12.18.09
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12.18.09 The following are some samples of the way analysts work over the data to come up with a prognostication. The fundamental picture: Note: Investors lost 57.7% from 1576 to the 666 low. They have gained 68% back from the low. One still needs to make another 43% from here to get back to the high. So the basic question is, can we drive earnings quickly enough to justify the current high valuations? Let’s take a look. The consumer drives two thirds of the economy. The consumer is retrenched and focused on paying down debt and saving, not spending. There is a very revealing study by the Pew Center on state taxes, called "Beyond California". Everyone knows how bad California is. The Pew Center looks at how the rest of the states are doing, and focuses on 10 states that also have severe problems. Sales tax receipts are down 14% in Arizona, and state income taxes are down 32%. On average, revenues are down almost 12%. Oregon has seen their revenues collapse a stunning 19%. New York is down 17%, with a deficit of 32%. Illinois has a projected deficit of 47% of its budget, second only to California with 49%. The Liscio Report notes that all states had negative year-over-year sales tax collections in October, and the weighted average decrease was 10.2%, down from a negative 7.2% in September. (www.theliscioreport.com)” Consumer sentiment indicators are negative. Why? The consumer is tapped out. Nearly one third of all mortgages are under water (the house is worth less than the outstanding mortgage balance). Credit cards are maxed out and home equity lines of credits are capped and/or pulled back. Unemployment is roughly 10%. Where are the new jobs going to come from? Are employers ready to hire today? Government stimulus has gone to the banks and bank lending to businesses has dropped $250 billion. It is not in the system. The velocity of money is dead. Local and State governments are in dire financial shape, state pensions are underfunded, and they will need to both borrow and raise taxes. Our federal government is running up trillion dollar deficits, financed by massive borrowing (issuing bonds that the very banks they bailed out are buying vs. using that capital to lend into the system). It is going to be tough to grow earnings with rising government debt, the unwinding of massive amount of private sector leverage, and the near 100% probability of much higher tax rates at all levels: local, state and federal. Two of the smartest fundamental guys on the planet, Mohammad El-Erian and Bill Gross from Pimco said recently, “The six-month rally in risk assets, while still continuously supported by policymakers, is likely at its pinnacle.” El-Erian and Gross believe stocks will return 4% on average over the next 7-10 years and bonds returning 2% as we work our way to a “new normal” as they have coined it. This from John Hussman recently caught my eye, “In my estimation, there is still close to an 80% probability (Bayes' Rule) that a second market plunge and economic downturn will unfold during the coming year. This is not certainty, but the evidence that we've observed in the equity market, labor market, and credit markets to-date is simply much more consistent with the recent advance being a component of a more drawn-out and painful deleveraging cycle. Meanwhile, valuations are clearly unfavorable here, and even under the "typical post-war recovery" scenario, we are observing an increasing number of internal divergences and non-confirmations in market action.” Why this is not the onset of a new secular bull market - Comparisons with August 1982 • P/E Multiples were 8x, not 26x. • Dividend yields were 6%, not sub-2%. • The stock market was trading at a discount to book, not a 2x premium. • Monetary policy was aimed at reducing money growth and inflation rates, not creating both as is the case now. • Fiscal policy was aimed at reducing nondefense spending, not accelerating it. • Deficits were peaking and coming down, not surging to 10%+ relative to GDP. • Global trade barriers were being torn down; not erected. • Deregulation back then was in; today it is all about re-regulation and government ownership. • Union membership was on the way down; today it is back on the rise. • The dollar was entering a Plaza Accord bull market, not a mercantilist bear market. • Credit, household balance sheets and participation rates were expanding, not contracting. • Tax rates, income, capital gains and dividends, were declining then; rising now. David continues, “In 1982, Ronald Reagan was President (two consecutive terms as Governor of California), Don Regan was Treasury Secretary (35 years of financial sector experience), Martin Feldstein as the Chief Economic Advisor to President Reagan (the dean of business cycle determination), and Paul Volcker was Fed Chairman (9 years of prior financial sector experience). Compare and contrast to Barrack Obama (junior senator from Illinois for 3 years); Timothy Geithner (21 years experience in government, three years as a lobbyist); Larry Summers (no private sector experience; 27 years of academia and government) and Ben Bernanke (no private sector experience; 30 years of academia and government).Which team do you think deserved the higher multiple — the one with actual experience in the real world or the one immersed in academia and government? And nicely summed up in Ned Davis Research’s December 2009 Special Report: “This review of secular bull and bear markets has demonstrated that a market’s secular state has a lot to do with investor and consumer sentiment, and the extent to which the sentiment is aligned with the economic fundamentals. Secular bull markets and secular bear market trends end with valuation extremes.” (Secular means long-term trend) Next Week: We will only have 31/2 days of trading so volume will be ultra-light and we don't expect too much to be going on of any importance. We remain 100% in Cash. We hope all of you have a very happy holiday. Merry Christmas, till next time. The MTA Staff |
