S&P Set for 50%+ Gains? Not So Fast, UBS

The headline is fairly self-explanatory, but it's true: UBS strategist David Bianco has a 2009 target on the S&P 500 of 1,300 – more than 50% above where it sits now. Talk about a V-shaped recovery.

As far-fetched as that might seem, I find these kinds of calls to be thought-provoking because it forces some comparative judgments between where the "market gurus" are, and where I'm at. The last time I did this was in mid-September in the days of S&P 1,250, and it made me realize just how bad the macro environment was becoming, and how little was being priced in to equities. Looking at past history, it seems to me like the S&P target must only be compatible with four-digit numbers, but how about Bianco's argument?

He believes there are a number of large-cap stocks with excellent global growth prospects that will power the index higher, and while I agree with the large-cap leaning to some level, this particular angle is puzzling. What global growth? Decoupling, for those of you who remember, was dragged out to the woodshed and shot – that was one of my better fall outlook predictions.

There is a danger to being persistently negative, though, especially when you have the world's central bankers lining up everything they have against you. So is it time to reverse course on my dour thesis that a global slowdown accompanied by scarce and expensive credit will weigh on sentiment? The data coming in continues to point in one direction, and that's from someone who wants to be an optimist.

The other day, I noted that China was cutting interest rates in an attempt to spur sagging economic activity, as China's manufacturing-dependent economy was apparently caught completely off-guard by the rapid drop in demand during the fall. Still, there is only so much interest rate manipulation can do when your trade partners feel very poor. American Express (AXP) CEO Ken Chenault said today that changing spending patterns have hit across all income classes, including the affluent his company is known for having. Following up on something first mentioned in May, Oppenheimer analyst Meredith Whitney continues to assert that credit card companies will pull back on more than $2 trillion in credit lines available to consumers, reducing overall liquidity by 45%.

The consensus is also growing that the Eurozone is going to be hit by a hard recession, although if even the notoriously slow Jean-Claude Trichet is aware of this, the contrarian in me perks up. The takeaways:

1. The American consumer is down for the time being
2. Europe is catching up to America in terms of economic problems
3. China's factories, and hence economy, are being idled by problems in the West

Put more acutely, we're in a global slowdown, and there is still plenty of surprisingly bad data emerging.

As for credit being both scarce and expensive, that has come true to a greater degree than I would have guessed ten weeks ago.

As the Fed and Treasury prop up various otherwise-insolvent institutions like Citigroup (C) and make it clear they will not allow another Lehman-esque failure, financial commercial paper issues have recovered somewhat, but are still 20% off their previous levels. The real plunge can be seen in asset-backed CP issues, which I'll touch on in a moment.

click to enlarge

As for expensive credit, consider the spread on A2/P2 CP relative to high-grade non-financial commercial paper. Having already jumped to absurd levels, it's continuing to push higher.

Likewise, A2/P2 CP relative to the 2-year Treasury is stumbling through uncharted depths:

Hat Tip, David Merkel

A little over a week back, I had some scary quotes about the state of the credit markets from Fortress Investment Groups (FIG). While they tried to be optimistic and say there were opportunities amid the fallout, their investors don't seem so confident: they are withdrawing enough money, and at an accelerated pace, that Fortress has had to put a freeze on the fund's assets. On their conference call last week, KKR Financial (KFN) CEO Nino Fanlo said that leveraged loan prices have fallen into the mid-70s, even though they have never typically breached the 90 mark in prior recessions.

A look at the various asset-backed and structured finance credit protection indices suggests that the top-level tranches are generally just off their lows (LCDX, CMBX, CDX on IG)…

…while the lower-tranche securities and the ABX continue to be destroyed.

And rounding it off, spreads on speculative-grade corporate debt hit a new high today.

The Standard & Poor's investment-grade and speculative-grade composite spreads once again widened past five-year records yesterday, leaving them at 556 basis points (bps) and 1,616 bps, respectively. Widening continued across the rating spectrum as well, with the exception of the 'CCC' spread (now at 3,027 bps). The 'BBB', 'BB', and 'B' spreads reached new five-year highs of 663 bps, 1,143 bps, and 1,710 bps, respectively. The 'AA' spread widened 4 bps to 433 bps and 'A' widened 2 bps to 500 bps, 4 bps short of its five-year high.

Since the stock market is simply a symptom of credit market stress, color me skeptical until there is some indication that ridiculously high spreads and distressed debt prices are stabilizing - not getting worse. For a contrarian point of view though, consider how the market performs after a terrible year.

Comments

[Anthony Alfidi:]

A lot can happen between now and the end of 2009. War, oil shocks, monetary policy changes, and other macro surprises make such long-term predictions useless.

