Boom went the Dow Jones overnight, up 130 points. The oil price declined by a couple of bucks. It wasn’t enough for the S&P 500 to cross over its 200-day moving average and break out into fresh new bullish ground. But it’s worth keeping an eye on.
On the other hand, while we’re looking for signs that stocks might rally on an oil price decline, some people are predicting Financial Armageddon. That’s more our style.
Yesterday at the Old Hat Factory we had a discussion about Freddie Krueger and whether or not he is modeled on the Sandman. Freddie, you might remember, is the villain from the movie “Nightmare on Elm Street.” He is, apparently, haunting the dreams of equity strategist Albert Edwards at Societe General.
Edwards send a note to clients this week that could give even the most dedicated bear insomnia. “Even as structural bears on equities over the last decade, we have never felt the confidence to lower equities to a minimum possible exposure of 30%. That ends today,” he wrote.
“It is the first time in over a decade that we have felt so very strongly that we make this recommendation. Conversely, as the world frets about inflation we raise our government bond weighting to its maximum 50%. We are not through the worst of this crisis. The worst is still to come.”
“We are trying to give our readers the strongest possible warning (ever!) that we are on the cusp of an equity meltdown that will slash and shred portfolios like Freddie Krueger. We see a global recession unfolding. Nowhere and nothing will be immune.”
You have to give the man credit for being pretty unambiguous. So many financial calls these days try to have it both ways, hedging a prediction with a caveat, qualified by a proviso.
Here’s a question, though. If you really believe the worst is still to come and that portfolios will be shredded and slashed “like Freddie Krueger” why would you have 30% of your portfolio in shares at all? Why not 50% cash and 50% bonds? Or 50% bonds, 30% cash, 20% precious metals, and 10% precious metals shares… or some such combination?
We won’t quibble with Edwards. Investors have consistently underestimated the seriousness of a long-term bear market in credit. The flip side to the scenario we mentioned yesterday is that the S&P 500 does NOT break out of its down trend, that high oil prices and higher inflation coexist side by side, and that financial stocks continue to write down asset values.
Wikipedia describes Freddie as the, “undead serial killer… who attacks victim from within their own dreams.” That sounds just like the credit crisis. Undead mortgage loans attacking commercial and investment banks from within their own balance sheets.
BHP has taken a break from being pursued by China to become a pursuer. The company agreed to buy Canadian firm Anglo Potash for $300 million. Potash is the latest commodity to get swept up in the food crisis. It’s an ingredient in fertilizer, something you need to grow food for a planet with over six billion people.
Speaking of inflation, China’s inflation rate reached a 12-year high of 8.3% in March. Food prices (remember potash) were up 22%. China’s central bank responded by trying to cool lending activity. It raised reserve requirements at banks to 16.5%
China is a rocking-chair economy. Politically, the leaders of its economy value stability. But social stability only comes with economic growth (as Bill mentions below). Growth with stability is like a rocking chair, moving and staying put at the same time. Rock too fast, though, and things fall apart.
Markets and Money