Just adding an alternative view... Jeremy Grantham thinks this market cannot bottom at a lower low (for now) because some ingredients are just not there: much higher oil prices and much higher interest rates a-la-1974/1982. Although he does not discard a retest he also believes time is running out and that the market is supported (even irrationally) by *the idea* of fiscal stimulus whether it bites or not. This would mean that markets may only tank if this support is withdrawn like it happened in 1937. Talks of sucking up liquidity or raising interest rates might have the markets revolt again. On another front, the reflation theme seems to still working its magic (jnk bounced off its 200 dma on good volume and lqd rallied as well while commodities' countries and currencies are still advancing including Russia recently upgraded by GS). All for now, of course.
Where you think unemployment is headed and when you think it will start to fall?The answer to this question has huge implications for the market, as I've said the stress test scenario(10.3% avg for all 2010) is consistent with GS earning less than $1b for 2009/2010 according to the government/bank own figures($17.8 in trading & counterparty losses against $18.5 pre-tax pre-provision income), this is not priced in the stock as forward estimates are much higher. In fact all financials dont price in the more adverse scenario Unemployment is not a lagging indicator in this cycle because it defines consumer sentiment(and therefore spending which currently is weak) and the amount of capital backing the largest banks(and therefore credit growth) This big rally is a speculative bet that GDP turns around sooner and stops the unemployment bleed, why are you trusting the stock market to get this one right while the corporate bond market is still pricing in massive job losses?(IIRC it was pricing in an addional 7.5m in job losses a month ago, now after the rally it could be something like 4-5m, which is a LOT) Keep your trailling stops tight
Lets say bears like Shilling are wrong and the S&P earns $50 in operating income this year(as opposed to his $40 bet), put a 15x multiple and you get to 750, the market would be quite overvalued, Q1 earned $10 in opearting so far. That $50 is likely to grow slowly as research from the IMF indicates global contractions and financial crisis are followed by weak GDP growth, the market would only be fairly valued if S&P earns $50 in operating then GDP growth skyrockets(whats the catalyst?), what are the odds that this time will be different to the IMF samples(and its a large one) compared to the odds that the market just came up with a nonsense theory like 'goldilocks' 'decoupling' and now 'greenshoots', I'd estimate its as much as 8-1 against it Maybe 666 is the bottom but that still makes 900 overvalued and a visit to 700's with overlevered garbage going much lower likely, that is all I need to make money
daal you're correct in what all are missing is yes the econ might have bottomed but thats it. What is going to make the econ roar? the answer is nothing yet the market movement of the past 3 months is discounting a roaring v recovery and thats not going to happen. That said the market could stay up for months yet as the dream of a v recovery could take months to dis prove
Listen, everyone knows the stress tests are an Orwellian joke and that the economy is in the shitter. However, the gubmint has made clear that it will stand behind the debt of all of these financial institutions. Therefore, they will continue to operate just fine, even though they are technically insolvnet. There are three paths for the stock market - raging bull (a la recently), raging bear (a la sept-mar), or just a normal stock market - some up and some down. Anybody looking for a return to the raging bear of last fall and this winter is going to wait a long time, maybe the rest of their lives. Armageddon is off of the table. Its time to start trading this stock market, the commodities markets, the currency markets, the bond markets as just normal markets. Cable is not dropping 20 handles in 3 weeks anymore 10 year notes are not falling 175 basis points in a month anymore COF isn't going from 35 to 10 in a straight line over a period of 6 weeks anymore It was a glory-filled time, but its over. That doesn't mean you can't make any money shorting crap financials, shorting cable, or buying treasuries. It just means that they're no longer easy trades. Start looking for the next big thing.
Big earnings surprises will affect the VIX, even after the resurgence of 'all is well' VIX is way higher than what you'd call 'normal markets' The S&P earnings are coming from the greatest profit margins ever, margins are mean reverting meanwhile the credit bubble has burst, the way the market is behaving right now is to act as if nothing happened, when the market realizes the 'earnings' backing their 9xx SP stock purchases are much lower than they realize and the growth will be lower than they think I can assure you, the stock market won't look 'normal' in anyway
Can't say I disagree with you and I even hope for this scenario. I've certainly had my fill of an economy dominated by financial services and am sick of guys with no skills other than a firm handshake and a pleasant manner make sick salaries as brokers and wealth managers. However, I've got to trade the market I have, not the one I want. Dow will take a stab at 10K before this current run ends.
