The False Mantras of 2009
By: Shishir Nigam Fri, Jan 1, 2010
As we reflect on the lessons learnt from 2009, it’s important to look at which theories have not come to fruition, or at least not yet. I look at the main themes and mantras that we heard echoed by almost every market expert but which we are still waiting to see in reality. In a follow up article, I’ll look at “New Mantras for 2010”.
Volumes will return after the summer
Throughout the summer of 2009, it was a regular occurrence to see the market spike upwards on low volumes and no news, while it fell on higher volumes. And in general, the market volumes were way below the norm. The mantra at that time was that volumes will return to the norm in the months of Sept – Dec. But of course, we didn’t see a major rise volumes while the equity markets continued to rally. Now, entering into 2010, volumes continue to remain low – possible indications that the low volumes are not due to seasonality but in fact due to large amounts of money still on the sidelines.
The big correction is around the corner
Starting from the end of March, 09, by which time markets had already rallied about 20% from their lows, investors/analysts/institutions have been calling and waiting for the big correction to come because the markets just can’t go straight up. But of course, that’s what we’ve seen for most of 2009. The closest we came to a major correction was in early July when the market lost about 7% from its high in June. How far away is this corner that we have to turn?
US savings rate will rise above 10%
When the US savings rate (as a % of income) rose from a low of 0.8% in Apr, 08 to 6.4% in May, 09, the mantra out there became that the US is going to see their savings rate spike to above 10% due to the consumer deleveraging being undertaken. Hence, the consequences for the consumer-driven US economy – roughly 70% of GDP is consumption – would be dire. Here we are in Jan, 2010 and since May, 09, we’ve seen that savings rate back down to 4.7% in Nov, 09. I’m sure waking up every other morning to 100 point gains in the market must have helped improve sentiment!
Insider sales indicate upcoming slump
Starting in the summer, people started noticing that insider sales outweighed insider purchases by quite a margin, with the ratio of sales to buys reaching 60 times on occasions. It was claimed the insider sales are indicative of the upcoming correction as insiders are bailing out on their own companies while they can still get a good return from the rising markets. Half a year later, markets are still rising and the insider sales to buys ratio continues to hover around 50 times.
Deficit will make US debt stink, China will dump debt
The US debt-to-GDP ratio reached roughly 65% and the IMF predicted a rise to 90% and beyond in the coming decade. The alarm bells went off and everyone started predicting failed US Treasury auctions and weak foreign demand as the Treasury auctioned of billions of dollars in debt each week. China, as the biggest foreign holder, was seen representative of the global demand for US debt (even though it holds only 6% of total outstanding US debt). However, the auctions came and went without surprises with some auctions doing better than expected. The current yield on the US 10-yr note has risen back to normal levels of around 3.75% since the crisis months of Jan, 09, but still way below the 5% highs of 2007. The same trend was followed by 30-yr notes which ended the year yielding 4.6%.
What does 2010 hold?
While the above mantras didn’t translate to reality in 2009, they should still be kept in mind looking forward to 2010, as I’ll discuss in a follow up article.
Disclosure: Long market.
Image Credit: Optical Illusion under a Creative Commons license.
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Last 3 posts by Shishir Nigam
- When Correlations Collide - March 7th, 2010
- Is the United States an “Emerging Market”? - February 28th, 2010
- It’s Time To Accept The C$ At Parity - February 21st, 2010
Good article Shishir. Makes you think about the time-spans of a lot of these predictions. The first two, for example, volumes returning and a correction occuring, I was kind of siding as well, but now I wonder whether it was more appropriate as a longer-term prediction for 2010. Peter Schiff (dubbed “Dr. Doom”) is definitely one who has been predicting his theories already occuring, so I know he would have loved to see some of these in fruition. Thanks for sharing and looking forward to the 2010 segment
Shishir, I must agree that the post is well proposed, and some of the mantras have been sold short so to speak, but the fact still remains that there are many players in this market who have tight stops on their profits if the milk begins to sour. Also, the savings rate is low, but the inverse argument would site consumer credit numbers instead. I would argue that savings are low because essential spending is eating away at income and only allowing consumers to save around 5%, while the consumer credit numbers are falling through records every month. Also, pulling up a chart of the 10-year Treasury will easily reveal a bottoming pattern which has occurred on mere whispers of Fed Funds hikes six months out. Public debt yields were hovering at 30 year lows due to turbo charged QE, but the auctions in medium to long term T-bonds will show that bid to cover ratios are now bucking the range of stability you refer to in your piece.
For the sake of the country I hope I am wrong, but my analysis, intuition, and portfolio argue otherwise.
Robert, thanks for your comment.
I think we’re in a market where one can find an economic figure to support every possible argument and theory. And that just goes to explain the degree of ambivalence out there on what’s REALLY happening.
What’s interesting is that this year might have been one of the few situations where every person on the street called themselves a “contrarian”. Nearly everyone doubted the solidity of the equity rally because of the disconnect with fundamentals…and so just because they opposed the direction of the market, they were “contrarian”. In fact, the REAL contrarian would be going against the consensus amongst investors…which was that the rally had no legs, when it actually did.