One Man’s Opinion: Should Investors Be On Margin Or Leveraged?

Ulli Market Review Contact

ManGeopolitical risks can weigh heavily on capital markets, since investors that know less about China than the US are more concerned about the world’s second largest economy, said Leon Cooperman, CEO of Omega Advisors.

The Chinese market turmoil is very significant for what’s going on in China, but in terms of the global economy, it’s not as significant as people make it out to be. In 2014, rest of the world was worried about a bullish bubble while in 2015 investors were worried about Greece.

In 2016, the rage is China though the developments in US credit market is far more important for US investors. China’s effect on Global GDP is not significant though China’s effect on commodity prices were quite dramatic; stocks of oil, metals etc have been destroyed.

However, developments in China are not as big a problem for the domestic US economy as they are made out to be, though that’s strictly a judgment call, he noted.

Asked if investors are shorting the S&P index to offset risks in the high-yield credit market, Leon answered in affirmative. There is no liquidity in the high-yield credit market; investors can’t sell their holdings and they are cross-hedging with the benchmark index.

The S&P needs to find a level where it’s comfortable at and that level is not far from the levels being witnessed presently. While BlackRock CEO Larry Fink thinks another 10 percent drop is possible, it’s unlikely the markets will go down another ten percent.

However, it’s not the time to be on margin or be leveraged. Omega has a portfolio of cash and stocks and has exited bonds. Investors need to watch the economy very carefully; it appears the economy is hanging in and going through a soft patch, but there’s no one out there that’s got a lot of credibility that is forecasting a recession.

Forecasts for a US recession may turn out all wrong though some sort of a corporate event (similar to the Lehman bankruptcy of 2008) may take place. As long as investors are long and not borrowed, they should hang tough and stick to the assumption that a lot of the current turmoil is the result of changes in market structure including new laws such as Dodd-Frank and Volcker along with specialist systems and the new uptick rule meant to contain the quantitative systems that are wreaking havoc with the market.

There is no basis for a big decline from current levels unless Omega Advisors is dead-wrong and the stock market is telling the economy is going into a recession. Technicians are likely to say chart indicators show the economy is going into a recession, but fundamental analysts have a somewhat different view, he explained.

Asked if he’s personally looking for levels below August 2014’s, Leon answered in affirmative and said the S&P 500 should offer support at levels between 1825 and 1850. The markets should hold around August levels; but if they don’t, then investors need to find another lower level, he concluded.

You can watch the video here.

Contact Ulli

Leave a Reply