StockTouch Blog

Looking for good news

December 5, 2011 by Peter

With the current daily news sentiment pandering around endless government debt creation or glorifying being a professional dufus (Google Snooki), we wanted to try and find some “happy thoughts” to help tide you over till the holidays. Now we won’t promise any amazing fixes to the economic problems out there, as we’ve discussed that would require a magician. What we will hypothesize is that the markets could potentially surprise us to the upside as we have apparently discounted a double dip recession, whereas a slowdown might be a more accurate label. According Marshall Aeurback, and investment strategist with Pine Tree Capital, the current economic period might end up being closer to 1998 than 2008. What does this mean? let me explain.

Now the problem with comparing our current economic climate to 2008, is that all crises are created different. While they’re all formed differently, they all share one common element. As best stated by Auerback, crises all share “The inability of markets to perceive that when a market discontinuity is fresh in the minds of investors (e.g., 2008); it seldom repeats until that institutional memory is dissipated.

Most evidence and recent media rants allude to the fact that European banks are insolvent conditional upon the PIIGS collectively being insolvent. It’s pretty obvious for a few, we’re looking at you Greece (although the European Central Bank (ECB) could easily keep them afloat by continuing to buy Greek debt), but for the others, It’s not 100% clear and, particularly in the case of Spain and Italy, it’s more a matter of the rates at which they can borrow at (covered in another previous post). So whether or not the ECB can continue to provide a safety net of liquidity, the real problem is growth in Europe which is lacking. The Euro Zone is already looking like it’s slipped into a recession whether it cares to admit it or not. Aeurback would argue that this recession, as opposed tosystemic risk and bank runs, is already priced into European stock markets.

While the current crisis in Europe is worse than the 1998 crisis with LTCM and Russia, in 1998 it was thought that the entire system would collapse. Remember in 1998 Fed funds were 5%, not zero; 10-year notes, above 4%, not 2%+; 2-year notes were 5%; SPX was 30x earnings, not 15x. We had not gone through a 1974-style liquidation in reverse parabola terms except for the one day 1987 sell-off, as we did in 2008–2009. Real estate was not selling for prices yielding 10%–15% on lower-end real estate, but that is where the focus of foreclosures is felt. With all this said, according to Auerback, “The story will be told in the next eight trading days.” So while there is still a 100% chance we see some continuing strain on the markets moving forward this week. There is also a chance it’ll be far less 2008 like and a little more “bear”-able and 1998 like. So when looking for opportunities in the market the next couple of week, remember that we’ve seen these conditions before.

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