Bearish on Equities? Big Mistake! 15 comments
Jeffrey Saut
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Excerpt from Raymond James strategist Jeffrey Saut's latest essay, published Monday (June 15th):
...Consider this, since the last recession corporate profits (as measured by the National Income and Profit Accounts) have doubled, yet the S&P 500 (SPX/946.21) is no higher than it was during the 2001 recession. The observation is that corporate profits, as a percentage of GDP, are higher today than they have been in most of economic history.
Moreover, it is becoming increasingly evident that the economic statistics are suggesting we are exiting the recession. Sure, the labor market is still a mess, but even here there are “green shoots” with over one hundred of the Fortune 500 companies announcing hiring plans. Further, according to Challenger, Gray & Christmas, corporate layoffs have declined by a large 55% since their January peak. All of this is consistent with the way recessions end. Additionally, we take President Obama at his word in that 600,000 jobs will be created in the next 100 days. To accomplish this, our guess is a decent modicum of cash is going to be spent. Given the already improving economic statistics, we believe this implies said stats will look even better in the months ahead. Consequently, companies will likely build inventories, make capital expenditures, and the employment numbers should at least stabilize.
Granted, there is a risk these measures will “pull” sales from 2010 into 2009 raising a risk the economy softens again in late 2010, but with the bulk of the stimulus monies “hitting” in 2010, our sense is that economic softening just won’t happen. Then there is the concern that Treasury yields back up too fast for the housing sector to heal, thus snuffing out the nascent recovery. However, we are betting the Fed is far more worried about the economy sliding back towards a deflationary death spiral than it’s worried about inflation. Therefore, our sense is the Fed will do anything necessary to bring interest rates back down until they are certain we are past any deflationary event. That likely will not be until 2010. Hence, we think the recent rise in interest rates is a head fake and are tilting accounts appropriately. We also think the recent dollar’s demise is a head fake in light of what we consider to be improving economic fundamentals.
All of this suggests that it is a mistake to get too bearish on equities. Maybe you don’t want to “play” as hard as we did at the March “lows,” but in terms of shorting stocks, we have NO interest! Manifestly, there is just too much liquidity supporting stocks. As Michael Darda points out in this week’s Barron’s,
“The money base – which counts currency in circulation, bank reserves and vault cash – is near a record high of nearly 2.9 times the stock market’s value. This ratio of liquidity to stocks was briefly higher in February, just before stocks took off, but is still well above levels below 1.5 times for much of the past two decades (it was below 0.9 times near the stock market peak in 2007).”
Additionally, even though we remain bullish on crude oil over the long term, in the short/intermediate term, we think oil is “stretched” and likely to decline further, helping the economic environment. That said, despite our energy analysts’ cautionary comments, I am becoming increasingly interested in investing in natural gas.
The call for this week: On our desk resides a book by Ned Davis, Being Right or Making Money. Since we are often wrong (like being too cautious for the past two months), but usually wrong quickly to avoid big losses, we opt for making money. To that point, the bears have been wrong since the March lows often citing all the old mantras that took us to those lows. To us, the current markets feel more like 2003, when the S&P 500 rallied from its March lows of roughly 800 into its June highs of around 1000. From there, stocks chopped / flopped around, without giving back much ground, until early September when they again rallied to break out above those June highs on another upside leg that tacked on an additional 150 points (to 1150).
While history doesn’t repeat itself, it often rhymes! If so, a Dow Theory “buy signal” will be rendered if the D-J Industrial Average and the D-J Transportation Average can better their respective January 6, 2009, closing highs of 9015.10 and 3717.26. If that happens, it would be termed a new bull market according to our interpretation of Dow Theory. Whether that occurs, or not, we think the emerging / frontier markets have already embarked on new bull markets. As for the recent mantra that “Buy and hold investing is dead,” while we questioned this “ride it out” mantra in late 2007, we think the current consensus “dissing it” has it wrong. Emphatically, one of the secrets to Warren Buffett’s long-term investment results is embedded in the tax code (i.e. – long-term capital gains); and, we continue to invest accordingly.
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This article has 15 comments:
Brokers make good money when assets turn but then make more money when there are more assets to manage.
Unfortunalty, given the maasive deleveraging taking place right now, I'm afraid your predictions will end-up wishful thinking.
forget the Dow theory about bull/bear markets...this bear market will not end until there debt is completely out of the system.
The FED has been pouring tons of liquidity in the system and the economical key figures have not yet shown any significant improvement. But that's normal. You can cure a cancer with a bandaid can you?
This market is due for a double bottom and there is much more pain coming down the road for equities, wheter you like it or not.
Just a short correction to your comment below.
"...Additionally, we take President Obama at his word in that 600,000 jobs will be created in the next 100 days...."
The president did not say he was going to create 600k jobs. The said he was going to "create or save" 600k jobs, making the claim completely unverifiable.
And what was the basis for the 600k number, again?
Even the services sector is suffering as retailers cut back, or go BK, restaurants are under pressure, and even law firms are cutting lawyers and cutting way back on recruiting. A few months back, I read an article which mentioned many mid-range restaurants were eliminating busboys, since they fall under minimum wage guidelines, and having the waitstaff bus the tables, since their income is tip-based, they don't come under the minimum wage standards.
GREEN SHOOTS AND BEARS
www2.standardandpoors....
Please read this:
www2.standardandpoors....
...to make sure you understand what you are looking at and why you can't play around with earnings.
BTW, notice that 2009 earnings- yes, the year we're only halfway through - are expected to be about $29. That's if the analysts are right, which they rarely are.
2010 could get us all the way back to $40...as long as all that pesky debt that seems to still be growing doesn't insist we pay it down.
> forget the Dow theory about bull/bear markets...this bear market
> will not end until there debt is completely out of the system.<br/>
>
Richard Russell is the premier Dow Theorist, according to many and he is not buying the green shoots BS.
RR is a guy who called the march lows and now he thinks we have a long time or ways to go before we see enough value in the market toend this bear market.
Right now we have a non-confirmation of the transports to the highs set in early May, a clear sign that the rally has stalled.
As you will see if you research Mr. Saut he is a classic market shill who always sees green shoots...mainly the ones sticking out of your wallet. :-)
...with all due respect, of course.