Bad News Bears Battle Break Neck Bounce

Phrases like dead-cat bounce, house of cards, stagflation, W-shaped, U-shaped, lackluster, sucker's rally, deflation spiral, run-away inflation, and great depression were all in their pronouncements.

The bad news bears have pointed to a fearful, unemployed consumer who has cut up her credit card, has no more savings, and a government that has only racked up more national debt -- the dollar is dead -- they claim.

But the Q3 business realities continue to paint a starkly different picture.

Stimulus programs are firing up. Inflation is under control. Manufacturing lines are back on-line. Equities are on a roll. Optimism is accelerating.

So what are the doomsters missing?

Here's what Barton Briggs (Managing Partner of Traxis Partners Investment Fund) writes in Newsweek:

First and foremost, they are betting against America, the greatest entrepreneurial engine ever created. History says buy America when it's down. In addition, emerging economies may well be the new dynamo of growth. They now account for 35 percent of world GDP and are growing two to three times faster than the developed world. S&P 500 companies now collect almost 50 percent of their revenues from overseas, and almost half of that portion comes from these fast-growing developing countries. Another factor could be that stocks currently despite the rally are still deeply undervalued. The rule of thumb is that stocks should sell at a price/earnings ratio equal to 20 less the inflation rate. Assume S&P 500 operating earnings are $70 to $75 next year and inflation is 1 percent, you get a theoretical price far higher than the current level of 1060.

Not only will the second half of 2009 continue to be strong, but 2010 will likely reap the benefits of this new international growth dynamo. It will be interesting to see where and when the dead cat lands.

Comments

[bigbear4511:]

Rally is funded by a 12 trillion dollar debt, soon it will be 13 and soon after that 14 and soon no amount of borrowering will be able to stop the states from complete and utter collapse. Maybe it will happen at 20 billion. Inflation could make a barrel of oil be 300 dollars at that rate of debt. Where will the economy be when you need a barrel of money to buy a loaf of bread? Just postponing the inevitable

Oct 20 05:07 AM

[Dave Wrixon:]

Bears don't battle anything. They simply don't buy. Those that are buying aren't bears.

Any way talking about breaking necks......

Oct 20 06:06 AM

[TheFounder:]

How about earnings of $60 with a P/E of 15? or perhaps, $55 with a P/E of 12? We shall see.

Oct 20 07:06 AM

[bartpr:]

you are ingoning the massive mortgage resets coming in 2010 on. they are the infamous sub sub prime interest option. arms. no one will be able to afford the resets. payments will at least double. goodby to recovery and bank earnings.

Oct 20 07:52 AM

[David Van K...:]

Has anybody besides me never heard of the "20 minus the inflation rate" rule of thumb? Where did that come from?

And saying what stocks "should" sell for is a fool's game. Whatever the historical median P/E of the market is--many say 15, you can look at a century-long chart and make up your own mind--the actual P/E spends very little time at or around that number. Historically, it's all over the place.

As I said in a comment yesterday, one analyst = one opinion, and it's really just a guess. Nobody knows the future. Nobody.

Oct 20 08:55 AM

[Big Jack:]

I am curious if anyone else finds it interesting that inflation rate plays as big a part in Biggs thinking as it does. Does this mean that a 7% inflation rate means the market should sell at 13? Seems to me that once markets realize that market "experts" have their own interests to support we may have at least a bit of common sense restored.

Oct 20 10:22 AM

[untrusting ...:]

Wonder what Biggs is gonna say if inflation hits 20% due to the hugh dollar devaluation and massive government borrowing?

Let's hope Biggs is buying and holding every stock he can and using leverage to the maximum extent possible. If PE's get to his theoritical level of 20-20=0, then he might have to eat his undervalued stocks along with his words.

Oct 21 01:35 AM

[The Good Ne...:]

David,

I agree with your comment that nobody knows the future. However, good analysis does not always equate to mere opinion. In my observation specific analysts (and weather forecasters), get the forecast right much of the time, while others fail almost always.

And if you've read my stuff long enough you've heard me say time and time again, when you take economic analysts as a group, "the majority is always wrong." (Galbraith)....

mast-economy.blogspot....

Looking back over the past year, Galbraith was right again.

Oct 21 04:09 PM