Bull and bear: “I love it!” says infamous contrarian. The higher the market goes, the further it will fall - The Share Centre Blog

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Michael Baxter

Bull and bear: “I love it!” says infamous contrarian. The higher the market goes, the further it will fall

Written by: Michael Baxter on February 1st 2013

Category: Bull & Bear, News

Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories: “I love it!” says infamous contrarian. The higher the market goes, the further it will fall. And now it’s a hat trick: another dampener on recent euphoria – this time from China. Russia sees solid growth, but slows towards year end. Eurozone PMI hits 11 month high. Companies in the news: BTG, Royal Dutch Shell, Cranswick

“I love it!” says infamous contrarian. The higher the market goes, the further it will fall

You have probably heard of Marc Faber, He produces the ‘Gloom and Doom Newsletter’. He is also an investment advisor and fund manager, and is also famous the world over for his contrarian views.

And as a man who made his name for being a bear, a really extreme bear, a sort of Mike Tyson among polar bears, he is never happier than when he has reason to predict falls in shares.

In an interview with CNBC, he said: “For the first time in four years, since the lows in March 2009, I love this market because the higher it goes the more likely we will have a nice crash, a big time crash.”

He added: “When you print money, the money doesn’t flow evenly in an economy. It flows to some people or to some sectors first, and in this case, it flowed into equities, and until about five months ago, bonds… I believe that markets will punish central banks at some stage through an accident.”

As for all that cheer on the euro area, he added: “A year ago, the mood in Europe (owing to the euro zone debt crisis) was horrible and nobody could see how on earth stocks could go up. Now since May 2012, less than a year ago, Portugal, Spain, Italy, France, are up between 30 and 40 per cent and Greece has doubled…the stock market in Greece has doubled. So you need to buy stocks when there’s no reason to buy them.”

He also predicted a crash in bond prices and said that equities may go into a bubble phase.

From one point of view you can see where Mr Faber is coming from. But just remember, a watch that has stopped is right twice a day. If you keep predicting doom, from time to time you will be proven right, but that does not necessarily mean some uncanny foresight.

Besides Mr Faber does seem to be attempting to have his cake and eat it. “I love this market because the higher it rises the bigger it will fall,” and “I think we may see a bubble in equities.”

So are we in bubble territory now, or will we be in bubble territory later. Let’s say both, then at least one of our statements will be proven right.

Here is a prediction: an exclusive one. Equities will rise, fall or stay still. There, said it. Not even the FSA can moan about that prediction.

And yet you can see why some might say equities have a bubble feel about them.

Frankly, judging by the sentiment out there, it would not come as a big surprise if stock indices, including the FTSE 100, pass all-time highs this year.

But sentiment and common sense are not the same thing. The real impetus for rising equities seems to be that investors are fed up with bonds, and have nowhere else to put their money. Such sentiments may well indeed make a stock market boom, but equally it is a boom that may end in tears.

And now it’s a hat trick: another dampener on recent euphoria – this time from China

Setting aside all that rather puzzling stuff about the euro area being past the worst, stock market bulls have been pointing at two places to justify their recent euphoria.

Firstly, they have been pointing at the US; the improving condition of the US economy, recovery in the housing sector, shale gas pushing down energy bills stateside, surging consumer confidence, and recovering jobs. Secondly they have been pointing at China, with growth better than expected and recent Purchasing Managers’ Indices (PMIs) improving.

But then the latest US consumer confidence index showed sharp falls, with the index falling to a 14 month low. Then data on US GDP indicated contraction in Q4.

This morning it was three in a row, with the latest blow coming from China.

The latest PMI for Chinese manufacturing produced by the Chinese government fell in January from the month before. It dropped from 50.6 in December to 50.4. Okay it’s still above the critical 50 no change mark, but only just, and the consensus view from bullish markets was that the index would rise.

But don’t start drinking hemlock yet, there is some good news and reasons to wait and see.

