Equity Roller Coaster

by | Nov 15, 2012 | Archives

We can expect an equity roller coaster in the months ahead.    For those who can ride through… there is great potential.

See why Jyske has changed its portfolio mix now below.

First, may I remind you this is the last day to order Thanksgiving roses until midnight EST.


Ecuador roses at our home.  Get details on how to order Ecuador roses here.


Thomas Fischer Senior VP of Jyske Global Asset Management speaking…


at our most recent Super Thinking + Investing & Business seminar.

As mentioned in an earlier post entitled Free Mercedes?, this is the time I have been waiting for… the darkest hour.

Boomers should feel truly blessed by this retirement age joy ride.

Like many boomers, I began my career in 1968.  The US economy was hot and American equities were in their bright hour.

Then they crashed…. both US equities and the American stock market.

Those starting years taught me a lot about recessions and the downside.  There was a recession in the early 1970s… an even worse downturn (the worst since the 1930s) in the 1980s and again a burst stock bubble in the 2000s.

Each crash was followed by an even stronger boom.

There are never guarantees, but history strongly suggests that the next major incoming tide of prosperity will help boomers (as well as the rest of the world) to enjoy many of our maturing years riding an equity market boom that could rise into the 2030s.

That would take me to age 85.

If I am still monitoring and writing about cycles then… maybe we’ll have one more big bear warning then.

For now the big tide ahead is good news.

It’s hard to image a strong equity bull market now.  This is the point.  The best time to get into equities is always when it is hardest to imagine a recovery.  Few investors grabbed the best opportunity at the worst moments in the early 1980s when the US market started its greatest bull rise… ever.

This post outlines why Jyske Global Asset Management is viewing this major economic shift and how they have altered their portfolios and leverage to the following:

Fixed income – underweight – No change.

Equities. Change from neutral/moderate overweight to underweight/neutral position.

Alternatives. Change from overweight to  neutral position.

Cash. Change from neutral to overweight position.

Many investment analysts and managers that I respect are agreeing that better stock market opportunities are forthcoming.

Thomas Fischer Senior VP at Jyske Global Asset Management (JGAM) just sent this note:  Gary,  I agree – equities seems like a better investment than bonds these days (especially dividend paying stocks).  We have our Investment Committee meeting on Thursday and shortly thereafter we will probably produce Advisory recs with some equities.  As soon as ready I will forward this list to you. 

When we receive this list I’ll be passing it onto our Multi Currency subscribers.

Thomas will join us at our February 1-2-3, 2013 Super Thinking + Investing & Business seminar.  See details here.

However… even during the boom… there will be ups and downs.   These economic tidal shifts are not exact.  Maybe the bear trend will last 13 years.  Maybe 15 years. Maybe 17?   Plus the bull cycle do not just rise.  The 15 year cycle is a long cycle with short term fluctuations as this chart of the last major bull market from 1982 to 2000 shows.

tockcharts.com dow

JGAM outlines one current risk in its recent Market Update that said: This was a post-election week that ended in concern about the fiscal cliff in the U.S. and another “cliff” in Greece.

The event of the past week was indisputably the U.S. presidential election. The initial reaction in Europe and Asia to the re-election of Barack Obama was rising stock prices. Apparently, investors were relieved that there will be no change of leadership at the Federal Reserve (Fed), something Mitt Romney had said he would have done. With Ben Bernanke still in the front seat at the Fed, a continuation of a very loose monetary policy should be almost certain. To investors this “guarantee” of liquidity puts a “safety net” – a Fed put – under stock prices. However, the question is what will happen in the long run when growth picks up and excess liquidity finds its way into the real economy, creating inflation and possibly a weak US dollar (USD). But that’s not something most investors worry much about for now.

After the initial positive reaction, markets turned to the near term risk of falling off the so called “fiscal cliff”, i.e. the automatic tax rises and spending cuts hitting the U.S. economy in the beginning of next year if an agreement is not reached between the White House and the Congress. If an agreement is not reached in time, then the U.S. economy faces a significant negative shock equivalent to 5% of GDP. Such a hit will push the U.S. into recession.

