the bowels of Manhattan’s 21 Club. Me: a cub business reporter thinking I was a budding J.J. Hunsecker in Sweet Smell of Success . You: a rapier-witted former oil company economist who—thanks anyway, Terence Stamp—would totally play himself in the Jeremy Grantham movie. Austere. Sober. Dire. No ums or buts, but a menacing look that could kill a goat. The stock market crash and ordeal of 2001 had transpired and shares were marking a bottom. But you were already warning that there would be a huge bill to pay soon enough, now that the Greenspan Federal Reserve had cut interest rates 12 times, most of them in extra-stimulative half-point increments. You exhorted my readers to invest in emerging markets and, if I can recall (I was, alas, in my cups), Carpathian timber, as the world was entering a commodities super cycle. Crude oil was then in the $20s and China had just joined the World Trade Organization. My takeaway: Pffft. This guy with the great accent and spread collar was such the alarmist. After all, who were we to fight the Fed and a tax-cutting Bush administration that had just won a huge midterm mandate? Plus, the country was bubble-chastened and not about to go there again any time soon. Then, well, 2008—after a torrid stretch for emerging markets and raw materials, oil went as high as $145. You called it and then some: The U.S. melted down and completed its worst stock market decade since the days of Herbert Hoover. Then, ever so fleetingly at the March 2009 low, in “Reinvesting When Terrified,” you urged investors to hurry up and get back in while the getting was good. I’ve since read every word of your prophecies. Now, with the Dow, Standard & Poor’s 500, and other indexes regularly setting all-time highs, you proffer good news that is actually bad news: The market is headed potentially much higher … but en route to its third calamity in just over a decade. “One of the more painful lessons in investing is that the prudent investor (or ‘value investor’ if you prefer) almost invariably must forego plenty of fun at the top end of markets,” you write in Grantham, Mayo, Van Otterloo (GMO) & Co.’s latest quarterly letter (PDF), “Breaking News! U.S. Equity Market Overvalued!” “This market,” you add, “is already no exception, but speculation can hurt prudence much more and probably will. Ah, that’s life.” Your “personal guess” is now that the U.S. market, especially riskier shares, could ascend another 20 percent to 30 percent in the next year or two, with the rest of the world, including emerging-market shares, making up some of the ground they’ve lately lost to the States. Great, right? But “then,” you predict, “we will have the third in the series of serious market busts since 1999 and presumably Greenspan, Bernanke, Yellen, et al. will rest happy, for surely they must expect something like this outcome given their experience. And we the people, of course, will get what we deserve.” “Be prudent,” you say, “and you’ll probably forego gains. Be risky and you’ll probably make some more money, but you may be bushwhacked and, if you are, your excuses will look thin. Your call. We of course are making our call.” Which is that U.S. shares are now significantly overvalued. GMO estimates that the S&P 500 would have to fall almost 40 percent (it lost 37 percent in 2008) to hit fair value. Looking ahead, then, the market’s expected rate of return for the next seven years is a negative 1.3 percent per annum, adjusted for inflation. Grantham’s asset allocation deputy Ben Inker does note that all this need not necessarily be preordained, especially if the country enters a “golden age” of corporate investment and economic growth. “This would,” he writes, “solve lots of problems, including the federal deficit and unemployment … but there is sadly no evidence whatsoever that it is occurring.” Square that with what Grantham said earlier this year on Charlie Rose : “I think Bernanke is whipping this donkey—this economy—that can only grow at 1 percent, because he thinks it’s a racehorse that should be growing at 3 percent. … This donkey can’t run.” Rose: “Until it either drops dead or turns into a racehorse.” Grantham: “Yeah, right.” Rose: “And you are betting on dead.” Grantham: “And I’m betting on dead …” Excuse me, then, while I go bet on a fifth of Chivas.

-0- Nov/20/2013 16:26 GMT

>>> Fed's Bullard (dovish, FOMC voter): A strong November jobs reports could inc

Fed's Bullard (dovish, FOMC voter): A strong November jobs reports could increase the odds of a December taper - US economic data is looking somewhat better, GDP has been revised up somewhat - Economy has seen cumulative progress in creating jobs since September 2012, the question is whether this can be sustained. - This cumulative progress is the strongest argument for tapering. - If the Fed can taper due to strong data, everything will be fine, should not see another 'taper tantrum' in markets. - Fed is trying to push people to invest in riskier assets.

