Ask not What Your Bank Can do for You…


New York – Now the NBER has confirmed that the U.S. economy is indeed in recession, the pundits are all racing to assess the breadth and depth of it. Earlier this week, Alan Sinai weighed in with an outlook in synch with his dismal profession. Others are calling for similar deep or broad (long-lived) recessions.

There is reason to agree with these dismal forecasters, but at least one research provider is bullish on the equity markets going forward.

Reasons to be Glum

After 9/11, President Bush said to the nation “Go out and spend”. This is certainly a valid cure for a recession, but the question really is spend what? As much as 15% of personal consumption in recent years has been financed by home equity loans and credit cards: this, at a time when the demographic suggests that the baby boomers should be aggressively saving for retirement.  Even those that have put a few nuts away have seen them dwindle. Consumers have been borrowing against appreciating assets-sometimes as much as the value of those assets. Nationally, the US runs a large government deficit, which is predominantly financed by foreign capital flows.  This means that a large chunk of any stimulus package and the bailout package will be coming from foreign central banks and sovereign wealth funds.

In 1998, Long Term Capital Management (LTCM) nearly took down the world financial system. The subsequent book on the topic, “When Genius Failed” was a study in what not to do. It was revealed that Long-Term Capital had racked up an unbelievable amount of leverage: in the order of 50 times equity. The implications for the debt/equity ratio of a company are generally covered in chapter three of any finance text, so how did all these geniuses fail to recognize this basic flaw. LTCM had the intellectual horsepower to manage risk. Robert Merton and  Myron Scholes are both Noble Prize winning economists in finance theory.  What the LTCM incident demonstrated was that, as described by Nassim Taleb in “The Black Swan”, there are events that do not adhere to statistical modeling.

In the current mess, we now find that the bulge bracket firms were all highly leveraged leading up to the current credit crunch to the tune of leverage ratios around the 50 mark-again? The government’s reaction to the crisis has been to buy shares in the bulge bracket firms, making the government a major shareholder in these corporations. Parenthetically, it is really ironic that the extensive deregulation we have seen recently has lead to a more socialist country than existed prior to it.

So is it time to sell the house and the portfolio and move into a double wide trailer? Not according to one reach provider. A recent report by Asbury Research reflects on market sentiment and concludes that equity is set for a rally.

Reasons to take Heart

Asbury Research was established in 2005 by John Kosar, CMT, to allow Institutional investors to incorporate technical market analysis into their investment strategy. Mr. Kosar is a 25 year veteran of financial markets, spent the first half of his career in the Chicago futures pits where he studied technical analysis and investor sentiment.

Without giving away the special sauce, Asbury’s analysis utilizes retail investor sentiment gleaned from bull/bear metrics, options data and other indicators to quantify the posture of the markets. In the just-released ” Sentiment Survey”, all of these indicators are in extreme bearish positions. Because these indicators are contrarian indicators-retail investors are always the most bearish at market bottoms and the most bullish at market tops–Asbury submits that the equity markets are positioned to rally.

We take heart from this prediction for the following reason. There is an old proverb that predicts that if one took all of the economists in the world and laid them end to end, they still couldn’t find a turning point. It takes a technician to do that. One only need look at the multi-factor models that actually work. If you look hard enough, you will find some kind of a technical indicator (such as momentum) embedded in the explanatory variable set, despite the fact that there is no economic or financial theory that supports this variable.

So barring the appearance of any black swans, there is good reason to believe that Asbury’s bullish outlook could materialize in the not too distant future.


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