EMPTY ATTEMPTS
Anatomy of three very different fixes
All happy families look alike, but every unhappy family is unfortunate in its own way. The famous incipit of Tolstoy's Anna Karenina gives us a useful key to understanding the movements of the stock exchanges. All great equity rally cycles look alike. After all, the secret lies in understanding as soon as possible that you are in a bull market. It is no small thing, of course, but once enlightened, the extent and duration of the rise can be calculated in advance with relative
ease. This was what Laszlo Birinyi did four years ago when he said that the bull cycle would have a very long life and would end with the SP 500 at 2400. He was taken for mad (the market was worth less than half) and defended himself by muttering that the great cycles are very similar and that he had done nothing but be inspired by those of the previous three decades.
Bear markets, by contrast, are like disease. They can be chronic, acute or fulminant. They can take from tiredness, boredom, annoyance or cause adrenaline rushes so intense as to be unbearable.
The impoverishment they cause can be so slow that it can be absorbed with a gradual psychological adaptation or so fast that the abyss can be glimpsed. The crash of October 1987, two days of pure terror, was an absolute unicum, unprecedented not even in 1929. The great decline of the XNUMXs was, on the contrary, slow and very
irregular and was interspersed, like that of 1929-33, with recoveries as dizzying as they were ephemeral. The decline of 2000-2003 was disastrous and relentless only for technology. Many traditional sectors, on the contrary, went up. 2008-2009, for its part, heavily involved the West, but coincided in counterpoint with the doubling, in the same months, of the Shanghai Stock Exchange.
Even the simple corrections, in their small way, are not alike. Consider for example the last three. In the summer of 2013, when Bernanke proposed the idea of tapering for the first time, the market thought of reliving 1994-95, i.e. the classic moment in which, with the cyclical recovery now underway and consolidated, central banks begin to raise taxi. Everything came down, stocks and bonds, but he was particularly cruel on the emerging ones. In 1994, moreover, the weak of that time had been punished, namely Latin America, Canada, Sweden and Italy.
Last year's correction ended only when the Fed withdrew the tapering idea in September, only to revive it and implement it three months later. Everything recovered, except the emerging ones. The correction in January of this year, unlike the previous one, did not originate from fears related to large economies or rates.
On the one hand, it was a physiological consolidation after the gallop of the previous months and, on the other, a sign of unease due to the crises in Argentina, Turkey, Ukraine and Venezuela.
The correction of the last few days, severe but little felt in Italy due to the scarce relevance of the affected sectors on our market, was not caused by particular events, but by the end of that phase of psychological limbo in which we closed ourselves, like in a cocoon, for more than two months.
It will be recalled that the severe cold of January, February and March had led the markets not to dwell on the macro data and to put them away waiting for the return to normality. Once the eyes and ears were closed, we found ourselves in one of those classic states of sensory deprivation that favor the onset of hallucinations. In the specific case, the deformation of reality has manifested itself through the inertial and continuous ascent of new technology and biotech stocks. A pure game of momentum, also favored by computerized trading programs. Let's talk about companies that have arrived at
quote dozens of times sales (not earnings, sales). Now that the cold is over and that macro data (and forthcoming QXNUMX earnings) need to be taken seriously again, the rush to sell has begun. The phenomenon was all American, but the worsening situation in Ukraine provided a good reason to accompany Wall
Street on the street of correction.
A brilliant and politically incorrect contrarian like Fred Hickey wrote that the heavy correction of frontier technology anticipates the general market correction by a few months, exactly as in 2000. Maybe. A strategist
measured as David Kostin, looking at the time series, speaks of a 67 per cent probability for a 10 per cent correction in 2014, i.e. a SP 500 temporary decline to 1700.
Our impression is that something could actually happen later, but that in the next two-three months (exogenous shocks aside) this is unlikely. Indeed, the market is certainly busy, but after the two corrections
this year has no particularly worrying excess positioning. The sentiment is also quite balanced. Of course, some specific fears remain. Some sectors, such as US banks, could disappoint. Our bet though is that the market will be strong enough to pivot without it in the event
DESCEND. As for the Fed, the impression is that a hike like last year's is not welcome. A descent, on the other hand, would also be lived with concern.
Ukraine, which markets tend to undervalue, will continue to be a problem. After an apparently conciliatory phase, Putin has embarked on a controlled but dangerous destabilization of the neighboring country. The risk is not that of a civil war or an invasion, but that the destabilization reaches such an intensity as to trigger phase three of the sanctions, the economic one. Neither Russia nor Germany wants to go that far, but neither has the
full control of events. Phase three would weaken Russia more than Europe, but it would by no means be painless for
Germany and would deal a major blow to the recovery of the Eurozone.
Probably the members of the ECB directorate do not make European QE depend too much on Ukraine, but in Merkel's mind the two issues could very well be linked. And it is Merkel, not Draghi, who will have the last word on the matter, as it was in the August 2012 case of the WTO.
It is possible that Qe has already been decided, but the triggering of phase three of the sanctions would make this possibility an immediate certainty. At that point, sanctions and QE, the ultra-strong euro could indeed weaken.
