This time it's not different . . .

Tue, Nov 13, 2012, 00:00

STOCKTAKE:This time is different – four words investors should “instinctively distrust”, said Credit Suisse strategist Jonathan Wilmot last week, warning that supposedly safe government bonds are anything but.

It’s “abnormal” that a large share of global savings are now invested in financial assets “with zero nominal returns or where prospective real returns are highly likely to be negative”, said Wilmot. The rush to US and German bonds is the inverse of the tech bubble, with investors “likely paying too much for safety, just as they paid too much for risk 12 years ago”.

The same valuation metrics that identified previous bubbles now suggest “safe” bonds, gold and oil are very expensive. Relative to bonds, US and European equities look cheap, he said.

Short-seller targets ‘Mail’

New EU rules compelling investors to disclose large short sales against a company came into effect this month. In the UK, the biggest short bet, at least in terms of percentage of a company’s market value, has been taken by renowned short-seller David Einhorn, who is betting against the Daily Mail and General Trust.

In 2008, the Mail condemned “ruthless” shorts who “made millions by sending share prices into freefall”. The Mail wasn’t the worst offender back then – “Don’t let the spivs destroy Britain”, pleaded the Daily Express, while the Mirror condemned one “greedy pig US billionaire who has helped bring HBOS to its knees”.

Einhorn, condemned by Lehman Brothers in 2008 for having the temerity to question its accounting procedures, is not likely to be too bothered by the Mail rhetoric.

Well-flagged Obama win rattles markets

It’s difficult – and usually pointless – to attempt to explain daily market movements. “Obama’s win prompts stock market swoon,” read one headline last Wednesday, following the Dow’s biggest loss in a year. “Stock markets welcome Obama win”, the Guardian headlined hours earlier, when markets were calmer.

It’s hard to see why markets, which are meant to discount events, would freak out over a well-flagged Obama victory. National polls were close, but statistical analysis of individual states suggested otherwise. Paddy Power paid out on Obama in advance, prediction market Intrade made him hot favourite for months, and high-profile predictions specialist Nate Silver consistently gave Romney little chance.

Still, some investors may well have gone with their heart rather than their head. Marc Faber was “surprised” by Obama’s re-election and thought the market “should be down at least 50 per cent”, while billionaire investor T Boone Pickens also thought Obama would lose. “You want to cut your throat. That’s the way I feel today,” he said.

Other reasons – gloomy headlines from Europe, the fiscal cliff – were cited for the falls. Again, old news.

The best headline, ultimately, came from FT Alphaville: “Dark clouds of uncertainty, or something”.

Apple still far from rotten

Apple is in a bear market. The world’s most valuable stock has fallen by 20 per cent since hitting $705 in September.

High-profile bond investor Jeff Gundlach, who described the stock as a “generational” short opportunity in May, reckons Apple, currently around $560, will tumble to $425. Its best days of product innovation are past, he says. In addition, many investors have huge capital gains due to Apple’s enormous rise in recent years, and will sell to lock in the current 15 per cent CGT rate, he argues. Further losses may well follow.

Bespoke Investment Group notes that Apple has experienced 10 declines of at least 20 per cent over the past decade. Those declines have averaged 30 per cent over 81 days, and a repeat would bring the stock below $500.

Still, higher prices followed those declines, so it’s premature to say Apple’s decade-long bull run is over. The stock is currently just below its 200-day moving average, and it has not stayed below this level for more than a few days since 2009. In addition, Apple is still up more than 35 per cent this year.

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