Trader’s Narrative

Jeremy Grantham declares most of the easy money made in his latest quarterly letter from GMO. I respect Grantham as one of the few ‘elder statesmen’ of the stock market because he approaches it with an impressive amount of perspective and discipline. No doubt, a result of having survived many market cycles.

He was one of the few who warned that the bubble was everywhere in 2007 and then surprising to many who were accustomed to his jeremiads against the market, he turned bullish in March 2009: Reinvesting When Terrified.

Here are a few choice excerpts from his latest missive on the US equity market:

Fair value on the S&P is now about 860 … This places today’s market at almost 25% overpriced

Having reinvested back in March to be almost neutral in equities, we have recently taken just a few chips off the table and recommend that anyone who was neutral weighted in equities or even overweighted (lucky you!) do the same.

Quality stocks (high, stable return and low debt) simply look cheap and have gotten painfully cheaper as the Fed beats investors into buying junk and other risky assets

As many have already done before him, Grantham compares the spring rally to the ‘last hurrah’ which saw the Dow Jones counter rally in the aftermath of the 1929 crash:

As mentioned six months ago, in the third year of the Presidential Cycle, a tiny fraction of the current level of moral hazard and easy money has done its typically great job of driving equity markets and speculation higher.

Price, however, does matter eventually, and what will stop this market (my blind guess is in the first few months of next year) is a combination of two factors. First, the disappointing economic and financial data that will begin to show the intractably long-term nature of some of our problems, particularly pressure on profi t margins as the quick fix of short-term labor cuts fades away. Second, the slow gravitational pull of value as U.S. stocks reach +30-35% overpricing in the face of an extended difficult environment.

But, like Doug Kass of Seabreeze Partners, Grantham doesn’t believe that we break the 666 low on the S&P 500 but that it will last as a long term inflection point. Turning to other markets, Grantham continues to favor emerging markets, even as their valuation pushes against his own value instinct. Finally, he finishes off with an special comment on the question of redesigning the financial system in the aftermath of the 2008 meltdown. The whole thing is longer than his usual quarterly updates but well worth the read.

Follow this link to download GMO latest quarterly letter. If that doesn’t work, you can also find it in the Free Trading Resource section in the Reports & Articles folder.

No, there is no free lunch. But for my US readers, there is a free trading magazine subscription in their future.. For a limited time, you can get a complimentary subscription to SFO magazine (Stocks, Futures, and Options).

It takes less than a minute to sign up and you need to provide some basic information. But as I mentioned, you need to be a resident of the US (because you need to provide a US address). Enjoy!

For economic and market news and to see what interesting reading you may have missed last week, check out the list below. To see it all, go to news.tradersnarrative.com:

• How demographics holds the key to the stock market
• The most powerful banker you’ve never heard of
• Who Is in the Oil Futures Market and How Has It Changed?
• Does anyone watch Fox Business News?
• Get a FREE Subscription to Futures Magazine (limited time for US residents only)
• There’s No Such Thing as Idle Cash on the Sidelines
• Zombie ETFs
• Kass: Market Has Likely Topped
• “We were completely and officially ignored”
• Dogs of the Dow have struggled in recent years
• Hedge Funds Back in Hiring Mode
• Get the Elliott Wave Theorist for FREE (limited time)
• Dow By Any Other Name

For the complete list, follow the graphic link below to news.tradersnarrative.com:

And remember to check back regularly since there are interesting links added throughout the week.

Europe’s Week Ahead

Here is this weeks summary of sentiment data for the stock market:

The weekly AAII measure of sentiment continues to reflect a repentant US retail investor. This week the bulls were unchanged at 34% while the bears increased 9% points to 49%. This is a very abrupt change as it was just 4 weeks ago (Sentiment Overview: Week Of July 31st, 2009) that we had the mirror opposite with 48% bulls and 31% bears. And it was only 2 weeks ago when we saw 51% bulls! This is especially meaningful as the market is actually trading higher

Meanwhile, the Investors Intelligence Advisors Index - a metric of the mood of stock market newsletter editors - is finally showing extreme levels of bullishness. This week’s results pushed the bulls slightly upwards to 51.5% while at the same time reducing the bears to just 19.8%. That widened the gap between the two camps to almost 32% points or put another way, we now have almost 3 optimistic editors for every gloomy one.

So it took the II a few weeks to arrive at the +50% levels of bullishness that we saw from the AAII earlier this month. But while the AAII’s recent lopsided sentiment corresponded to the swing top in May 2008, the discrepancy in the II is even more ominous.

The last time we had less than 20% of the stock market advisors bearish was in October 2007 - the start of the bear market. While the percentage points between the two camps isn’t as wide as in October 2007 (40% points), it is 31.7% points - close enough to merit caution for the bulls.

Right now, looking at these two popular sentiment metrics can be confusing. Either one is ahead of the other or they are both wrong. Fortunately there are many other indicators we will take a look at after the jump.
Continue reading ‘Sentiment Overview: Week Of August 28th, 2009′

More than a year ago I called it: We are in a recession!

It was rather foolhardy to go out on a limb like that but with the help of hindsight we now know that that was quite a prescient call. What I didn’t expect was that we would be entering one of the most serious recessions we’ve seen in recent history.

Since the National Bureau of Economic Research has been keeping track of them, we’ve had 22 recessions (including this one). However, only 4 have been longer in duration:

Source: Chart of the Day

It may be just as foolhardy to now do an about turn and declare that the ‘Great Recession’ is over. But we are seeing some indications of that. The bad news is that the sharp contraction in inventories that we’ve seen has been unprecedented in recent economic history. The good news is that such drawdowns have historically signaled the end of recessions:

Souce: Doug Kass at theStreet.com

Final days of the Hedge Fund Operational Due Diligence book giveaway. Follow the link and submit your email for entry into the draw. Yup, that easy.

Here are just a few picks from the past week’s reading list at news.tradersnarrative.com. Follow the link below to get much, much more:

• The Quiet (Lobbyist Lead) Coup
• Eternal Struggle: Stocks vs. Bonds
• Fast Money, Ratigan Jumps Ship (off to ABC?)
• Should You Your Watch Your P&L While Trading?
• Roubini Likes Geithner’s Plan (!)
• The Why’s & How’s of Pyramiding (the good kind, not the ponzi kind)
• Doug Kass: Raise Cash as Rally Pauses
• Simple Flow Chart of Geithner’s Financial Bailout Plan
• What does one TRILLION dollars look like?

And remember to check regularly since there are new links added everyday.