One final market forecast for 2010
Here’s a look ahead from a Canadian technical analyst who fears debt, likes gold and gives a cautious edge to resource-based stock markets.
It’s almost the middle of January, which probably means it’s time to stop mulling over forecasts for 2010 and get on with it.
But we’d like to consult one technical analyst before we move on.
We turn to one such chart reader who lives in Toronto but writes for a readership that is heavily American.
History says this is not a good time for investors, according to Ian McAvity’s Deliberations on World Markets. What’s more, the mountain of debt we’ve been chipping away at for the past two years is still liable to send an avalanche down on our heads.
Mr. McAvity does shake his head at those who consider the run-up in gold as a “bubble.” On the contrary, the rise in the price of gold has been “remarkably orderly” in his opinion. It remains a reliable source of value.
This analyst’s outlook for stock markets is not particularly sunny, although it remains better for those markets rooted in resources (read Canada and Australia) than it is for Wall Street.
We begin with that enormous pile of debt.
Another cockroach
Mr. McAvity is contemptuous of the large bills being run up by the administration in Washington (nor was he any easier on the promiscuous debt policies of the Bush administration).
What’s more, he fears that yet another “credit market cockroach” may come out of the woodwork. In his lexicon, cockroaches are hidden blights in the financial system that can suddenly burst into the open. We have certainly seen a horde of them in the past few years.
This time it may be debt from individual U.S. states that will start the crackup. California is just the most celebrated example of a big state wallowing in debt. New York and Michigan are two others.
With or without another financial crisis, the stock markets may well be headed downward. It’s that time of the decade.
What bubble will pop?
Here’s a quick history lesson. “Japan’s Bubble popped in 1990, Gold popped in 1980 and the Tech Bubble burst in 2000,” says Mr. McAvity. “What bubble may pop in 2010?”
But wait. Why should anything pop just because it’s the beginning of the decade? Well, because for various reasons, markets have hit the skids in the following periods — 1920/21, 1929-1932, 1937/38 (with a bottom in 1942), 1961/62, 1969/70, 1980-82 and 2000-2002. 1990 to 1992 wasn’t as bad in North America, but it was hell in Japan.
But the bubble that may pop is not gold, this analyst insists. He repeats: it is Sovereign Debt. That is, in this case the danger comes not from massive individual debt as in 2007, but from government debt.
“Central bankers have done an amazing job of persuading markets that having saved the world from a crisis they didn’t foresee, they have the skills to extract the excess liquidity painlessly, with no inflationary impact,” proclaims Mr. McAvity. They will “keep interest rates ‘near zero’ so economic growth can return to the previously unsustainable state where the U.S. GDP appeared to need more than $6.50 of new credit debt to add each $1 to GDP.”
Government debt in the U.S. and the U.K. alone may undermine global investor confidence over the next two years, he states.
Suffered from ambition
Gold does give this analyst reason for confidence. He is by no means a full-fledged “gold bug,” nor is he eagerly awaiting a big surge in the price.
When gold fell back in December, it was a “corrective pause,” in Mr. McAvity’s opinion, and created “a more sustainable trend.”
What is worrying is the mediocre performance of gold mining stocks compared to the price of the metal. He thinks the bigger firms have suffered from their ambitions. Costly mergers and acquisitions have not always been good for them. In pursuit of size, they lowered the grades of their ore and “lost control of costs when oil soared.”
Miners should have “their day in the sun” when gold advances to higher highs, he concludes, but he is still waiting for “Show Me” evidence.
Contrarian bells
Stock markets may be due for a sharper corrective pause, Mr. McAvity believes. He notes that in one survey of U.S. investment advisories, bearish sentiment of 33 per cent is at its lowest since 1987.
He comments archly: “Contrarian bells don’t ring much louder than 22-year records.”
We currently hear talk of “a strong earnings recovery” on the S&P 500 Index in New York, the analyst reports. But he is skeptical. Stock and home prices remain the “twin pillars of private wealth,” and the market still has unresolved mortgage debt hanging over it.
“That’s why I don’t expect the public back in the market for a long time to come,” he says. He believes that the March 2009 lows will be broken “before we see new highs in the even more distant future.”
Canadian energy
On the other hand, equity markets in Canada and Australia have made huge gains in the last decade, the analyst tells his readers. So have their currencies. And it’s all based on resources, which were somewhat out of favour in comparison with the S&P 500 from 1980 to 2000.
But investors should not let their expectations run away with them for either these two resource-based markets or their currencies. Yes, they’re in a powerful uptrend, but this analyst’s charts indicate that there is a ceiling ahead. No market is safe from correction.
Mr. McAvity showcases two exchange-traded funds. iShares MSCI Australia Index Fund (NYSE-EWA) has been running upward since the spring and trades at $24.16. iShares MSCI Canada Index Fund (NYSE-EWC) has also been rising, but in stops and starts. It trades at $27.29.
There is one area of great interest in Canada. “With the tax treatment of energy trusts changing in 2011,” he says, “broad market weakness may give another opportunity to Canadian oil and gas stocks, with their politically stable base likely to prove to be an attribute.”
Above all, this analyst concludes, fear the cockroach of debt. It should make us all very cautious for the next two years.
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