Dear Jeremy Klein:
I have waited since Monday, Feb 28th to respond to you, my old partner and dear friend.
First, I have covered all my shorts and started to build a small long book. The trade back through 1300 that I’d blogged about has occured. We had a nearly 5% correction from recent Highs on the S&P futures of 1343 to the Lows set in overnight of 1283. The next time I’ll attempt to short this market will be near the 1304 - 1308 level. I will be slowly buying speculative take out names as they have cheapened up significantly.
I will now respond to your points one at a time.
1. You recently made your perception clear that oil could soon return below 90, when you stated “crude was trading at 85 just prior to the Libyan crisis.” Well, its been 2 weeks, we are nowhere near 90, and I still believe it will be a while longer before we somehow find our way back to that level. We are far from out of the middle east oil crisis, and this could continue for the rest of the year.
2. You also believed that the revised GDP was not all that important as it was a look back of very old data, and more importantly thought the housing data is priced into market. Perhaps this is true, but the bottom line is that we have 5 years of inventory build up. So while I am long term Bullish and have been short term bearish, my bullish thesis is a slow and steady grind from here. Not the Hyper bull market we were in the last 6 months.
3. You’ve commented that the jobless claims have resumed their downward trend. However, most recently we were a little too close to 400,000 for my comfort. It is going to be an ongoing struggle for the labor environment to improve. Again this is why I look for a much slower grind up in the market than we have experienced recently.
4. Michigan sentiment came in a little lighter than expected. And while you importantly pointed out that it is near its 3 year highs, that is exactly why I think we needed a small correction, a pause, and a slower resumption of the bull market.
5. As far as the Index of out performing names, lets keep in mind that:
a. I trade names that may not be in the S&P 500; although I know you, my esteemed colleague, believe that outside of the S&P nothing else matters.
b. Often a handful of stocks are sustaining an Index due to extremely strong moves up, while the rest of the names in an index suffer.
6. In response to the market not being overbought; I think the move below certainly shows us that we cannot expect a market to be up 4% every month, and we were in some need of a pull back, which is what came to fruition.
7. And finally, if you read the blog below, you’ve questioned my probability of an extreme event occurring in Saudi Arabia. Well, I think we know the answer to that now. Sauid Arabia has demonstrated that they will fire on protestors. And clearly the show of force on the streets of their major cities implies that the Kingdom is nervous.
Now I am no soothsayer. And I do wish I had taken your opinions more seriously last year as I would have saved hundreds of thousands of dollars. You saw the sell off in April and May of last year and warned me. I probably would have made a great deal of money. I have happily paid attention ever since. So I only felt it appropriate to give you a heads up on my bearishness, 4 - 5 percent higher than where we are today.
In addition, you do have an uncanny ability to pick the year end close of the S&P. Pay attention members. Klein is looking for an end of year 1435 close. And although I have to look over my previous blogs, I believe I was looking for 1425.
As usual my good friend, great minds think alike.
Best Regards,
Jeremy Frommer
——————————Below is my previous response to Jeremy Klein’s own response which is bolded———————————-
My old friend, partner, renowned economist, and all around great guy, Jeremy Klein, provided a counter point to my most recent blog “Stock Market Commentary 2/25/2011 – My Advice”
In all fairness and in the interest of thoughtful debate, it is only appropriate to publish it as its own blog.
Three other important points about the distinguished Jeremy Klein
- He is a wine connoisseur
- He is known at Goldman Sachs as “The one that got away”
- He is the winner of HFL pick the year end close on the S&P 2010
His response follows:
“To my old friend Jeremy Frommer,
As you know I hold your opinion in the highest regard, you are by far one of the wisest and talented individuals I know, that said, I am not sure I agree with your view. First, crude traded at $85 just prior to Libya. It sold off there, after Egypt calmed down and may do the same when Libya reaches a resolution assuming another major oil producing nation doesn’t fall. Ironically, you argue that consumer is worse off than people think which would imply demand for oil would decrease which would also bring crude back down below $90.
A revised reading on Q4 GDP is not all too relevant as it looks back at chunks of data 5 months old. New Home Sales was disappointing, but much of that was the snap back from the CA tax credit expiring last month. More importantly, the housing sector remains depressed which most everyone agrees with and is priced into market.
Jobless Claims has resumed its downtrend and Thursday’s print was without any seasonal adjustments, so it’s clean. Most
importantly, you ignore the University Michigan number, which now sits on 3-year highs and clearly shows that consumer sentiment is important.
I am also not sure how stocks in general have underperformed the S&P 500 when the latter is an index average.
I am not sure the market is overbought let alone leveraged overbought. The TICK information and open interest in the futures actually imply managers are very nervous and looking to hedge aggressively and quickly at the first sign of trouble. Therefore, we will continue to get sharp 1-3 day sell off such as the one on Jan 28 and this week before grinding back higher as the managers scramble to cover. The increase we have seen in open interest on these sharp down days contradicts greatly what one would expect when coming off 2 1/2 year highs such that we saw panic selling through Thursday afternoon.
Finally, what percentage would you put on Saudi Arabia falling into same malaise as Egypt, Libya, and Tunisia? I am no expert on Middle East, but given monarchy is liked much more than Gadaffi, proactively trying to reform, and the U.S. will do anything in its power to aid the nation in keeping pumps flowing, I would put it at 10%. Earnings on the SPX for 2012 are $110. I think that’s a bit of stretch and will use $105. If oil prices continue to rise, I will use $85 as an estimate as energy names (12% of index and rising) will see solid increases. I will use a 14x forward multiple for the former and a 13x for the latter given additional risk premium for geopolitical uncertainty. Using my aforementioned, yet understandably arbitrary, probabilities yield a year-end level of 1435.
Been tuning in a great deal lately, as Hedge Fund Live has become the top ten go to destinations for a real time look at the markets. I really enjoy the content.
I look forward to hearing your response.
All the Best
Jeremy Klein”
Well J. Klein, you will hear from me soon as I have quite a bit to say. For now I hope our members, readers and listeners enjoy our debate
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