Bah! Humbug

http://www.ritholtz.com/blog/2010/12/10-reasons-to-be-cautious-for-the-2011-market-outlook/

There are forecasts everywhere of better times ahead in terms of employment, retail, inflation, GDP. David Rosenberg is having none of it. He sees the market as heavily propped up by the Fed. This is his look forward for 2011.

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1. In Barron’s look-ahead piece, not one strategist sees the prospect for a market decline. This is called group-think. Moreover, the percentage of brokerage house analysts and economists to raise their 2011 GDP forecasts has risen substantially. Out of 49 economists surveyed, 35 say the U.S. economy will outperform the already upwardly revised GDP forecasts, only 14 say we will underperform. This is capitulation of historical proportions.
The last time S&P yields were around this level was in the summer of 2000, and we know what happened shortly after that.
2. The weekly fund flow data from the ICI showed not only massive outflows, but in aggregate, retail investors withdrew a RECORD net $8.6 billion from bond funds during the week ended December 15 (on top of the $1.7 billion of outflows in the prior week). Maybe now all the bond bears will shut their traps over this “bond-bubble” nonsense.

3. Investors Intelligence now shows the bull share heading up to 58.8% from 55.8% a week ago, and the bear share is up to 20.6% from 20.5%. So bullish sentiment has now reached a new high for the year and is now the highest since 2007 ¯ just ahead of the market slide.

4. It may pay to have a look at Dow 1929-1949 analog lined up with January 2000. We are getting very close to the May 1940 sell-off when Germany invaded France. As a loyal reader and trusted friend notified us yesterday, “fighting” war may be similar to the sovereign debt war raging in Europe today. (Have a look at the jarring article on page 20 of today’s FT — Germany is not immune to the contagion gripping Europe.)

5. What about the S&P 500 dividend yield, and this comes courtesy of an old pal from Merrill Lynch who is currently an investment advisor. Over the course of 2010, numerous analysts were saying that people must own stocks because the dividend yields will be more than that of the 10-year Treasury. But alas, here we are today with the S&P 500 dividend yield at 2% and the 10-year T-note yield at 3.3%.

From a historical standpoint, the yield on the S&P 500 is very low ¯ too low, in fact. This smacks of a market top and underscores the point that the market is too optimistic in the sense that investors are willing to forgo yield because they assume that they will get the return via the capital gain. In essence, dividend yields are supposed to be higher than the risk free yield in a fairly valued market because the higher yield is “supposed to” compensate the investor for taking on extra risk. The last time S&P yields were around this level was in the summer of 2000, and we know what happened shortly after that. When the S&P yield gets to its long-term average of 4.35%, maybe even a little higher, then stocks will likely be a long-term buy.

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4. It may pay to have a look at Dow 1929-1949 analog lined up with January 2000. We are getting very close to the May 1940 sell-off when Germany invaded France.
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1940 was the bottom for the UK market. As for the Dow, once we get past pearl harbor and Midway it'll line up perfectly. Thanks for the heads up.

 

1) Optimism "pays" on Wall Street, not pessimism.
2) No surprise there.
3) An outflow of $8.6-billion from bond funds is "chump change" in the big scheme of things.
4) "II" is a good contrary indicator.
5) The 1720's with British data may be a "better" analog for where we may be at this time in the market.
6) What happened during the Civil War or Revolutionary War?
7) Dividend yields need to go from "low" to "high", not just low to "average".
8) 2011 ought to be "good". Be there for it!

 

What about the Falklands "conflict"?

 

Out of 49 economists surveyed, 35 say the U.S. economy will outperform the already upwardly revised GDP forecasts, only 14 say we will underperform. This is capitulation of historical proportions.


Finally a quote from Hayek:

“It is high time, however, that we take our ignorance more seriously”

 

She said that?

 

Justthink of all them poor sods, which have whacked all the xmas goodies on the credit card.Wont be so "HO HO HO" come Jan!?