Analysts at "You and BS" are consistently horrible. I have no idea why the annual surveys in Euromoney and Institutional Investor take them seriuously. Maybe they need to stroke major firms for ad revenue.

2008 Dec 06 03:09 PM

[Distressed ...:]

Obama could be the catalyst though... S&P is right at the 26 yr trend.. But I don't know what to make of the logarithmic chart since 1950... All here

www.distressedvolatili...

2008 Dec 06 04:07 PM

[the_feds_co...:]

The banks right now are "flush" with cash from the fed.The banks are begining to buy each others stocks .Look for the financials to lead the way in the next bear rally.They will attempt to "jump start the markets" and then sell their positions before the average investor is just getting fully invested.In that way the banks will reap handsome profits.
They will also do the same thing with the chinese market.
All depressions and recessions have large bear market rallies -we will have one as well.
Watch for the following to determine when a rally begins
1) investor sentiment seems hopeless
2)the market shakes off "bad news" or becomes immune to bad news.
3)the Russell 2000 leads the way up.
4)The financial sectors garner strength.
Once these forces become apparent we will have a rally. It will not sustain itself -but we will have it !
It could take us from 11k to 13k somewhere in that range.
It happens in ALL bear markets it will happen here as well.
g/l to all cheers...;}

2008 Dec 06 04:12 PM

[update:]

Any of the clowns in the media and on the internet that keep predicting these miracle recovers need to sink their teeth into this kind of data.

Clearly we are in far worse shape than we are being told.

2008 Dec 06 04:22 PM

[nmelendez:]

It's going down to 550-600 after a bear market rally to 1200. Look at the head and shoulders formation coming in from 2000 to 2009 and project it to 2012. The banks will make out like big dogs since they are buying japanese, chinese and UAE money. When the dollar goes to hell they will be ok but the average folks will be wiped out.

2008 Dec 06 04:49 PM

[CJJ:]

Yes, the banks will be rich and the people in the country will be poor. All signs point to this and every conspiracy theorist will tell you this is a coordinated plan(not sure if conspircacy theorists now think the rich people of the world are working together or if its still just in the US).

Also many people everyone is heralding in these times, Rogers, Skiff, etc. are extremely rich people. Rich people don't really want everyone to be poor, it is messy for business and makes them real targets to be killed. They merely want to be richer. If you listen all the whining and clamoring for bailouts, it is coming loudest and biggest from the rich. They are scared to death to lose any of the 100s of times worth of money more than the average joe.

2008 Dec 06 05:54 PM

[Big-P:]

50%? Sure...why not...and then back down to new lows.

2008 Dec 06 07:22 PM

[brianoh:]

The problem that we face as we all know is inflated asset prices being restored to more normal levels. In 2001, US stocks were valued at a PE ratio of 30 (Dow). For that to be sustained, other income-earning assets had to be inflated to a similar level (ie. R/E). Greenspan caused these problems with cheap plentiful credit, and the resulting bursting of the R/E bubble followed by stocks. Historically, stocks have had PE ratios circa 15, not 30. I still hear some economic commentators talking in terms of PER 30. Obviously that does not reward investment and price risk. In a recession, the DOW deserves a price of something like 6,000 and in normal times, perhaps 7,000 to 8,000. Mister Market is simply re-pricing the inflated assets. The impact of that re-pricing is obviously impacting the inflated and cheap liquidity levels that were based on those inflated asset prices (assets prices fall and must be liquidated). Greenspan and his cronies obviously caused these problems, and that “era of largest wealth creation” is being shown for what it really was – asset-inflation. Pretty simple really. As the Fed attempts to re-inflate those asset prices it simply causes a bubble in bonds, because people have already been conned once. One of the Fed mandates is price stability and they have simply applied that selectively to consumer prices and cheap imports have sustained that. What the US needs is some proper economists to stand up and be counted. I have not seen much evidence of that. It is all prop-up, bail-out, and mail-out, and funded by the people that save money to rescue the people that have debased their cash.

2008 Dec 06 07:57 PM

[otbricki:]

You are missing that the US is still relatively isolated in terms of its economy on the demand side. Only 8% is tied to exports.

Certainly economic problems in China are not going to impact demand for US goods and services, and will help keep commodities costs down. A decrease in European demand won't help, but even if it goes down 10% it is well less than a 1% hit on US GDP.

Slowing economies in Europe and Asia, lower commodity prices and the recent strength of the dollar will help curtail inflationary pressures for a while as well.

Recent efforts to push down mortgage rates and lower energy costs have a good chance to start putting money in the pockets of consumers. It this happens it is very easy to forecast a V shaped recovery starting mid-2009.

Given that the S&P was 1500 not long ago a 50% increase by the end of 2009 is quite plausible.

