James Montier – Suckers’ rally or real deal?

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The debate rages on: Is this a suckers’ rally or a new bull market? James Montier, the highly respected co-chief strategist of SocGen has weighed in on the subject in his latest Mind Matters investment newsletter. The paragraphs below have been republished from a post by Paul Murphy on the FT Alphaville blog.

The question [whether this is a suckers’ rally or a new bull market] is on quite a few lips right now. Montier says he doesn’t have a clue. So he’s buying insurance – to protect on the downside. From the strategist’s latest missive to clients:

“This strategy paid dividends in Japan which was characterised by explosive rallies (driven by the economic recovery) and the horrifying slumps as the recovery failed. Two methods of insurance stand out. Either I could buy index puts (relatively cheap at the moment) or I could construct individual short positions. In the past I’ve argued that the perfect short candidate is overvalued, with deteriorating fundamentals, poor capital discipline and poor accounting. Running my screen to find such names reveals candidates such as Anheuser-Busch InBev, Ericsson, Cairn Energy, and Staples.”

Montier’s point is that he needs to “off-set ignorance” – and his Eastern experience teaches that a portfolio of shorts offers the best hedge. A value oriented long/short strategy for Japan has generated a return of 12% per annum over the last two decades in Japan, against a market that was contracting at a yearly rate of 4%. A long-only value strategy for Japan generated a 3% return – indicating that the the Japanese market’s under-performance was largely down to the appalling performance of supposed “glamour stocks”, which lost 8.5% per annum over the past 20 years.

So, what to sell … Montier reckons there are four traits to the perfect short: overvaluation, deteriorating fundamentals, poor capital discipline and bad accounting.

Here, in three parts, is his full filtered list (click to enlarge):







Source: Paul Murphy, FT Alphaville, May 6, 2009 (hat tip: GreenLightAdvisor).

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2 comments to James Montier – Suckers’ rally or real deal?

  • Jack Gallagher

    Great post. I’d love to see more like this one, please!

  • I wrote in Mid march to ignore corporate earnings – in the article
    Stealth Bull Market Follows Stocks Bear Market Bottom at Dow 6,470
    Quote –
    Yes I am aware of the on-going corporate earnings contraction forecasts that SUGGEST stocks should be going MUCH lower, though some of the estimates of where the market should be heading to are pretty ridiculous, were talking ridiculous price levels of as low as DJIA 400! However the stocks bull market was also elevated to Dow 14,000 on the basis of corporate EARNINGS forecasts that suggested that Stocks should go MUCH HIGHER. So what does that tell you ? It tells you that what you tend to read is always suggestive of the JUNCTURE being FAR AWAY, NOT imminent. IT IS ONLY LONG AFTER THE FACT, AFTER MARKET’S HAVE ALREADY MOVED THAT THE JUNCTURE IS RECOGNISED AND ANALYSIS PRESENTED AS TO WHAT WENT WRONG WITH THE SCENERIO THAT CALLED FOR MUCH LOWER PRICES.
    Similarly wide spread consensus today exists for SHARPLY LOWER CORPORATE EARNINGS going into 2010 THAT MUST MEAN MUCH LOWER STOCK PRICES. However this earnings analysis that is so abundant today, should have been presented OVER A YEAR AGO ! in October 2007 I.e. at or near the market peak! So that ordinary investors could actually ACT on the information. NOT NOW AT THE MARKET BOTTOM ! We are again seeing REASONS as to WHY INVESTORS should avoid investing INTO the Stealth Bull market!, precisely as we all witnessed what was effectively Bullish propaganda during the final stages of the Stocks Bull Market, so we are NOW witnessing what is effectively BEARISH propaganda in the final stages of the Bear Market. Now, don’t get me wrong, I am not saying that the analysis is not genuine, what I am saying is that IT IS IRRELEVANT! As it is always much easier to build a scenario in favour of a trend that has been in force for sometime that has generated much data and analysis in support of why it exists and therefore it should continue for much longer, then to “Think Out side of the Box” to disregard bearish data that has been magnified by the growing consensus that really should have been known more than a year earlier in favour of the technical picture that as the analysis of October 2008 stated, that a. we are NOT heading for a Great Depression (as I will further elaborate upon in the Q&A below) and b. The stocks bear market HAS fulfilled its bear market objectives in terms of price and time, more than anyone could have been imagined a year ago!
    But now, even after the stock price wipeout to below Dow 6,600. The analytical weight bearing down of overwhelming information is that in support of a continuing meltdown for even as long as several more years towards Dow targets such as 4,000 or even as low as 400 by what can only be termed as perma-bear psychology. Remember Dow 14,000, NO ONE PAID ATTENTION to the perma-bears at that time. As the market was firmly in grip of the perma-bull psychology which was eyeing Goldilocks levels of 18,000. There were even calls that China’s SSE at 6,000 should go much higher, despite being on a P/E of about 60. The uber bullish media played on the fact that the NASDAQ peaked on a P/E north of 100, so much for the earnings factor! In fact I pointed out in November 2007 that investors should get out of china AT SSE 6,000 and to forget SSE 9,000, its going straight down towards an initial target of 4,000. Instead today earnings is brought to the fore to support a further collapse of stock prices to what is commonly referred to as reversion to below the mean, AS AN EXCUSE TO FALL FOR THE TRAP OF PERPETUATING A DISTANT JUNCTURE BOTH IN TERMS OF PRICE AND TIME. Therefore repeating the same mistakes that occur at ALL market Junctures ! Which is DATA is PUT AHEAD of PRICE ! To which my answer is this – What are you trading ? Are you trading the Corporate Earnings Data or the actual Stock Index ?
    The only thing that actually matters is the PRICE ! NOTHING ELSE! and I mean NOTHING ! Not earnings, Not fundamentals. Listen to the PRICE or you WILL miss the Stealth Bull Market!

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