In Europe, Greece faces another “cliff”. Greece and the troika – the IMF, the European Central Bank (ECB) and the EU Commission – are again having difficulties reaching another bailout agreement. If not reached very soon, Greece risks defaulting on a 5bn euro (EUR) debt payment next week. All this uncertainty – both the fiscal cliff in the U.S. and the Greek problem – has put the EUR under pressure. Investors are seeking shelter in USD and government bonds in the U.S. and Germany.

One positive news this week was better economic data from China. Data showed industrial output in the world’s second-largest economy to expand by more than expected in October. Maybe, it’s time for investors to turn to this part of the world to escape the looming cliffs in Europe and the U.S.

JGAM is also being cautious in its portfolio structuring.   They wrote more about this in their latest portfolio update:  On 8 November, the Investment Committee conducted its monthly meeting, reviewing all managed portfolios and investment recommendations.

In order to protect the good profit we have had so far this year, we have decided to reduce risk exposure. There are a number of near-term risks that we want to avoid. The fiscal cliff in the U.S. is one challenge and a possible debt default in Greece is another. We have sold the stocks Target and Visa and the oil ETF plus cut by half the gold position.

Changes to portfolios in October

In October we did not make changes to the portfolios except changing the funding on leveraged portfolios from 100% US dollar (USD) to a loan mix of 80% USD and 20% euro (EUR). This mix reflects the currency mix of the investments in the portfolios.

EU’s austerity obsession and ongoing deleveraging

Recently, JGAM (Lars Stouge) attended a conference in Brussels, arranged by the Center for European Policy Studies (CEPS) – one of the 10 most influential think tanks in the world. With Commissioner and Vice-President Olli Rehn as the key-note speaker it was an opportunity to get inside the “machine room” of the EU Commission to see and learn how this influential institution thinks and acts.

Mr. Rehn was optimistic on the development in the eurozone. He claimed that convergence in unbalances and competitiveness to some extend has already taken place and was convinced that the process would continue, as long as policymakers stick to the strategy of creating and maintaining credibility by pursuing an austerity path.

This approach was indeed challenged by other participants at the conference. Especially, professor Paul De Grauwe from London School of Economics was doubtful and accused the Commission of being obsessed by austerity and creating a “homemade recession” in Europe. In his opinion the members of the eurozone should follow an asymmetric macroeconomic policy, allowing surplus (read: Germany) and low debt countries to run debt sustainable fiscal deficits and thereby, helping the heavily indebted members by creating the much needed growth.

JGAM’s take-home-conclusion from this top-level discussion is that the eurozone is still in the dark on how to tackle the crisis. The latest development in Greece – where the sovereign debt level is now predicted to go above 190% of GDP – and the sprouting concern on the French economy – one of the core members of the eurozone – does question the austerity path taken by the Commission. Maybe, its critics have a valid argument by claiming the European recession to be homemade and a new type of policy mix should be considered soon, otherwise, the euro itself could be at stake.

Another interesting key speaker was Senior Economist Manmohan Singh from the IMF. He presented an eye- opening and brilliant analysis of bank’s balance sheets and monetary policies on a global scale. Since the collapse of Lehman Brothers in 2008 the total volume of collateral pledged among banks has been reduced from 10tn (trillion with a “t”) to 6tr USD, globally. Furthermore, the velocity of collateral – i.e. the number of times a collateral is re-pledged – has dropped significantly because of increased counterparty risk. This means that a substantial deleveraging has taken place outside of the balance sheets of banks, causing a credit squeeze on the real economy and hence, a drag on growth potential.

