The economy has seen quite a ride in the past 12 months here in the USA. We've come a long way, maybe.
But according to GreenLightAdvisor.com, others like Laszlo Birinyi, founder, Birinyi Associates, and Barry Ritholtz, CEO, FusionIQ, and prolific author of The Big Picture blog, believe that the market has the capacity to surprise.
BIrinyi says the recovery in the economy and earnings could far exceed expectations, and the market is pricing in the upside surprise.
Here are some recent Bloomberg headlines to ponder.
From Birinyi Says Stocks Rally Signals Economic Rebound (August 24, 2009, Bloomberg.com):
Birinyi said on May 20 that the S&P 500 would climb to a record 1,700 in the next two or three years, a 66 percent gain from its current level. The index has rallied 14 percent since his forecast. The benchmark for U.S. stocks may rise 6 percent to 1,087 within the next three months “if it continues to progress at the rate it’s been progressing,” he said.
Anyone attempting to apply Roubini’s wisdom to stocks may be forgiven for missing the biggest rally since the 1930s as the Standard & Poor’s 500 Index climbed 52 percent in six months. While Roubini said in March the advance was a “dead-cat bounce,” that it may “fizzle” in May and warned in July that the economy’s “not out of the woods,” the MSCI World Index was posting a 58 percent gain, the largest since it began in 1970.
“We’re looking at a bull cycle in phase one,” Laszlo Birinyi said in a telephone interview yesterday. Birinyi was the top-ranked Dow Jones Industrial Average forecaster for most of the 1990s on PBS’s “Wall Street Week with Louis Rukeyser.” “No one wants to come out and say, ‘This is a bull market.’ Everyone’s just dancing around the term,” he said.
Barry Ritholtz says the market has the strength and capacity to surprise us higher, now that fund managers are buying this rally, according to the Merrill Lynch Survey of Fund Managers. Ritholtz reminds us that in 1973-74, the market fell 44%, then rallied 78%. He says he is not calling the forecast this time that tightly, but says that before this is all over, the market which is up over 50% currently, may see 60, 70, or 80% before topping out.
The melt-up in the market has caused professional investors a great deal of performance angst over whether or not to re-enter the market more willfully, given the underlying concerns about the economy’s recovery and sustainability of earnings forecasts. Ritholtz says that fund managers are buying the rally, and this is reason to believe the market melt-up can extend higher.
Professional money managers are buying into the rally in a big way, according to a Merrill Lynch Survey of Fund Managers:
- 75% believe the world economy will improve in the next 12 months. That’s the highest level in nearly six years and up from 63% in July.
- Average cash balances have fallen to 3.5%, the lowest since July 2007.
- 34% of managers surveyed are now overweight stocks, the highest since Oct. 2007.
- Risk appetite is also increasing, to the highest levels in two years.
Investor optimism about the global economy has soared to its highest level in nearly six years, with portfolio managers putting their cash back into equity markets, according to the Merrill Lynch Survey of Fund Managers for August.
A net 75% of survey respondents believe the world economy will strengthen in the coming 12 months, the highest reading since November 2003 and up from 63% in July.
Confidence about corporate health is at its highest since January 2004. A net 70% of the panel respondents expect global corporate profits to rise in the coming year, up from 51% last month.
August’s survey shows that investors are matching their sentiment with action, by putting cash to work. Average cash balances have fallen to 3.5% from 4.7% in July, their lowest level since July 2007.
Equity allocations have risen sharply month-over-month with a net 34% of respondents overweight the asset class, up from a net 7% in July. Merrill Lynch’s Risk and Liquidity Indicator, a measure of risk appetite, has risen to 41, the highest in two years.
“Strong optimism in August represents a big turnaround from the apocalyptic bearishness of March. And yet with four out of five investors predicting below trend growth for the year ahead, a nagging lack of conviction about the durability of the recovery remains,” said Michael Hartnett, chief global equities strategist at Banc of America Securities-Merrill Lynch Research. “The equity rally has been narrowly led by China and tech stocks. We have yet to see investors fully embrace cyclical regions such as Japan or Europe, or Western bank stocks.”
