Aside from the Jim Cramers of the world - who has been right so far, I might add - it seems I am reading more and more bearish commentary from market experts. Perhaps that's because of the media I frequent, I don't know, but it seems to me to be the case.
From The Financial Times
Anthony Bolton, Britain's most feted fund manager, has fired a
message of doom and gloom as his parting shot to the industry as his
sparkling career spanning more than quarter of a century draws to a
close.
Speaking at a dinner marking the appointment of Sanjeev
Shah as his successor to manage Fidelity's flagship Special Situations
fund, Mr Bolton warned that he was fearful of a stock market slump.
"We've
got a bull market that is four years old now," he said. "I find it
difficult to find cheap shares. The low risk and high risk [shares]
have gone up together. That spells danger. You are seeing mergers and
acquisitions' tittle tattle that makes me concerned."
His views
will be closely watched by financial advisers and rival investment
professionals, not least because Mr Bolton has displayed a canny
ability in the past for predicting stock market corrections. ...
Stressing that these were his personal views, Mr Bolton said much of
the boom in mergers and acquisitions - and also risks in markets - were
being driven by a dramatic weakening of the legal covenants that have
traditionally protected investors holding syndicated bank loans.
"The
comments that we get in private from private equity is that they can't
believe some of the covenant-light deals they are getting," he said.
"It is only a question of when rather than if [things go wrong]. I
can't tell you when it's coming. I can tell you the pressures are
there."
More on private equity, easy credit and the potential effects on the market
Steve Rattner, managing principal of the Quadrangle Partners, has a
blunt warning for those riding the wave of easy credit in the private
equity industry. It won’t last.
On FT.com’s View from the Top video, he says:”Those
of us who are in private equity think we are unbelievably talented
investors, masters of the universe, whatever you want to describe
ourselves as, and many private equity guys are extremely talented
investors, extremely talented managers. But when you cut though it all,
what’s really going on here is that you have a credit-fuelled bubble
driving private equity deals that would not happen in a normal credit
market.
“You can borrow more money today, at lower rates relative to
risk-free rate – the treasury rate – than ever before in history. And
that has taken deals that would not have made any sense for private
equity, and made them into very economically attractive private equity
deals.
“Unless you believe that there is a new paradigm: that somehow
we’ve reinvented the rules of history, and of finance, the music is
going to stop…Once the default rate starts to rise, the lenders, who
are now throwing money at all of us private equity guys at these
incredibly low spreads, say, “What was I thinking? Why was I lending to
this particular creditor at 296 basis points over treasuries? I wasn’t
getting paid for the risk I’m taking.” And then we will go back to some
sort of normalised existence.”
Tobias Levkovich, strategist for Citigroup and fellow Canadian, wrote a piece entitled Monday Morning Musings, The Angle from Armonk, dated, I believe, May 18, highlighting Robert Rubin's thoughts on the market in a speech he gave at a Citigroup conference
Mr. Rubin raised the issue of the political risks of trade protectionism, the need for more comprehensive investment in education, infrastructure and training, the challenges of burdensome regulation and litigation, and the emergence of China and India as global competitors to the United States, plus large cash pools coming from outside the US like petrodollars. Indeed, he highlighted that the uncertainties around the world today are the most testing that he could recall in his adult life, while admitting that he has a bias towards risk aversion. His most interesting comment though, quoting Alan Greenspan, was that so-called excess liquidity is more a function of confidence than just cash swirling around and that it could dissipate quickly if that confidence was broken.
A few weeks ago, Jeremy Grantham let his thoughts be known.
[Jeremy] Grantham, chairman of Boston firm Grantham
Mayo Van Otterloo, has been a voice of caution for years. But he has
upped his concerns in his latest letter to shareholders. Grantham says
we are now seeing the first worldwide bubble in history covering all
asset classes.
Everything is in bubble territory, he says.
Everything.
"From Indian antiquities to modern Chinese
art," he wrote in a letter to clients this week following a six-week
world tour, "from land in Panama to Mayfair; from forestry,
infrastructure and the junkiest bonds to mundane blue chips; it's bubble time!"
"Everyone, everywhere is reinforcing one another," he wrote.
"Wherever you travel you will hear it confirmed that 'they don't make
any more land,' and that 'with these growth rates and low interest
rates, equity markets must keep rising,' and 'private equity will
continue to drive the markets.' " ...
Grantham concludes that every asset class is
expensive today compared with historic averages and compared with the
cost of replacing it. By his calculations, the only assets likely to
beat inflation by any significant margin if you hold them for the next
seven years are managed timber, "high-quality" U.S. stocks, and bonds.
"The bursting of [this] bubble will be across all
countries and all assets, with the probable exception of high-grade
bonds," Grantham warned. "Since no similar global event has occurred
before, the stresses to the system are likely to be unexpected. All of
this is likely to depress confidence and lower economic activity."
I agree.
Grantham talks about the stampede into private equity and the effects on the market.
