11 Reasons Why the Stock Market is Risky Right Now

Passport Capital’s John Burbank discusses 11 reasons why the stock market is risky right now in his latest investor letter. John Burbank’s biggest investment idea for 2011 is Saudi Arabia. Eleven percent of Passport’s flagship fund is invested in Saudi Arabian investments. Burbank is betting on publicly traded petrochemical manufacturers, banks, construction firms and health-care providers. His large stock picks in the U.S. markets didn’t perform well since the end of first quarter. This is also one of the reasons making him more cautious about the stock market.


According to John Burbank here are the 11 reasons why the stock market is risky right now:

1. Equity volumes continue to decline

2. May was the first month since the first quarter 2009 in which less liquid equities declined

3. We perceive a certain degree of investor crowding in pursuit of short term returns in an environment of compressed risk premiums

4. Given an environment dominated by beta factors, we believe investors are utilizing ETFs over individual stocks for hedging, further reducing idiosyncratic stock liquidity- particularly for names not weighted in the ETFs

5. The data we receive from prime brokers suggest hedge fund net exposures remain high (net exposures in the 50% range are only slightly off 2007 highs), and mutual fund cash levels remain low

6. The longer China’s tightening cycle persists, we believe, the greater the risk of a hard landing

7. Inflation has so far defied many emerging markets’ tightening cycles

8. We believe the coincidence of Europe’s intensifying sovereign debt crisis and European Central Banks’ audacious interest rate increases puts economic stability at risk

9. In the U.S., Dodd Frank uncertainties and the utter lack of mortgage foreclosure progress have left financial institutions with significant illiquid, stranded, and overvalued assets

10. U.S. government spending should fall and tax collection should rise to some extent; these necessary steps will be very negative for growth

11. The 2012 end of the one time tax deductibility of corporate capex creates yet another demand “air pocket” in the wake of yet another failed attempt to use policy to pull forward future demand in hopes catalyzing genuine expansion.

Burbank believes it is prudent to maintain a sizable store of cash and plans to use his cash when opportunities appear more compelling.