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My Stock Market View for the Rest of 2011
Down, then up, then down again. How about that? I believe that the global risk markets will bottom sooner than people think, and that the time has come to compile a shopping list of investments to pick up on distressed days in the market.
I think that at the most extreme, the S&P 500 will bottom at 1,000. At this level, the index will be showing a 28% decline from the April 29 peak. The market multiple will have collapsed from 14 to 10 times earnings. That is against a 30 year range of 10-22. In other words, we will have discounted a full scale recession. Ten year Treasury bond yields are telling us the same with a 1.90% yield, against a 3.6% inflation rate.
The likelihood is that this recession is not going to happen. Virtually all the current economic data is consistent with the forecast I have maintained all year of 2%. Car sales show that the industry is recovering. Major exporters like Caterpillar and Freeport McMoran show the demand from emerging markets is booming. An enormous reconstruction package in Japan is just starting to kick in. Add all this together, there will be enough demand to assure 2% growth for the full year, which would represent a modest improvement from the first half.
Mind you, I am not proclaiming the birth of an entire new bull market. I believe that we put in the top for stock prices for this economic cycle on April 29 at 1,384, and it is unlikely that we see that print again. My best case scenario will be for a recovery of the 200 day moving average at 1,285. If we start this move off of a 1,000 bottom then there is room for a 28% move, certainly something worth taking a bite of.
What will be the drivers of such a move? In September, we will start releasing Q3 corporate earnings, which are likely to be buoyant. We will also start to see the traditional yearend liquidity push. Europe will hopefully go quite again, once the leadership returns from summer vacation. The icing on the cake would be any surprises from the Federal Reserve on the monetary front at their September 20-21 meeting, as they did last year. All of this will pave the way a rise in risk assets everywhere that could last three to four months.
That gets us into 2012, when the real challenges reassert themselves. Very little about the presidential election is likely to be equity friendly. Arrest Ben Bernanke for treason? Really? Where’s the rally in that? Gale force headwinds on the demographic front start to kick in and the first baby rooms reach the age of 66 and dramatically pare back spending. Corporate earnings will then hit diminishing returns.
Real estate promises to take another leg down, possibly as much as 25%. This will put the banks through the meat grinder once more, but this time there will be more TARP. You can forget about getting any help from congress on the economy either. It all sounds like a replay of 1937 to me, when the government ended stimulus too soon, triggering a secondary great depression. This could all add up to a real crash of the 2008 variety, with declines of 50% or more on the menu.
So what I am proposing here is not an investment, but a trade. It assumes a dead cat bounce in PE multiple from 10 to only 12.8. Preserving your capital will be the name of the game, while pulling in what incremental trading income that you can.
How could I be wrong? If failing stock prices deliver a self-fulfilling prophesy. If this summer’s melt down in risk assets frighten consumers into paring back spending and corporations into backing off from capital investment, then my growth targets above will like high, and we are already in a recession. Call us “dead men walking.”
It is also possible that structurally low growth is forcing a permanent downshifting of the market’s multiple range from 10-22 to 8-16. Then risk assets will begin plumbing far greater depths. This could also happen if any of the long list of structural negatives listed above accelerate. The only way to stay alive in these markets is to believe that all things are possible at all times.
I don’t know if any of you have noticed, but I have run up seven consecutive profitable trades for my Macro Millionaire trade mentoring program in the past month. Since August 10, the year to date performance for my virtual hedge fund has soared from 19.14% to 36.32%. That easily places me at the absolute top of hedge fund performers during a period when long time veterans in the industry were getting carried out en masse.
I managed to nail the $110-$122 range in the S&P 500 (SPY) early, trading the options from both the long and short side. I played Euro (FXE) shorts for fun and profit. I also caught the two spikes in gold up to $1920, bringing in almost instantaneous profits in puts on the (GLD).
Buying Bank of America (BAC) stock the day before Warren Buffet made his strategic move, causing it to spike 25%, proved to be prudent. The Russell 2000 vaporized after I went short at $74 through the (IWM). The grand slam came with a Swiss franc (FXF) short days before the authorities pegged it to a rapidly weakening Euro, taking my puts up a stunning 400%.
For those who wish to participate in Macro Millionaire, my highly innovative and successful trade mentoring program, please email John Thomas directly at madhedgefundtrader@yahoo.com . Please put “Macro Millionaire” in the subject line, as we are getting buried in emails.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
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Did this guy just break his arm patting himself on the back? He's about as good as Goldman, never making a mistake...oops, never acknowledging a mistake...
The only clamping-down-on I'm doing is buying more Silver and some Gold. No more cheap plastic crap from China. I can't wait to see what scheme they come-up with this holiday season to get Americans to shop/spend? Maybe they'll just fudge the numbers again thru rose colored lenses....... BLS = Ballistic Little Schills
Tout.
High on scecondary hopium smoke if you think the S&P500 will bottom at 1,000. It is good you acknowledge the downside risk.
Fair market price for the S&P 500 is 900. We will overshoot 1000 enroute to about 700-800. Buy in that range if you're a bottom feeder....
For as long as technicals matter, you have a good call, for as long as technicals matter.
Right. For as long as technicals matter, indeed. So, let's look at this key sentence again:
"How could I be wrong? If failing stock prices deliver a self-fulfilling prophesy. If this summer’s melt down in risk assets frighten consumers into paring back spending and corporations into backing off from capital investment, then my growth targets above will like high, and we are already in a recession. Call us “dead men walking.”
Technicals are important. If for no other reason than so many people follow and act on them. Of course, they can't analyze fundamentals, and they can't see trends in the overall world economy, which is why it takes a combination of technicals, fundamental research, and a keen awareness of currrent events around the world to make sound decisions.
I subscribe to ChangeWave Research. I won't post proprietary information here, but I can assure you that corp capex is headed down. The survey numbers are in, and 4th qtr spending for IT companies is on course to be one of the 3 worse quarters in the past 10 years. And, guess what? Consumer spending is headed down, too.
This thing could bounce from 1000 to 1280 before falling even further. Go back and look at 2008. Hell, it went up 15% in a day and a half in October. Didn't stop it's eventual collapse. It all depends on your time frame. However, I wouldn't try and play a move like that with someone else's money and I certainly wouldn't do it with mine. too much chance we are in the real end game here, the death of the social democratic welfare state.
I kind of have to agree with you. In this environment, anything is possible.
Yes, the market can rally, but no, I can't agree with your reasons. Manipulation is the only bullish thing I can see.
First of all, two decades of stimulus failed to stimulate the Japanese economy, so how is the rebuilding package going to do any better?
Nobody knows that the growth rate of the US economy is, the numbers are all doctored and inadequate. The same people that predicted a recovery before are no more reliable today.
Time to bone up on your history. That little bit of Keynesian claptrap is no longer credible. Neither is the one about how wars help an economy. One excellent book on the subject is "FDR's Folly." You can get it on iPod, and it's worth listening to more than once. It's that good.
Overall, a good article. Anything is possible, but the boomers are clamping down on spending and the economy will not recover due to the demographics alone, leaving aside all the damage they have done to kick the can and buy up all the cheap gold they can get.
Nothing makes me stand up an listen more than another self promoter telling us how great their picks have been in the past. Where's the barf bag - fast!