In fact, the new global money flows
have probably created the first truly global bubble, almost everywhere
in almost everything. Particularly noteworthy and the beneficiary of
our twin forces are small caps everywhere which on our data are more
overpriced, driven by private equity deals, than an overpriced market.
But
private equity itself is the star and indeed in future years may give
its name to this bubble, the Private Equity Bubble. Potential private
equity deals have been efficiently exploited by other investors, in the
process creating odd cross currents like the out-performance of
inefficient companies that are conducive to improvement by the
acquirers. ...
An ominous recent survey confirms just
how powerful this asset movement still is: 24 per cent of institutions
expect to lower their allocation to US active equity portfolios versus
only 4 per cent that intend increases.
But
for private equity 34 per cent are intending to increase and only 2 per
cent to decrease. It almost doesn't compute but it will be interesting
trying. The new assets will be looking for excuses to be overpriced for
they will, more often than not, be on the right side of supply/demand
imbalances.
Conversely,
the sources of funds, US blue chips and US bonds will be in the reverse
position and will mostly be lower priced relative to fair value than
the newer favourites. ...
So we are probably in for an extended period of mispricing usually in
favour of the trendy assets, but with reactions towards fair value that
will sometimes likely be dramatic.
What could trigger a "dramatic reaction?" Charles Kindleberger, in his classic Manias, Panics and Crashes, argues that the end of bubbles often occur due to unexpected extraneous events outside the financial system. Such an example was the sharp sell-off last February and March triggered by the Chinese government, a sell-off I believe was a warning shot to the global financial system.
David Andrew Taylor over at Dismally expects the end of the yen carry trade to signal the end of the bull market.
First, where is all of this money coming from? Japan and the carry. The
carry doesn't like instability. If world equity markets start to shake,
the carry will roll. Hard. We saw a taste of this in late February when
the Chinese bourses tripped up, and the carry got whacked. This will
very likely be the domino effect that pushes all, as in every single
one, equity market in the world to take the necessary tumble back into
normalcy. At the same time, the ramifications are going to metastasize
around the global financial system. The money that's been accumulating
in the carry will head right back to Japan, providing a liquidity
crunch.
Finally, when short funds start shutting down, red flags start flying for me
Greg Newton at Naked Shorts relays the tale of Keel Capital, a US hedge fund that once managed $175m in assets. But reports on
Monday said that the fund had decided to close down because of a lack
of attractive short-selling opportunities and a strategy that it
described as too restrictive.
The long/short equity hedge fund focused on companies undergoing
disruptive change and started trading in early 2005. They chose to
liquidate because a strategy shift would have taken too much time and
money, co-founder Jeff Bernstein said in an interview.
As more hedge funds have started and others have grown into giants,
trading opportunities have become scarcer and volatility has declined,
he said: “It has become somewhat systemic: With the growth of hedge
funds, short interest is higher and that has dampened volatility and
could lead to long periods of lower volatility in future,” according to
Bernstein. “To compound this with a low-volatility fund was difficult.”
They are not alone. Cantillon Capital Management in January used a similar line when they decided to call it a day.
I am becoming more selective. I have been buying recently, last week adding to my coal position. However, I have also been selling technology, and plan to sell more. The game has changed in tech. Volatility has left the building, or at least relative volatility has.
I continue to look at what is going on in emerging market with great skepticism. I wrote last month I was pondering a small, speculative position in long-dated deep out of the money iShares China 25 ETF, ticker FXI. In actuality, I was considering the position in March when it looked like the market was bottoming. Since then, the value of those calls have risen 600%. I don't kick myself, though, because I know there will be another opportunity in the not to distant future to take the opposite position. At some point, I will start buying long-dated, deep out of the money puts on the same ETF. I hope I'm smart to recognize the top and have the guts to go in hard. Or maybe I'll scale in as the market keeps rising. We'll see. That's the great thing about Bubbles - there will always be opportunities to make a lot of money.
China trades for about 50x earnings. I wonder if it will get to 100x? It got to something like 60x or 80x - I can't remember - several years ago. This nutty action seems to have stronger foundations than the previous run-up. But not strong enough.
Finally, a comment on the DJ Real Estate ETF, ticker IYR, of which I own long-dated now at or near the money puts. A REIT analyst - whose name I cannot remember at the moment - left a voiceblast this morning stating that the reason why the REITs were breaking down was because CMBS spreads were widening. (He then argued that he wouldn't have to cut numbers because the cap rates in his models were 6%, not the 5%-5.25% currently implied in the group. But that doesn't matter to me.) Remember that the spreads were widening in the residential mortgage backed securities last year as the subprime market began falling apart, and was presaged by a top in the homebuilders a few months earlier. I believe a similar scenario will play out in commercial real estate, which has become over-extended. A return to historical valuations would plunge the IYR back into the $30s - today it is $82. I have a hard time fathoming the ETF will fall that far - I would be very happy if it did - but I can see it falling to $70 or even into the $60s.
Of course, markets can do anything.