thevoice@voiced...'s  Instablog

The following are comments compiled by US equity strategist Tobias Levkovich of Citigroup Investment Research. Institutional Investor has named Mr. Levkovich on its list of the nation’s leading analysts both as an equity strategist and as an industry analyst. He has been accorded a runner-up slot for portfolio strategy in the 2002, 2005 and 2006 Institutional Investor All-America Research Team (II) poll, along with third-team honors in the 2004 II poll. He also has been acknowledged by Smart Money magazine as one of the 30 smartest people in investing (December 2002) and was recognized as its Best Market Seer for 2003. In November 2004’s issue, he was named to the “Power 30 Thinkers” list.

“With the S&P 500 up roughly 60% since March 2009, the index has put itself in the running for the fourth best one-year gain following a bear market trough since 1929 and all the other periods were in the 1930s. Yet the current “Great Recession” is quite different than the Great Depression on various measures including the lack of an 86% market drop. Accordingly, a continuous surge in EPS will be needed to sustain the rally effort, especially as the top line is still not beating forecasts in any meaningful way.

Many market observers consider the current environment to be dramatically different from more recent economic downturns, even in the face of the 1973-74 severe correction and the back-to-back recessions of 1979-80 and 1981-82, which were deeply painful, not to mention a savings and loan financial crisis in the late 1980s, given unbridled growth in poor real estate loans. Hence, some skepticism is appropriate when people only highlight the differences but overlook similarities. Some investors contend that the market’s rebound relative to average bounces off recession lows is meaningless given the pullback from the abyss of financial Armageddon.

While corporate margins are being sustained by cost-cutting for now, the bottom-up consensus estimates calling for 27% EPS growth in 2010 requires a sharp bounce in operating profits that seems unsustainable without a broader-based sales pickup. A production recovery to stop inventory de-stocking and eventually to restock shelves should help, but sustainability remains crucial.”

Disclosure: No positions

The following are comments compiled by Wall Street economist Jan Hatzius of Goldman Sachs. Notable for his bearish forecasts, he was listed atop of 52 Wall Street economists in The Wall Street Journal′s economic-forecast rankings.

“Over the last year, policymakers have boosted the housing market by reducing foreclosures, slowing the pace of distressed sales, and stimulating demand for owner-occupied housing. The effects of these policies are evident in a swelling foreclosure pipeline, a surge in first-time home purchases, and abnormally low mortgage rates. We estimate these policies have reduced foreclosure supply by 450,000 and increased demand by 200,000. Taken together, these moves might have added 5% to home prices nationally. If this estimate is correct, it suggests most of the increase in home prices since the spring—which has totaled between 2% and 4% in seasonally adjusted terms—has been due to temporary factors.”

“In 2010, we expect some of these supports to fade. Fed and Treasury purchases of mortgage-backed securities will taper off, and the pause in foreclosures created by federal mortgage modification programs may end. The federal tax credit for first-time home buyers appears likely to be extended for at least a few months, but probably no longer than through the first half of 2010.”

“Our conclusion is that despite the better recent data—including stronger-than-expected report on existing home sales in September—the risk of renewed home price declines remains significant, and our working assumption is a further 5%-10% decline by mid-2010. However, the cloudy policy outlook adds to our already considerable uncertainty of where house prices will ultimately bottom.”

Last week Ron Paul’s “End The Fed” cracked Amazon’s Top 10 List of Bestsellers. Ron Paul is one of the biggest advocates of the free market and sound money philosophies and has been amassing legions of followers with his revolt against the Federal Reserve System. Paul is a member of the Liberty Caucus of Republican congressmen which aims to limit the size and scope of the federal government and serves on the House Foreign Affairs Committee, the Joint Economic Committee, and the Committee on Financial Services, where he has been an outspoken critic of American foreign and monetary policy.

His followers will say that the FED is one of the biggest scams in the Unites States history. Mainly since its conception was by private bankers and not the common man. Milton Friedman believes the FED is responsible for the environment that caused the great depression. Many believe the FED is responsible for the current crisis as well.

I have not yet read the book but from what I hear the Fed is reluctant to disclose other banks holdings in order to protect their solvency. Could it be that the FED is primarily concerned by protecting its own solvency? Could the FED be too big to fail? And if so does'nt the FED then pose a systemic risk that could be catastrophic? On a grander scale, wouldn't all countries have to embrace the gold standard for optimal performance? If not the risk of a 1907 repeat is bound to happen again. London and other European banks raised interest rates stemming outflows while the U.S. maintained the gold standard, leading to the creation of the FED.

The Keynesian school believes in printing money when necessary to improve economic fundamentals. I do not have a problem with this as long as the stimulus is spent wisely. Allocating these funds to a scrupulous group of banks that have obvious ties with the current FED does not seem optimal except to the selective pockets that gain.