Bernanke and Co are now officially greenshooters "In the forecast for the meeting, which was prepared prior to the release of the advance estimates of the first-quarter national income and product accounts, the staff revised up its outlook for economic activity in response to recent favorable financial developments as well as better-than-expected readings on final sales. Consumer purchases appeared to have stabilized after falling in the second half of 2008, and the steep decline in the housing sector seemed to be abating. However, the contraction in the labor market persisted into March, industrial production again fell rapidly, and the broad-based decline in equipment and software investment continued. Conditions in financial markets improved more than had been expected: Private borrowing rates moved lower, stock prices rose substantially, and some measures of financial stress eased. The staff's projections for economic activity in the second half of 2009 and in 2010 were revised up, with real GDP expected to edge higher in the second half and then increase moderately next year. The key factors expected to drive the acceleration in activity were the boost to spending from fiscal stimulus, the bottoming out of the housing market, a turn in the inventory cycle from liquidation to modest accumulation, and ongoing gradual recovery of financial markets. The staff again expected that the unemployment rate would rise through the beginning of 2010 before edging down over the rest of that year. The staff forecast for overall and core personal consumption expenditures (PCE) inflation over the next two years was revised up slightly. The staff raised its near-term estimate of core PCE inflation because recent data on core and overall PCE price inflation came in a bit higher than anticipated. Beyond the near term, however, the staff anticipated that the low level of resource utilization and a gradual decline in inflation expectations would lead to a deceleration in core PCE prices. Looking out to 2011, the staff anticipated that financial markets and institutions would continue to recuperate, monetary policy would remain stimulative, fiscal stimulus would be fading, and inflation expectations would be relatively well anchored. Under such conditions, the staff projected that real GDP would expand at a rate well above that of its potential, that the unemployment rate would decline significantly, and that overall and core PCE inflation would stay in a low range." "Consumer spending firmed somewhat during the first quarter despite the rising unemployment rate and significant financial strains. Participants generally expected that household demand would gradually strengthen over coming quarters in response to the rise in household wealth from the substantial increase in equity prices that had occurred over the intermeeting period as well as the support for income provided by fiscal policy. Nevertheless, participants judged that the recovery in consumer demand over the next few quarters would be slow, reflecting adverse labor market conditions and continuing adjustments to earlier reductions in household wealth." So the greenshooters are betting the US consumer is back at spending, well turns out they were wrong as Jan and Feb so far have been proven to be a head fake, mar and apr(fed staff did not had access to apr data) were both down and the same store sales and other pre-retail sales data indicate a weak May for Q2 The other green shoot that they point out is a rise in equity prices, this is true it will help the economy perform better than otherwise but the economy must be really in trouble when the green shoot theory points to itself as a reason on why economy will do fine
Daal, with all due respect... I think if you just focus on unemployment and consumption you may get blindsided. Yes, consumers are the biggest chunk of the economy but if you look under the hood you would see crashed stone and lumber shipments stabilizing, as well as lumber contracts retesting lows... an indication of bottoming out. Are we going upwards from here, maybe maybe not. As of today, the dollar broke down, gld is firming up, commodities currencies are moving in tandem with dollar devaluation and oil reflation. Briefly, Fed's reflation policy keeps gaining track. What are the implications? At least one sector of the sp -an important one- energy, will start to show stronger earnings. For how long and will this be derailed? I have no idea. Anything can happen, but I would be surprised to see a retest of lows.
I'm taking a look at lumber as well, however instead of trying to pin this down from the bottom up I rather look at the top down, and this leaves the IMF and Rogoff studies as guides, which both point out that things arent so rosy. Output gain in the first year after a financial crisis is 2% on avg and 3.5% for a syncronized recession, since its both now maybe 1% should be expected, quite lower than the blue chip consensus of 2.7%, fed's 2-3% and the 2-3% that seems to be inbuilt in equities right now Plus I'm preparing an entry on broad unemployment(U6) that I dont see many people talking about. Its possible that the stress tests are more flawled that they look