>>> US Gapping down

Gapping down

In reaction to disappointing earnings/guidance: CHLN -15.8%, QUNR -5.8%, GFI -4.2%, LOW -3.8%, MODN -3% .

Select metals/mining stocks trading lower: IAG -2.3%, GG -1.2%, AG -1.1%, ABX -1%, GLD -0.8%, EGO -0.8%, HL -0.8%.

Other news: AEZS -8.2% (announces proposed public offering of common shares and warrants), CRNT -6.9% (announces proposed public offering of common stock, size not disclosed), LOV -6.5% (announced that Great Hill Partners, LLC and its affiliates, as selling stockholders, intend to sell shares of common stock of Spark Networks), SSW -5.7% ( plans to offer 3.5 mln Class A common shares in a registered public offering ), ICLD -5.3% (modestly pulling back), FU -4.8% (lower despite reiterating denial of allegations), GOOD -4% (plans to sell shares of its common stock in an underwritten public offering), NHI -1.8% (announces offering of 4.5 million shares of common stock; to acquire 25 independent living facilities), TEF -1.3% (still checking), BUD -1.1% (still checking), GPK -0.9% (announces commencement of secondary common stock offering of ~47.87 mln shares by selling stockholders; announces $200 mln stock repurchase), CLVS -0.6% (acquires Ethical Oncology Science to gain rights to lucitanib, a unique dual-selective Phase 2 FGFR/VEGFR inhibitor, files for 3,713,731 share common stock offering by selling shareholders).

Analyst comments: TWTR -2% (downgraded to Hold from Buy at Cantor), CHRW -1.6% (downgraded to Hold from Buy at Deutsche Bank), WDAY -1.4% (downgraded to Market Perform from Outperform at Cowen), TSLA -1.3% (Hearing tgt cut to $120 from $141 at Barclays), PDCO -0.7% (Patterson Companies downgraded to Neutral from Buy at UBS), BA -0.7% (downgraded to Perform from Outperform at Oppenheimer), MOS -0.6% ( downgraded to Hold from Buy at BGC Partners), POT -0.6% (downgraded to Hold from Buy at BGC Partners)

FT : France in Fed taper line of fire

French bonds could sell off sharply if US yields rise

When France’s weak economy and public finances are panned by international critics, its politicians have an easy riposte: just look at our bond yields. Paris can borrow at lower costs than London, and the spread between French over German 10-year bonds has remained remarkably stable over the past year. Standard & Poor’s early morning announcement two weeks ago of another downgrade – this time to double A – failed to cause markets to choke on their croissants. Investing in French assets cannot be so awful.

Could that change as the US Federal Reserve starts to wind back its exceptional stimulus measures? Among investors I have spoken to recently, a school of thought is developing that it might. During the global “taper turmoil” earlier this year – the weeks after May 22, when Ben Bernanke, Fed chairman, first hinted at his plans to taper, or scale back Fed asset purchases – eurozone bond markets remained surprisingly tranquil, even as emerging markets sold off sharply. But while global policy makers and economists still struggle to understand the interlinkages between Fed actions and global markets, it seems implausible that Europe can escape unscathed when tapering becomes real, perhaps as early as December. After all, “global QE” – quantitative easing by the Bank of Japan as well as the Fed – drove European bond prices higher and yields lower; taper turmoil showed the potential for disruption when it goes into reverse. Stabilising factors If there will be European fallout, where will the effects be worst? Intuitively, the weaker eurozone “periphery” economies seem most at risk of a market correction as global QE ebbs, especially if fresh taper turmoil increases investors’ risk aversion. In fact, countries such as Spain, Italy and Ireland have benefited from four stabilising factors this year. First has been their transition – thanks to the European Central Bank acting as a backstop – from existential crises to something nearer normal economic conditions. Growth is low and unemployment alarmingly high, but the danger of imminent ejection from the euro has gone. Second, at least Irish and Spanish bonds have benefited as turnround stories, with tangible evidence of structural reforms improving competitiveness and growth prospects. Third has been the “re-domestication” of Spanish and Italian bond markets – fickle foreign investors have fled. Fourth, eurozone periphery countries have moved decisively from current account deficits to surpluses; they no longer rely on capital from overseas. All four supporting factors will remain in place even as the Fed tapers. None, however, apply to France. Instead other reasons explain the impressive performance of France’s bond market this year – and why it might now be vulnerable. Higher bond yields When the Fed was ramping up its asset purchases and US Treasury yields were falling, global investors looking for higher returns were attracted by France’s large and liquid bond markets. Until June this year, French 10-year yields were higher than US equivalents. France was considered part of the eurozone’s safe, northern core, which made it attractive to investors for whom German Bund yields were simply too low. The Swiss central bank was an avid buyer of French bonds, as were Japanese banks.

