"Buying Here Is Like Picking Pennies In Front Of A Steamroller" - 10 Reasons To Be Bearish From Credit Suisse

Just like the ongoing fascination with $50 oil, everyone wants to know if the S&P will rise above the psychological level of 2,100 (or hit Jeff Gundlach's "all green" level of 2,200). To be sure, this comes at an awkward time for the big banks, many of whom, Goldman and JPM most notably, have recently warned that the market is either poised to drop, or that every rebound in the S&P should be actively sold (something both the smart money and retail investors have been doing aggressively and as buybacks have trickled down in recent weeks, many are wondering who is buying).

Today, JPM seems to relent modestly on its recent macro pessimism, and notes that for the very near-term, the debate may lean (very slightly) in the favor of bulls for two specific reasons: 1) China appears to be pursuing a strategy of relative CNH/CNY stability (i.e. very orderly and gradual weakening) and 2) investor sentiment remains bearish and skeptical. 

However, JPM adds, the latter tailwind has lessened (in fact many are beginning to think the SPX will continue squeezing to >2100) and China remains a risk (Chinese financial officials will apparently press their American counterparts on the Fed’s tightening schedule during the upcoming June 6-7 economic summit between the two countries).  Meanwhile, valuations can’t be ignored (they are stretched at present levels).  To justify a sustained move through 2100 one needs confidence in a $130+ EPS number for ’17 and clarity on the big outstanding macro issues (what fiscal and monetary policy levers does Japan pull?  Does the Fed hike in the summer?  Who wins the US presidency in Nov?) and neither is likely for the time being.

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Then, to balance out JPM's modest bullish tone, Credit Suisse chimed in with a handy list of 10 key reasons why investors and traders should be cautious. Here they are.

  1. Little margin for error.  Multiples are elevated and the economic/earnings cycle is aging – this means the margin for error is small and shrinking and thus chasing the SPX at 2100+ is akin to “picking up pennies in front of a steamroller”. 
  2. The Fed is a risk.  Expectations for a June or Jul hike have risen but there is still a lot of uncertainty about how FOMC policy will play out this year and the implications 1-2 tightening steps would have on FX, growth, equities, etc.
  3. Central banks are no longer helping.  Central banks have adopted the Hippocratic Oath when it comes to policy: “do no harm”.  But they no longer can provide material upside support as policy returns diminish (and policy mistakes are still possible, something evidenced by the BOJ NIRP decision on 1/29).  Thus while CBs can help forestall sharp sell-offs, they aren’t equipped right now to drive fresh highs. 
  4. Global growth likely won’t accelerate in the coming year.  US economic momentum looks better than the Q1 numbers suggested but GDP still can’t break sustainably above 2%.  Meanwhile, China growth trajectory appears to have lost some steam in Q2.    
  5. The US political outlook is very uncertain.  Early polls show Trump and Clinton running very close (and Clinton meanwhile is still battling a two-front war w/Sanders staying in the race while her email problems won’t go away).  The GOP majority in the House is likely safe but the Senate is very much up for grabs. 
  6. The US isn’t the only country to face political uncertainty thus year – potential Japanese snap elections, Brexit 6/23, Spanish elections 6/26, Australia election 7/2, Italy constitutional reform referendum in Oct, etc. 
  7. Valuations aren’t cheap.  2016 isn’t even half over and thus investors can’t simply shift to 2017 forecasts just yet and on estimates for this year valuations are stretched.  Meanwhile investors should be hesitant to take at face value the current ’17 consensus of ~$130+ (note that at this time last year the consensus called for $130 in ’16 EPS). 
  8. GAAP and non-GAAP differential is widening.  SEC officials have been growing more vocal about the bourgeoning chasm between GAAP and non-GAAP earnings and this will likely become a growing issue going forward.  Equity valuations become significantly more expensive on GAAP numbers. 
  9. Regulatory scrutiny could make mgmt. teams reticent to engage in large M&A.  Regulatory opposition has killed a number of big deals including TMUS/S, CMCSA/TWC, AMAT/Tokyo Electron, SYY/US Foods, GE/Electrolux, ODP/SPLS, HAL/BHI, PFE/AGN, and more. 
  10. Impaired liquidity conditions – this problem has been felt most acutely in HY but even the world’s most liquid markets (like Treasuries and FX) are suffering problems too.  

Just to be balanced, Credit Suisse also shared its reasons to be bullish, key among which was the following:

  • Valuations aren’t crazy (esp. on ’17 numbers).  On ’16 consensus EPS forecasts, multiples are rich (consensus range is ~$120-123 – at $123 the current PE is ~17x).  But on ’17 numbers valuations aren’t ridiculous.  Thomson is penciling in ~$130.70 in ’17 EPS while the Bloomberg estimate is higher at $133.  On $130 the current PE is 16x.

Well, yes, and here's why on a 2017 basis valuations are not crazy: because somehow consensus is convinced that in 2017 earnings can soar by 14% - this would be the biggest rebound in non-GAAP EPS since the crisis.

Meanwhile, GAAP earnings are < $90 and at a level last seen in 2010, when the S&P was 500 points lower.

The other reason is far more realistic, even if it directly contradicts point #3 from the bearish list above:

  • Equities could become a larger component of BOJ and ECB policy.  The BOJ is already buying equities but will prob. ratchet higher its purchases at either the June or Jul meeting.  The ECB is on hold for now but could very well wade into stocks should inflation trends not pick up (this was discussed in a recent Reuters article http://goo.gl/otAk8y).      

Why of course: when it becomes a matter of overt policy (as opposed to "conspiracy theory") that activist central banks are in the business of putting short sellers out of business, that will surely be the moment to go all in the "market."


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