2008 Dec 06 08:51 PM

[hoover:]

True. All you have to do is look at the several major bear market rallies from 1929 through 1932. These were big rallies on the Dow lasting months. Prosperity was "right around the corner" acording to the politicians of the era, but they never found the right corner. When the first cycle was over the Dow had lost a "mere" 89%. Then the market rose for a few years, before collapsing again slowly in the late thirties. Finally WW-II began, millions of young were pulled from the work force to fight the war (reducing unemployment), government took over production to produce war equipment, the equipment was destroyed in the war reducing supply, consumers products were rationed further reducing supply, and pay was pumped into workers pockets that couldn't spend the money because goods were unavailable, Result after the war: people had money to spend for the first time in 15 years, high demand existed from a goods-starved population, and companies were converting back to consumer goods to increase supply. Demand was high, U.S. was victorious, and people had money to spend -- the thirties depression in 1946 was finally over. Today, like 1930, we have too many goods (supply) and too little money to buy the goods. Obama and his financial team are going to have many sleepless nights.


On Dec 06 04:12 PM the_feds_corrupt wrote:

> The banks right now are "flush" with cash from the fed.The banks
> are begining to buy each others stocks .Look for the financials to
> lead the way in the next bear rally.They will attempt to "jump start
> the markets" and then sell their positions before the average investor
> is just getting fully invested.In that way the banks will reap handsome
> profits.
> They will also do the same thing with the chinese market.
> All depressions and recessions have large bear market rallies -we
> will have one as well.
> Watch for the following to determine when a rally begins
> 1) investor sentiment seems hopeless
> 2)the market shakes off "bad news" or becomes immune to bad news.
>
> 3)the Russell 2000 leads the way up.
> 4)The financial sectors garner strength.
> Once these forces become apparent we will have a rally. It will not
> sustain itself -but we will have it !
> It could take us from 11k to 13k somewhere in that range.
> It happens in ALL bear markets it will happen here as well.
> g/l to all cheers...;}

2008 Dec 06 09:11 PM

[MarvinMBA:]

A rally by any name now seems very far afield. Looking at the fundamentals, I would say we are in a Depression, not even the middle of one yet. Any rally not based on fundamentals is doomed to fail before it even gets its head above the water, not even climbing in the life boat. With job growth and unemployment and market destruction, both asset and paper, its going to hard to find the bucks for a cup of coffee let alone a rising stock market. The contrarian investors had their day when we had another economic model to work with but today the model is in shambles...for the near term and even the long term take whatever means it takes to get in a cash position in my opinion...MarvinMBA

2008 Dec 06 10:38 PM

[sickofthehype:]

Another huge bubble will soon implode - T Bills!!!!!!!!
Just wait until that money take the exits. You WILL see huge market recovery, both in equities and real estate.... for a while at least.

Inflation will be hitting as well. Dow at 20,000? Might actually happen sooner than most people think. A gallon of milk might be $10 but hey, you're home will double in value again.

2008 Dec 07 12:57 AM

[Fitz919:]

Don't be fooled. Everyone is overlooking the basics. Those insidious Mortgage Backed Securities which were sliced and diced, fraudulently rated Tripple A, and sold globally, must each be unraveled so that Individual Mortgages can be identified. Those Mortgages must be sorted into their various types. Some of those mortgages are still viable, and can continue to produce income for their owners. The others: the Sub-Prime, Alt-A, Option Arms, Interest Only, All Variable Rate Mortgages, etc, etc, must be Refinanced along with all those that have already defaulted.

You have to recognize the fact that using the Lender's Appraiser always results in inflated home prices, and that Lenders always offer the Borrower the Mortgage plan which benefits the Lender the most. (It's like the difference between a Market Order, and a Limit Order. One gives you the worst possible price at that moment in time, and the other puts you in the driver's seat, because you get to choose the price.

If anyone and everyone could Refinance at a Fixed Rate of 4%, and no Lender could do otherwise, no matter how large the Mortgage, we would see a Refi-Boom, and 6 months to a year from now, we would be fully recovered from this recession. Caps on the rates charged on Car Loans, and Credit Cards would follow. The 451 Trillion Dollar Derivatives Market (The Largest Global Fantasy/Nightmare, the World has ever known) would deflate dramatically and would be largely eliminated.

When this crisis hit, Lenders immediately fired the very people they needed most: The people who write the Mortgages. They should have been put to work writing up new fixed rate mortgages to replace the junk they were selling. But Lenders, like most Felons, are rarely willing to admit what they've been up to. And having face to face meetings, for the purpose of righting the wrong they've perpetrated, with those they've defrauded, is not only painful, but dangerous. Lenders have chosen the safer route: Admit nothing. Wait patiently, while preserving capital, accept all bailout offers, and pray the Hedge Funds don't decide to Short your company's stock to death.