The case against France is that if the Fed slows its asset purchases and US Treasury yields rise, those inflows could start to reverse and French bonds would sell off – perhaps sharply. Eric Chaney, chief economist at Axa, points out the very different debt profile between France and Germany. As a share of GDP, French public sector debt will soon be 20 percentage points higher than Germany’s. Without action to alter France’s debt dynamics, the spread between French and German bonds could widen by 50 or 100 basis points, warns Mr Chaney. French politicians probably need not worry just yet. Investors shorting French bonds have often lost their berets. When French yields have hit instability in the past, it has been because of obvious systemic risks – the exposure of its banks to the eurozone “periphery” economies in 2011, for example. Whatever the risks posed by Fed tapering, it is hard right now to see what might trigger another big sell off. As the eurozone crisis has lost intensity, eurozone bonds have performed more like “rates” markets, with yields linked to growth and inflation prospects, rather than default risks. France’s economy is contracting, which will curb any uptick in yields. Still, as Fed tapering draws near, markets may make life less comfortable for French politicians – and limit their bond yield bragging possibilities.

>>> US Gapping up

Gapping up

In reaction to strong earnings/guidance: STV +9.2%, LZB +8.5% (also increased its quarterly dividend by 50% to $0.06 per share), JCP +5.4%, DE +3.7%, ADT +0.9%, (also enters into accelerated share repurchase agreement to repurchase ~400 mln of common stock).

M&A news: TEVA +1.6% (Bloomberg discusses merger possibility between Teva and Mylan or VRX, according to reports; upgraded to Positive from Neutral at Susquehanna).

Select oil/gas related names showing strength: SD +4.5%, RDS.A +0.8%, BP +0.7%, .

Select solar names showing strength: RSOL +10.8%, SPWR +4.3%, JKS +3.4%, TSL +3%, YGE +2.2%, SOL +1.6%, .

Other news: IPCI +21.2% (continued strength), HNR +19.5% (announces revised $400 mln proposal from Pluspetrol for co's interest in Venezuela; termination of negotiations with Vitol), UNIS +17.9% (attributed to reports of deal with Hikma), BMRN +4.9% (confirms FDA Advisory Commitee recommends approval for Vimizim for the treatment of patients with Morquio A syndrome), MDR +4.4% (ticking higher, subsidiaries was awarded project for a customer in the Arabian Gulf. The value is approximately US$ 200 million and will be included in McDermott's fourth quarter 2013 backlog), VEEV +4.3% ( following positive Mad Money mention), OMER +4.1% (announces FDA acceptance of Omidria as proprietary name for OMS302), OTIV +3.3% (Silk & Sons disclosed stake), YHOO +3.1% (increases share buyback authorization by $5 bln), NQ +2.9% (following conference yesterday), NOK +2.6% and ALU +1.3% (still checking), RYAAY +2.3% / ZNH +1.1% (still checking), ARO +2% ( Hirzel Capital disclosed stake), BSX +1.2% (receives FDA clearance and CE Mark approval for Direxion Torqueable Microcatheter), SSYS +1.2% (continued momentum), HLF +0.8% (William P. Stiritz, Chairman of Post Foods (POST), disclosed 6.38% active stake in 13D filing; plans to interact with Company management), CRM +0.7% ( following positive Mad Money mention), CAT +0.6% (following DE results), ZNGA +0.5% (picked up in afternoon trade on reports that the co received favorable patent verdict in Texas case), AMGN +0.5% (announces evolocumab (AMG 145) results from first 52-week study of PCSK9 inhibitor to reduce LDL cholesterol; Amgen tgt to $142 from $138 at Deutsche Bank), FNF +0.4% (Dan Loeb's Third Point Capital reported new stakes (as of 9/30) in FNF (2.1 mln shares) and NLSN (1.0 mln) in an amended 13F filing out last night after the close).

Analyst comments: COG +2.1% (upgraded to Outperform from Market Perform at Bernstein ), PCLN +1.8% (added to Conviction Buy list at Goldman), BBY +1.6% (upgraded to Buy from Neutral at Citigroup), PSO +1.4% (ticking higher, upgraded to Buy from Neutral at BofA), GMCR +1.3% ( initiated with a Buy at Buckingham Research).