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Notes to myself, possibly of interest to others.
-- Bill Northlich

Thursday, July 8, 2010

Vitus Update - Quit while I'm ahead? Plus, Optimism (!)

Bragging:  On April 21 I sent an Update saying the market was near a top.  The top came on the 23rd at 1217 (!).  Last Tuesday I sent out a "warning" that the S&P was getting close to the resistance level of 1040.  It closed last friday at 1022.  Consensus is it could get to 880 in the next few months.  I agree, but beware of people who say a thing "could" do X.  Yesterday the market was up.  Today it's sort of up.

I've consistently been grumpy about the near/medium term prospects for the economy and the markets.  I've harped on the investment themes of bonds (US and corporates), dividends, quality stocks, and gold, all of which have done well, and which I continue believe in.   Another theme of "Emerging Markets", especially through commodity-producing first-world economies - has done not so well, at least since the aforementioned "top" call.

Constant themes still negative:  The constant "metrics" I follow and relentlessly quote in this Update remain (relentlessly) negative.  employment, the most (IMO) important by far, and housing both had a bad June.  Consumer credit continues biting the dust, although the results there are mostly only through May.

Sometimes the market predicts the economy, sometimes vice-versa.  Right now they seem to be predicting each other.  And here's a very analysis-based observation:  To me, the macro market/economic environment sure has the "feel" of the summer of '08 to it.  

Whadaya mean, Optimism?  IMO, there is one factoid which might significantly ameliorate a near/medium term double-dip recession, and that is the fact that in general corporate balance sheets are healthier than they've been in - well since I've been following markets closely (early 90's).  Corporations are sitting on a cash hord of  $1.6T.  The main reason for this is expense (staff) cutting during the downturn.  But nowadays, like private equity, companies don't see anything to invest in.

IMO (again), this unusual abundance of financially healthy corporations is under-appreciated in the market - or at least by market commentators, and very well could be a counter to economic pessimists like myself.  I have actually privately asked my hero David Rosenberg about this issue.  He thinks the corporate cash hord actually supports his pessimistic scenario, at least investment-wise, in that healthy corporate balance sheets mean healthy corporate bonds, which play to his safety and income themes.

Speaking of Rosenberg, his latest of 7/5, notes that he keeps being asked if there is anything optimistic he can say.  Without further comment, he offers

First, the correction along with rising payouts has led to a 30 basis point rise in the S&P 500 dividend yield in the past six months, to 2.2%. That is about 40 basis points better than you can get from the belly of the Treasury curve. Second, on consensus earnings estimates, the P/E ratio, at 12.5x, generates a decent 7.9% earnings yield, which is equivalent to the yield an investor garners today from the junk bond market.

And then, a bit grumpily, on 7/8:
Screen shot 2010-07-08 at 10.19.44 AM.png
...given that temp employment is running at a near 20% trend in June, albeit from easy comps this time last year, the trend in private payrolls could rise further in the next few months. In October, temp agency employment should start seeing its YoY trend slow down given that it will hit some very hard comparisons.

James Hamilton of UCSD has a recent Econobrowser blog post outlining his opinion that the situation, though unpleasant now, is not double-dip material.

Barry Ritholtz, whom I cite often in the blog, is of the same opinion as Hamilton, and turns one of Rosenberg's weapons against him, citing a different ECRI leading indicator than Rosenberg, which shows more optimism.

Warren Buffett (reported 7/8) says "We’re coming back, no question in my mind".
Finally, I've said, and basically believe, that we erudite few who vie to out-pessimise each other have a problem:  We loose sight of the fact that regular people think and plan mostly about an optimistic future.  Frequently and inexplicably they don't conform to uber-pessimistic scenarios just because econo-folk opine that they will.


The Middle Class is dwindling.  Basically, less Middle Class, less consumer activity.  Consumers consuming is 70% of the economy.  To me, this is the true tragedy of the crisis and it's on-going aftermath.  

My secret sources say that gold will likely continue to meander lower into August, then very substantially rally into the end of the year.  The sources also say that the government will likely produce another stimulus - of some kind - in order to prime the sinking economy.  Said stimulus should give a huge (additional) boost to the US stock market.  The original time frame for this has been the first of 2011.  However now that the cat is out of the bag, maybe it's much sooner.  That could whack gold significantly (there's that "could" again).  

And, stocks-wise, don't forget that the election is coming up.  US majority administrations have traditionally found a way to goose the market ahead of elections.  I would maybe think they would wait for the presidential elections in 2012 to play a last card. OTOH, it will take time for a stimulus to stimulate.  OTOH...  Sigh.

Hope these musings are somewhat helpful; all for now

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