It's brutal out there. And the ones who caused it to get this bad, aren't lifting a finger to solve the problem.

All the charts and graphs you show us don't mean squat. A recovery won't come untill there's a whole lotta refinancing going on. You can take that to the Bank....if it's still there on Monday morning.

Tripple Levereged ETF's RULE!!!!

2008 Dec 07 01:18 AM

[uluvbs:]

The author forgot to mention that two months ago David Bianco cut his S&P target from 1650 to 1500. He then cut the 1500 to 1300.

2008 Dec 07 01:55 AM

[Domino412:]

Does this mean I should go all the way out to my margin limit and buy shares in some of the 2X and 3X bull ETF's? I sure don't want to miss out on any recovery.

2008 Dec 07 12:45 PM

[adan:]

re: "...a 2009 target on the S&P 500 of 1,300 – more than 50% above where it sits now. Talk about a V-shaped recovery...." -

or, rather than "recovery," maybe an equal energy "bounce"

just trying to be aware of both sides of the trade (to paraphrase the folks at minyanville)

2008 Dec 07 01:28 PM

[Fitz919:]

Only do it if you are a true day trader, watching your screen constantly. These Levereged ETFs have absolutely shocking volitility, and move so fast you don't dare take a restroom break once you buy one. Also, never hold one overnight. Always buy and sell the same day. If you want to use margin, you can if you adhere to those two rules. And the best part of using some margin on a pure day trade, is that you'll never pay any margin interest, or suffer a margin call. If you don't have a negative balance at the end of the day (this includes After Hours Trading), your broker will not charge you any margin interest. If you've never heard of this, call your broker, he'll verify it.


On Dec 07 12:45 PM Domino412 wrote:

> Does this mean I should go all the way out to my margin limit and
> buy shares in some of the 2X and 3X bull ETF's? I sure don't want
> to miss out on any recovery.

2008 Dec 07 04:14 PM

[E Nuff Sed:]

There is historical precedence.
The S&P 500 gained 53% from Sep 74 to June 75 (9 months).

2008 Dec 07 04:23 PM

[curious cat:]

if you do not want to go in the direction of a charging elephant, get out of the way. a path will be cleared to the nearest watering hole. don't fight the fed.

2008 Dec 07 04:51 PM

[ozcutty2:]

When the market moves over 10% in a day, 50% gain is only 5 days.
Catalyst could be Obamas stimulous which looks like getting closer to the magic trillion dollars.
Rally could be fast and powerful but when you drop 50% and recover 50% you are still down 25% overall!
Banks will definitely lead, imagine if Citigroup actually reported a profit in a couple of quarters, the market would go nuts!

2008 Dec 07 08:29 PM

[leh:]

IMO the rally's begun as of Friday. LOTS of money managers looking to get in here in hopes of paring their considerable losses YTD. Citi's chart was a tell on Friday morning as it gapped down for just 1/2 an hour before starting to almost immediately recover well ahead of the general market. And of course the insurance stocks went nuts on the HIG earnings. I think the train is leaving the station, folks, now. I see a possible 5-week rally into the Obama inauguration, then a big correction.

2008 Dec 07 08:55 PM

[Trinitymaster:]

Dow 25,000 will happen during Obama's administration. At that point you should buy Put LEAPS that are as far out as you can get. Buy the ones that are 60% of the then current price. You will make a fortune when the market goes down.

Until then, take advantage of stocks that refuse to die- like Target (horrible fundamentals, bleeding money). DAYTRADE in and out only. "BUY and HOLD" is now renamed "ANTE and FOLD". There is no long term strategy anymore. In and out, that's the only way nowadays.

2008 Dec 07 10:19 PM

[happysoul77777:]

The CDS market is being manipulated.

The ETF AGG has recovered close to the level of pre-Lehman.
The absurd, ill-conceived, flawed fair market value accounting basically implied that at the end of September, the net worth of all financial insitutions were close to zero. Now. the broad market index has recovered, the financial institutions' net worth has increased a magnitude of a few trillions plus the recent capital injection by the Treasury.

There are a bunch of big manipulators still trying to create a panic by advertising the easily manipulated derivative indices.

Normally, I am already bullish. But, the stock market is structurally flawed because of the repeal of the uptick rule and the unregulated CDS market. Thus, I have concluded that this is a casino, and it should be played accordingly!

2008 Dec 07 10:24 PM

[James Wilson:]

All the banks are tied togeather !

They each hold a big stake in their competition which makes the banks basically Sisters in the Fianical Sector.

2008 Dec 08 01:06 AM

[nmelendez:]

Everyone forgets the Dollar. The dollar is about to unwind and go down to 62. Equities will rally. Then its doomsday. Dow 3000.

2008 Dec 09 10:08 PM