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Investor who predicted the subprime crisis says stocks will fall 10%-plus

Lawrence G. McDonald says to buy certain beaten-down commodities

With the stock market in such a funk, it’s a great time to check in with someone who knows a thing or two about meltdowns.

That would be Lawrence G. McDonald, who says (with Patrick Robinson) in his New York Times best-seller, “A Colossal Failure of Common Sense,” that he warned colleagues at Lehman Brothers of the coming subprime storm and how it might hurt the investment bank.

Nowadays, McDonald is the head of U.S. macro strategy at Newedge, where he uses a six-factor capitulation model to judge when sentiment has broken down so much, a sector is worth buying.

It’s an indicator for true contrarians that can suggest the best time to buy a sector because everyone else hates it so much, they’re all trying to get out at once.

“Too many people have the attitude of ‘don’t try to catch a falling knife.’ But you can take advantage of big sell-offs.”
Lawrence G. McDonald

This is the kind of tool that might come in handy right about now, given concern over the stock market — and the outright hatred of asset classes like gold, coal, uranium — all of which McDonald favors for a bounce right now.

I’ve watched McDonald make some great market-timing calls over the years, so I think he’s worth listening to. Like anyone, he’s not always right. But most recently, McDonald was bullish on Brazil right before the 7% jump in the iShares MSCI Brazil Index EWZ, -4.38% on Oct. 6. He was bullish on U.S. bonds in late August 2013, and late September 2014 ahead of big rallies; and gold last December ahead of a huge, three-month rally.

“Too many people have the attitude of ‘don’t try to catch a falling knife.’ But you can take advantage of big sell-offs,” says McDonald. “When the selling abates, it is like a storm that clears. The sky is blue and there is really nobody left to sell for the next three weeks to three months.”

Take note of that last phrase. A lot of times, these are just short-term trading calls of one to three months, and not buy-and-forget calls. He also prefers to play capitulations via ETFs, as opposed to stocks, which are riskier.

With those provisos, let’s take a look at some of his current calls.

Lawrence G. McDonald, head of U.S. macro strategy at Newedge, expects gold, coal and uranium to bounce from their lows.

U.S. stocks headed for more losses: McDonald expects a correction of 10% or more, which means we are less than halfway there, at best. Three factors point to more trouble ahead.

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