Last week certainly was in favor of the bears. Soft economic reports, profit warnings around the globe and Friday GE missed guidance. Most markets saw a substantial selloff, even though OMX recovered some of the losses the last hour of trading.
As my view is very bearish for the near future, I have been shopping around for positive data points, potential surprises on the upside, or at least something that shows that it is not as bad as it seems. Most of the points I present concern the American economy, but with a diminishing decoupling story we are all on our toes for what happens in the US. If you don’t believe me, look at Friday’s OMX graph around 12:30 when GE came to the altar.
§ Asset managers are still positive, emphasizing value and assuring investors that they will be wealthier two or three years from now if they buy today. But mind you, they already have a lot of skin in the game, and would be brainless not to advise buying. 3-5-10y annual performance starts to look pretty awful for many mutual fund managers.
§ Inflation might not be as bad after all. The huge spread between CPI and core CPI, excluding food and gas, shows us that other factors, as labor cost, stay still. And they’re not likely to surge in the near future as jobs are cut across the board. Moreover, the CEO of Swedish (?) furniture retailer IKEA announced price cuts, and as the dollar weakens others are bound to follow. Since this is supposed to be good news, we don’t mention what this might do to earnings.
§ US exporters can’t find containers to ship their exports. As the dollar weakens, US are lowering imports and other countries go bargain hunting. Soon we may see US companies “in-sourcing” production and later on move it back home, this may be good news for our forward looking markets. Even badly hurt automakers GM, Ford, Chrysler say they see great opportunities in foreign markets.
§ Hedge funds can’t go any shorter. With the ongoing deleveraging and bad Q1 performance, many managers are likely to be very nervous, and keep their fingers close to the buy-to-cover button. If anything, this may cause a huge rally. My belief is that this is one of the reasons for the low volume lately; Hedge funds are positioned, and not likely to change their view anytime soon. Thus lower activity.
And for the bad news? Just about everything else. As asset managers have an incentive to stay bullish, economists do not have one to be bearish; but they all are. Big Ben and the IMF have already told us their view, this week Marty Feldstein from the National Bureau of Economic Research joined them in saying that we’ve been in a recession for some time now. As we all have had our hands full with the credit crisis, the recession has not yet (until Friday) had the impact on the markets it is likely to have.
I will be back with more of the bad news, until then I recommend XACT bear, or puts, either on OMX30, or on optional large cap. I believe we have a few tough weeks ahead of us, but for those of you interested in shorter trades there will be potential rallies with every positive report; thus keep your eyes and ears open. Meanwhile, buy something nice from H&M’s new Marimekko line, if Q2 sales disappoints we may go all the way down the basement….again.