March 10th, 2010
Two remarkably well thought-out pieces by David Rosenberg, brought to us by Zero Hedge, demand our immediate attention. Yesterday, Rosenberg used the anniversary of the S&P 500 low of 666 to draw some meaningful comparisons. Today, his discussion on Government sponsored volatility is spot on and needs to be absorbed if a successful investment strategy is to be maintained….
On The One Year Anniversary Of 666
The media are all over the fact that today is the one-year anniversary of the 12-year low in the stock market reached on March 9, 2009, when the S&P sagged to that diabolical 666 level. (Funny how nobody celebrates October 9, which is the anniversary of the 1,565 high set back in 2007.) A lot has changed over a year, and that includes the factors that have supported the recovery in the equity market:
- The VIX was 50, not 17.
- The yield on the 10-year Treasury note was 2.9%, not 3.7%.
- The budget deficit was $900 billion, not $1.5 trillion.
- Baa spreads were 540bps and tightening, not 260bps and widening.
- The market was 20% ‘cheap’ as per Shiller P/E ratio, not 25% overvalued.
- The DXY was at 90 and depreciating, not 80 and appreciating.
- Oil was at $47/bbl, not $82/bbl (we can see $80+ crude being good for the Saudi market; we’re not sure how it fits in bullishly to the S&P call).
- Equity PM cash ratios were at 5.5%, not 3.6%.
- Market Vane bullish sentiment was at 32%, not 53%.
- Real GDP was -6.4%, not +5.9%; and the ISM was 36, not 57 (we were in the basement looking up, not on the rooftop looking down).
Rosenberg On Government Sponsored Volatility
When we look at the past 12 years, dating back to LTCM and the bailout that ensued, we have endured a 60% rally, followed by a 50% selloff, followed by a 100% rally, followed by a 60% selloff, followed by a 70% rally. The whole way along, the equity market is basically flat for a buy and hold investor.
The point in all this is the intense volatility that has been and continues to be nurtured by government policy. The lesson is that investors will now lose out by going long after a 50% selloff from the high and are unlikely to feel much pain from selling into a 70% rally from the low. All the while, the name of game is to minimize the volatility in the portfolio and embark on strategies that have low correlations to the equity market.