The rival PMI for Chinese manufacturing, produced by HSBC and Markit, rose to 52.9 in January, which was a two-year high.

Furthermore, the HSBC/Markit version puts more emphasis on smaller Chinese companies, which many feel will provide the real impetus for recovery.

When the official PMI was doing okay and the HSBC/Markit version showed nasty falls, the bears said that the government PMI was not very credible, and we should believe the unofficial version. Well, now the unofficial version is looking good. On this occasion the bulls seem to have more reason on their side.

As for the US, later today we will see the latest jobs report. On this occasion, the reports may well be more closely watched than normal.

Russia sees solid growth, but slows towards year end

According to official data out yesterday, the Russian economy expanded by 3.4 per cent in 2012. Not bad. Not bad at all – although the markets had expected slightly better growth than that.

But then again 2011 was better, when Russian GDP was up 4.3 per cent. Alas it seems that as the year progressed, growth slowed. And based on this, Capital Economics is forecasting growth of 2.8 per cent in 2013.

In many ways Russia is putting on a show we in the UK can only envy. Unemployment fell to an historic low, and real wages rose by no less than 8.2 per cent in 2012. That’s real wages, note.

Given the strength of the Russian labour market it may come as no surprise to learn that the main driver of Russian growth was consumer spending – private consumption was up 6.6 per cent in 2012.

Investment growth, on the other hand, fell from 10.2 per cent in 2011 to 6.0 per cent in 2012.

Neil Shearing, Chief Emerging Markets Economist at Capital Economics, said: “In order to raise trend growth, Russia needs to rebalance its economy away from an over-reliance on consumption and towards greater investment. But today’s GDP data suggest that this remains some way off. In the meantime, the fact that growth is weak for structural rather than cyclical reasons will limit the scope for policy stimulus to revive the economy.”

Eurozone PMI hits 11 month high

It was good news, but just remember that everything is relative.

The good news is that the latest PMI covering Eurozone manufacturing hit an eleven month high in January.

The bad news is that at 47, it is pretty awful.

So yes, there’s reason to celebrate, in much the same way that the man who keeps getting beaten up only gets beaten up a little bit.

As you know, the key level is 50, anything above suggests growth. Well just two countries saw scores over this level – the Netherlands, with a reading of 50.2, and Ireland, with a score of 50.3.

Alas, although Ireland had the highest reading of all the countries measured, it also suffered the biggest decline, with the index falling to a nine month low.

The rest of the picture looks like this:

Germany,  49.8 11-month high
Austria 48.6 2-month high
Italy 47.8 10-month high
Spain 46.1 19-month high
France 42.9 4-month low
Greece 41.7 2-month high

Chris Williamson, Chief Economist at Markit, said: “While the industrial sector looks likely to have acted as a drag on the eurozone economy in the final quarter of last year, deepening the double-dip downturn, the PMI provides hope that the first  quarter could mark the start of a turnaround.  Providing there are no further set-backs to the region’s debt crisis, these data add to the expectation that the eurozone is on course to return to growth by mid-2013.”

Companies in the news

Bull: Today, Tempus at the ‘Times’ took a look at BTG. “BTG was one of my tips for the year as offering, in the biotech area, a good spread of proven compounds and drugs under development,” began Tempus and concluded that the shares still looked undervalued.

Bull and bear: Over at the ‘Telegraph’, Questor reviewed Royal Dutch Shell. Profits were down on consensus expectations, and Questor is worried about the reserve replacement ratio at the company. For all that, it was still positive about the company but feared recent rises in shares meant it had lost some of its appeal, and so said “hold”.

Finally back to Tempus and Cranswick. It weighed the export potential and Asda contract against recent rises in shares and decided to stick with its “hold” recommendation.

 alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: another equity bubble, BTG, China PMI GDP, Cranswick, eurozone PMI, Marc Faber, Royal Dutch Shell, Russia GDP

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