Bloomberg.com also reported the following on August 27th concerning the U.S. economy:
The U.S. economy took a first step toward recovering from the worst recession since the 1930s in the second quarter as companies reduced inventories, spending started to climb and profits grew.
Gross domestic product shrank at a 1 percent annual rate from April to June, less than the 1.5 percent decline projected by economists in a Bloomberg News survey, a Commerce Department report showed today in Washington. Corporate earnings rose by the most in four years, the department also said.
Government programs, including the “cash-for-clunkers” and first-time homebuyer incentives, are boosting manufacturing and housing, indicating the gain in sales that began last quarter will be sustained in the second half of the year. Another report showed unemployment may jeopardize the strength of the economic rebound.
“We’re on a pretty decent recovery path,” said Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York. “There was a better mix last quarter with almost every major component of final demand being revised up and inventories being revised down. That puts us in a pretty decent position going into the third quarter.”
So the stage is being set for one of two things: First, a surprisingly buoyant follow-through on this remarkable "recovery rally" that started back in March, or, Secondly, a "two more steps forward and then three steps backward" scenario that will bring even those more fearful investors off the sidelines.
This will allow stocks to go up a couple of more "stories", allow a wonderful "shorting opportunity" to unfold, followed by a "quick and nasty" reversal so that those big players who shorted stocks at the top can buy to both cover their short positions and refill their inventories that became depleted when they were selling while everyone else was buying.
Nadeem Walayat at The Market Oracle had some interesting thoughts on this topic:
"The perma bears having missed the whole bull market as each minor dip was THE end of the mistakenly labeled "bear market rally" for the rules are clear, pick up any reputable technical analysis book and you will read that a bull market is confirmed when an stock indices rallies by 20%, similarly a bear market is confirmed when an indices falls by 20% from a high, therefore regardless of the perma views of this being a bear market rally, whilst under the basis of technical analysis this rally has long since been confirmed as a bull market more than 30% ago! So much for the claims of following the basic tenants of Dow theory!
"The stock market's powerful advance of 50%+ may soon give an opportunity for the perma bears to crow loudly as the market heads into the seasonally weakest period of the year i.e. Sept to October, especially as an technically overbought rally is well primed to achieve the anticipated 'significant' correction, perhaps even a crashette, where readers need to remember that the bull market would still remain intact as long as the Dow does not fall by more than 20% from the peak.
"Rules exist for a reason, and that is to arrive at a FIRM TRADEABLE CONCLUSION, rather the deluded fixation that is indicative of a perma attitude that are perpetually fixated to one side regardless of the actual price action i.e. the whole rally has been supported by the crash is coming mantra for the past 6 months! A totally useless repetitive statement when it comes to the monetizing of analysis. There is no point in catching a say 15% drop if one fought against the 50% rally, as the net position is still for a 35% LOSS!"
My friend Richard Wendling at BearFactsSpecialistReport.com has mentioned there there is a possibility of a pullback coming over the next week or so:
"Remember the next two weeks are sandwiched around the Labor Day holiday. A great many traders and investors will be out of town enjoying their last fling of summer.
"Thus there will be less enthusiasm in the market place and it could decline on very light volume, allowing sepcialists to contine accumulating stock beefore making their final push higher."
Richard's web site and monthly DJIA reports can teach a great deal about the timeframes of both rallies and declines. The media and the most-listened to commentators want people to believe that the stock market rally has a long way to go.
They are talking up stocks like Citigroup (NYSE:C), JPMorganChase (NYSE:JPM), Alcoa (NYSE:AA),Freeport McMoRan Copper & Gold (NYSE:FCX), Boeing (NYSE:BA), Chevron (NYSE:CVX), Apple (Nasdaq:AAPL), Intel (Nasdaq:INTC), Cisco Systems (Nasdaq:CSCO) and Research in Motion (Nasdaq:RIMM).
Sounds like a familiar, historically relevant way for the stock exchanges to do what they do best. I can hear the echos from Warren Buffett's cave, "Be greedy when everyone is fearful and be fearful [a.k.a. "go short"] when everyone is greedy." It doesn't seem like "everyone" is greedy quite yet.
DISCLOSURE: I'm long JPM, AA, and CSCO
