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Are The Bulls Growing Weary?

Daily State of the Markets
Monday, November 19, 2012

Editor's Note: Dave M has an early meeting and has asked Curtis Bergquist, a longtime friend and fellow money manager to fill in for him. Dave asked us to remind everyone that Curt currently maintains a bearish view of the global macro picture (although he is also playing for a bounce higher in the near term), but has some good stuff to share with us on the state of the bull market and the earnings season. So, without further ado, here are Curt's thoughts on this fine Monday morning.

Good morning, I have a few random items I thought I would share with you.

First: While stock market rallies tend to last longer than most can imagine and global markets are higher today, as I see it, the momentum of this bull market is definitely waning. As longer term readers know, I treat the vast bulk of my investment funds quite differently than I do my aggressive funds. What I term my "serious money" is invested in standard fashion using such things as mutual funds. I gradually adjust my market risk exposure level over time by raising or lowering the percentage of my "serious money" which is in cash. This approach may not ever be featured on "Fast Money" but it kept my clients safe during the 2008 debacle.

Upon reviewing things this weekend, I came across some clear evidence that the markets momentum is fading away. One of the simplest ways to measure market momentum is rate of change. So, in looking at my "serious money" over the weekend, I noticed that one of the funds I track reached a level (adjusted for reinvestment of all capital gain and income distributions) last week which was only 0.49% above a peak level it last achieved on February 18, 2011.

Thus the fund, which (again in my opinion) has an overall stellar record going back nearly 4 decades during which it has achieved an average annual total return of more than 13%, has basically gone nowhere for roughly the past 1 year and 9 months. In comparison, for the approximately 1 year and 11 months prior (spanning the period from 3/9/09 to 2/18/11), the fund's NAV nearly doubled (+93.09% adjusted for reinvestments). Therefore, it seems clear to me that the momentum of this aging bull is waning significantly.

Second: Earnings projections from Wall Street analysts, once more in my opinion, are far too optimistic. At this time, with about 460 out of 500 S&P500 Index companies having reported, Q3 earnings and revenues figures are just plain bad. As things stand now earnings are down -2.2% from Q3/2011 while revenues have fallen even more, dropping about -3.6% year-over-year. And yet Wall Street remains ever optimistic. The consensus is for S&P500 earnings to grow by 5.5% Y/Y in the 4th quarter. Perhaps more potentially troubling is the consensus belief that earnings will expand by a further 11% of more in 2013 to a new record figure of approximately $114.


It appears that Wall Street is either unaware of all the signs that a global recession (and a particularly severe one in Europe) is looming or that, in its collective wisdom, it believes that all the world's problems and concerns will be quickly and painlessly resolved.

For reference, I would call your attention to the fact that back on January 1st the consensus was for 2012 earnings to grow by 11.5% or so. Now the consensus of those Wall Street Wizards is for 2012 earnings to expand by 5% for the year. Remember also that in 2007 these same (well mostly the same) geniuses were calling for a surge in earnings for 2008 to new record ground. You may recall that things didn't quite work out that way. Should the current expectations for Q4 and 2013 also prove to be overly optimistic such will likely not generate a bullish response by the market.

And would any of us really be surprised if the Wizards were wrong?

Just asking...

Turning to this morning... It appears to be a game of follow the leader in the global markets today. In short, the markets appear to welcome the optimistic comments by President Obama over the weekend implying that the worst case scenario about the fiscal cliff might now be avoided. Asian markets improved, European markets are up more than 1%, and the U.S. futures now point to a strong open.

On the Economic front... We will get reports on Existing Home Sales and NAHB Housing Index this morning.

Thought for the day... Security is not the meaning of my life. Great opportunities are worth the risk. -Shirley Hufstedle

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

  • Major Foreign Markets:
    • Shanghai: -0.65%
    • Hong Kong: +0.73%
    • Japan: +3.66%
    • France: +1.57%
    • Germany: +1.55%
    • Italy: +1.19%
    • Spain: +0.72%
    • London: -0.07%
  • Crude Oil Futures: +$1.03 to $87.95
  • Gold: +$9.40 to $1724.10
  • Dollar: lower against the yen, higher vs. euro and pound
  • 10-Year Bond Yield: Currently trading at 1.609%
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: +10.02
    • Dow Jones Industrial Average: +82
    • NASDAQ Composite: +17.69

Positions in stocks mentioned: none

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