Crispin Odey: Bullish Again

Crispin Odey has yo-yo-ed in his views about markets, as hedge fund managers are prone to do. He thinks we are in a trading market, but makes some good points about why he is currently “rather bullish” in his latest monthly report.

In keeping with my view that this is a trading market, I find that I have again changed my mind and feel rather bullish about the prospects for stock markets over the next six months. Partly this reflects that markets make up their minds in the spring and the fall.

It is now too late for the markets to get bearish. And yet, people are wanting these markets to go down. For all of the fall in the percentage of cash held by institutions signifying that they have become more enthusiastic, the numbers merely reflect that equity markets are up over 50% from their March 10 lows of a year ago whilst cash, (and most people!) are unmoved. There is the first signs of retail investors tickling their way back into equities but again in this season of ISA’s it is worth remembering that over 80% of ISA’s are in cash.

My own optimism for stock markets has a dark side too, but it is based on the fact that equities, at least in Europe, are still so cheap against bonds and property. Ten year government bonds are yielding just over 4%, prime UK property is yielding through 6% whilst the FTSE is on a gross earnings yield of 10%. There is no good reason for the bigger, better, quality equities yielding anything more that high quality property.

The changes in the UK which imposed rates on empty commercial property makes the case for equities stronger, whilst the bigger stocks have the advantage of liquidity. If, and I know that it is a big if, the dangers to this massive build-up in government debt do not make themselves manifest immediately, the strongest trend around will be the arbitraging of bonds, property and equities.

That arbitrage could return over 30% even from here. The dark side is that a period of respite that allowed equities to re-rate, would also mean that when we meet again with inflation, equities will fall just as far and fast as other asset classes. As a trader that makes me excited too!

My view is that while the markets continue to look for direction, there is as yet no reason to think that an end to the market rally is imminent. Although more people are coming round to the case for equities, they are not yet such a majority as to justify a contrarian change in stance.