http://www.zerohedge.com/article/rusell-napiers-latest-view-equities-credit-and-general-economy-sees-30-upside-stocks Russell Napier's Latest View On Equities, Credit, And The General Economy; Sees 30% Upside In Stocks Submitted by Tyler Durden on 09/15/2010 12:38 -0500 Asset-Backed SecuritiesCapital MarketsDouble DipGross Domestic ProductM3RosenbergShadow Banking CLSA's Russell Napier is one of the more respected strategists out there. Which is why his latest outlook on various asset classes is required reading, even if we very much disagree with some of his "facts." In essence Napier is betting on a smooth inflation premise, which will result in a surge in stocks by 30%+ over the next 18 months, and a crash in bonds. As justification for the validity of his observations, Napier refers to CLSA's M3 proxy which he notes is starting to rise, and makes reference to such shadow economy indicators as ABS whose issuance he believes is picking up, indicating a return to a normally functioning credit market. Napier also cites the often misunderstood concept of capital on the sidelines, which for Russell means only one thing: "corporates are not using [cash] to repay debt so it will be used to the benefit of the economy or asset prices." So far this premise has been proven completely wrong, as corporations more than anything demonstrate a capital prudence in light of a regulatory environment which is very uncertain, and instead of exposing themselves to counterparty banking, companies are now their own banking centers. We don't see this trend changing any time soon, especially when one considers imminent changes to the tax code, which will make hoarding of cash even more difficult. Lastly, with gross profit margins (as Hussman pointed out) having just one way to go, and the result being a substantial drop in cash generation, companies will likely store as much cash as they can get their hands on. Nonetheless, Napier does bring up some useful observations, especially as pertain to rates. Full presentation inside. One specific item that Napier is patently wrong on is his belief that the shadow banking system is renormalizing. A month ago we demonstrated that in Q1 the shadow banking system collapsed by a record $1.3 trillion. Back then we said: The decline in shadow banking liabilities (defined as the total shares outstanding in money market mutual funds, the total liabilities of GSEs, total pool securities in the GSE mortgage pool, the total liabilities of ABS issuers, the total amount of securities loaned by funding corporations, the total liabilities of Repo markets, and total outstanding Open Market Paper: all of these can be found in the Z.1) between December 2009 and March 2010 amounted to $1.33 trillion! This was nowhere near even remotely offset by the $250 billion increase in liabilities of Commercial Banks. The full detail of the collapse in the shadow banking system is presented in the charts below. Open Fire Tuesday, September 14, 2010 Today is one of those days when you really don’t know what to do, but you have a twitchy trigger finger and things are getting nervous. So far the run up in equities has occurred nicely, we have had a turn in USTs and the Euro has indeed been a false start sell off, correcting back up leaving us room to reconsider the opportunity to sell it. But today just feels a bit more "iffy". Whether that is biased by sitting in London, listening to the radio and wondering if you are back in the 1970's with the TUC threatening coordinated protests and action against the cuts. Or if it’s the Telegraph article about the doom coming, we don’t know, but the press is sounding more like the Kaiser Chiefs everyday. Or if it's hearing about the ongoing grief in Greece that the world apppears to have forgotten. Our interest in Greece has of course been provoked having witnessed first hand the extraordinary pricing of nearly everything out there this summer. October's Vanity Fair is carrying a great article on how the crisis evolved and the mind set that prevails and is well worth a read. Some of the figures quoted are staggering. The BBC also ran a piece last night on how the populace is trying to fight back. The most facinating way of protesting they have developed is militant shopping. You go as a crowd into a supermarket, fill your baskets, all arrive at the check out and then all demand a discount causing chaos. TMM so wants to try that in some UK establishments, but unfortunately most of the complete rip offs are occuring in the monopolistic service industries you can't avoid and they know it. UK RPI printing today at 4.7%? PLEASE show us the deflation this summer's markets were so discounting... It may just be a sanguine post holiday gloom. But whatever is affecting TMM's pschye is making them wonder if its time to open fire on the bulls. But it’s not clear. Ideally we would see a break of the recent SPX highs in the 1130 region to see a renewed wave of buying come in for one last hurrah, as it still generally feels that there aren't many people on board this equity run and denial is rife. But there are some technicals mounting that need to be overcome. There are a raft of soothsayer indicators suggesting turns in FTSE, HSI, DAX and Copper and there is one coming up in SPX tomorrow. Add to that a mood shift following a good rally, the onward approach of our end of Sep "it all falls over again" date, the softness in Germany's data and, despite the ideal of seeing one more big up-splurge, we are going to make a call that those are definitely white socks and let loose the first volley into the oncoming equity bulls and also restart the euro selling. "Let em have it lads... Sell!" Posted by Polemic at 11:36 AM 4 comments Links to this post
