Observations from Seth Klarman

Yes volume collapsed, and volatility only dipped slightly, but that didn’t stop the stock market from doing what it’s seemingly programmed to always do–go up. So the S&P500 inched up another one percent last week. It’s not that the average retail investor is buying into this rally; nope, he’s long since abandoned stocks for bonds. Instead, it appears to be the work of algo traders who lately have comprised over 70% of all stock market trading in the US.

All the while, the world’s leading economies are still slowing down. China had very disappointing export numbers. Japanese GDP growth is collapsing, when compared to the brisk growth it enjoyed in the first quarter. We all know that the periphery states in euroland are in deepening recessions, but now even the titan of Europe is showing signs of slowing—Germany’s economic numbers badly disappointed last week. Even here in the US, there’s nothing really encouraging to point out. Consumer credit is back in contraction mode. Wholesale trade is crumbling. And unit labor costs are spiking.

And US corporate sales and earnings continue to disappoint. Sales are now stagnating, when compared to last year. And earnings have stopped growing. So the ever-optimistic snake oil salesmen on Wall Street, also known as analysts, are now backed into projecting an incredibly massive 15% quarter of earnings growth in the 4th quarter. Why 15%? Because that’s what will need to happen for the annual earnings growth for 2012 to come in at a respectable level.

How interesting. This is almost exactly what happened in the middle of 2008 when poor first half earnings were supposedly going to be “made back” in the final half of that year. Instead, as we all know, not only did earnings not rebound, they collapsed.

Technically, the S&P500 is very overbought on a daily basis. As much as interest rates appear to be pinned down by the Federal Reserve (by its own admission), the US stock market appears to be pinned up at lofty levels (also explicitly endorsed by the Fed), levels that border on the surreal…..especially given the context of deteriorating global economies and corporate earnings.

Seth Klarman, one of the most successful hedge fund managers in the world, recently summed up the situation as follows (via ZeroHedge):

“The market roller coaster of 2012 continues. Speedy ascents. Sudden plummets. Unexpected twists and turns. Gut-wrenching volatility, only to end up where you began.”

“It is a strange world we inhabit. One where economies remain extremely depressed yet almost no companies go bankrupt, while low interest rates encourage holders of capital to speculate. One where global turmoil mounts while the world passively watches. One where nearly every member of Congress will insist that we need to rein in deficit spending, while collectively Congress accomplishes virtually nothing. It would be absurdly funny if it weren’t so incredibly tragic.”



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