Russell Napier, CLSA

6,910 views

Published on

Published in: Economy & Finance, Business
0 Comments
4 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
6,910
On SlideShare
0
From Embeds
0
Number of Embeds
113
Actions
Shares
0
Downloads
251
Comments
0
Likes
4
Embeds 0
No embeds

No notes for slide

Russell Napier, CLSA

  1. 1. Anatomy of the Bear Investing at the bottom Russell Napier March 17 th 2009
  2. 2. Conclusions <ul><li>To reach record lows (1921, 1932, 1949, 1982) equities will have to fall 50% - not yet. </li></ul><ul><li>Deflation produces record-low valuations but prolonged deflation remains unlikely. </li></ul><ul><li>Deposit insurance, Freddie & Fannie, Fiat money and the lessons of history mean deflation is unlikely. </li></ul><ul><li>A significant rally is likely and investors need to look at corporate bonds, commodities (copper) and TIPs. </li></ul><ul><li>The final leg of the equity bear market will be driven by a bear market in treasuries. </li></ul>
  3. 3. How cheap are equities? Source: CLSA Asia-Pacific Markets Q ratio for US equities with S&P 500 at 800
  4. 4. How cheap are equities? Source: CLSA Asia-Pacific Markets Cyclically adjusted PE with S&P 500 at 800
  5. 5. Deflation drives low valuations <ul><li>History shows how deflation is one of the few times when bonds outperform equities. </li></ul><ul><li>In periods when deflation has been probable, equities yield more than bonds. </li></ul><ul><li>Deflation kills equity, as assets decline faster than liabilities. </li></ul><ul><li>Deflation kills equity if cashflow declines, forcing debt defaults by corporations and individuals. </li></ul><ul><li>All the great bear-market bottoms coincide with the death of deflation. </li></ul>
  6. 6. Key inflation indicators - TIPs Yield on 10-year Treasury securities minus yield on 10-year TIPs
  7. 7. Key inflation indicators - BAA bonds Timing of corporate-bonds and equity-market bottoms Aug 1982 Feb 1982 Jun 1949 Jan 1948 Jul 1932 May 1932 Aug 1921 Jun 1921 Equities bottom Corporate-bonds bottom
  8. 8. Key inflation indicators - BAA bonds Dow Jones Industrial Index and Lehman Brothers BAA Corporate Bond Index, 1974
  9. 9. Key inflation indicators - BAA bonds Dow Jones Industrial Index and Lehman Brothers BAA Corporate Bond Index, 1981
  10. 10. Key inflation indicators - BAA bonds Dow Jones Industrial Index and Lehman Brothers BAA Corporate Bond Index, 1987
  11. 11. Key inflation indicators - BAA bonds Dow Jones Industrial Index and Lehman Brothers BAA Corporate Bond Index, 1990
  12. 12. Key inflation indicators - BAA bonds Dow Jones Industrial Index and Lehman Brothers BAA Corporate Bond Index 2002
  13. 13. Moody’s BAA US Corporate Bond Yield
  14. 14. Key inflation indicators - Commodities 3W Oct 2001 2W Oct 2002 2W Oct 2002 2W Aug 1991 2W Oct 1990 3W Jan 1991 1W Oct 1982 2W Aug 1982 3W Jul 1982 1W April 1980 4W Mar 1980 3W Dec 1980 1W Mar 1973 1W Dec 1973 4W Jan 1974 CRB index DJ Industrial Copper
  15. 15. May Copper Futures
  16. 16. Three Year US TIPS (Yield)
  17. 17. Changing Deflationary Expectations TIPS Indicated Deflation/Inflation 1.0% 0.3% 10-year 0.6% (0.3%) 5-year (0.5%) (3.6%) 3-year (0.9%) (5.0%) 2-year (0.5%) (5.3%) 1-year Jan 09 Nov 08 (%)
  18. 18. Earnings-cycle propositions 1881-2009 <ul><li>Deflationary earnings contractions end after 23 months and normal contractions after 18 months. </li></ul><ul><li>The current 66% contraction is the third largest on record and earnings just above 1989 levels </li></ul><ul><li>Earnings normally contract a further 8-20% after the stockmarket bottoms. </li></ul><ul><li>Earnings contractions >57% only happened with nominal GDP contractions of 17% and 46%. </li></ul><ul><li>Market will bottom three to six months before the economy and nine months before earnings cycle bottoms. </li></ul>
  19. 19. Conclusions on the rally <ul><li>The limited deflation already factored in, is still unlikely. </li></ul><ul><li>The current 66% earnings contraction is already large and should end 2Q-3Q09 - market bottoms in 1Q-2Q. </li></ul><ul><li>Corporate-bond rally precedes equities. </li></ul><ul><li>TIPs price rise needs to accompany an equity rally. </li></ul><ul><li>Copper-price rally should accompany an equity rally. </li></ul>
  20. 20. The S&P at 400 by 2014 <ul><li>The CAPE and Q ratio lows of 1921, 1932, 1949 and 1982 suggest the S&P will bottom at around 400. </li></ul><ul><li>A loss of faith in US Treasuries and the dollar will drive the final leg of the bear market. </li></ul><ul><li>Treasury market likely to exceed US$12tn by 2011, when babyboom-medicare entitlement begins. </li></ul><ul><li>Demand for Treasuries falls as emerging world goes for consumption-driven growth. </li></ul>
  21. 21. The S&P at 400 by 2014 Share of total US Treasury market owned by foreigners Source: Datastream
  22. 22. Conclusions <ul><li>US Treasuries could repeat their 83% price decline of 1946-81. </li></ul><ul><li>The supply/demand imbalance for Treasuries can be met with higher rates, higher savings and deflation. </li></ul><ul><li>The supply/demand imbalance for Treasuries can be met with Fed reaction to cap yields and produce inflation. </li></ul><ul><li>The negative economic/political ramifications from foreign selling of Treasuries could prompt capital controls. </li></ul>

×