Mr. Singh also convincingly claimed that expansive and unconventional monetary policies (i.e. substantial quantitative easing) has only barely compensated for the shrinking of bank’s off-balance sheets. JGAM’s take-home-conclusion from this insightful analysis is that expansive monetary policies has not been expansive at all, as it has barely compensated for an even larger contracting effect from shrinking volume of available collateral between banks. This leads to the conclusion that deleveraging will take a long time to be completed, as there is no excess liquidity in the system.

A Deloitte survey, presented at the conference, confirmed this conclusion, as it unveiled that banks expect deleveraging to extend another 5 to 7 years. This is not good news to those who hope for and rely on growth, i.e. debt oppressed countries – which by the way includes the U.S. with its own version of the eurozone struggle, namely the “fiscal cliff”.

Economics and financial markets

Near-term there are several reasons to follow a more cautious tactical investment strategy, protecting the good performance we have had so far this year:

The U.S. fiscal cliff is approaching. The eurozone crisis is re-emerging with the risk of (i) another Greek default, (ii) Spain postponing its application for help and (iii) France entering the stage of questionable economies. China changing its leadership and the subsequent uncertainty about policy and growth.

We expect the White House and the Congress to come to an agreement on the fiscal cliff threat of automatic tax rises and spending cuts. If an agreement is not made, then running over the edge of the cliff will spark a 5% fiscal contraction next year, pushing the U.S. economy into recession. A more likely scenario is that some tax increases and spending cuts will be postponed leading to a more modest drag on the economy. However, bottom line is that next year the U.S. is going to have a policy mix of easing monetary and tightening fiscal stance. This type of policy mix will result in a continuing low level of interest rates and bond yields, which should be supportive of the stock market.

The near term outlook for Europe is not favorable. Even Germany is beginning to feel the consequences of depressed demand. The absence of growth in Europe only amplifies the debt problem among the Southern- European members of the eurozone. As we write this memo it’s up for question whether Greece will default on a 5bn EUR payment this week. It will probably not happen, but we continue to ride on the edge of default, not dealing with the root causes of the crisis.

Japan is not offering a better outlook. The latest GDP number shows that the economy is shrinking by 3.5%.

The only bright spot seems to be China. However, the government has been somewhat paralyzed ahead of the political handover and therefore, policy easing has been slow. But China has enough fiscal power to make a difference and it has the incentive to use its economic power to create the domestic demand needed to make up for the lack of growth in its export markets. China is definitely an investment area we are going to focus more on in 2013.

Asset allocation

Based on the near-term risks we have decided to reduce risk exposure and protect some of the good performance we have had so far this year.

Fixed income:  We keep an underweight position, favoring corporate bonds with a short or moderate duration.

Equities:   We move from a neutral/moderate overweight position to an underweight/neutral position, still favoring large dividend paying companies. We have sold Target and Visa as these stocks are relatively more dependent on domestic demand compared to the rest of our portfolio.

Alternatives:  We go from an overweight to a neutral position. We have reduced our gold position by approximately half. Our large gold position was initially taken as a hedge against an unexpected large third quantitative easing by the Fed (i.e. excess liquidity flowing into gold). However, now that we have got the “QE Infinity”, the hedge against the unexpected is not needed. Also, we have sold our oil position. This position was initially taken as a hedge against a Middle East crisis between Israel and Iran. However, after the re-election of Obama we assess the risk to have been reduced. Further, weak global growth outlook puts a damper on the demand for energy.

Cash: We move from a neutral to an overweight position.

We expect this non-earning cash position in USD to be only temporary, as we expect to enter the Chinese market in the near term and possibly selected undervalued and solid European export stocks.

Loan mix: The loan mix is unchanged 80% USD and 20% EUR.  Leverage:  The gearing level is still below maximum.

For more details on Jyske’s  portfolio mix and its services, Americans contact Thomas Fischer at fischer@jgam.com

Non Americans should get in touch with René Mathys at mathys@jbpb.dk

History suggests that a major, long term bull market is about to begin.  For those who see this and act… the rewards could be truly outstanding.