Tuesday, February 17, 2009
Saturday, February 14, 2009
Earnings Will Get Even Worse
Last week I said that 2009 as-reported earnings estimates for the S&P 500 would be dropping. 2008 earnings had dropped to $29.57 as I wrote the letter. They are now down to $28.60. One of my favorite analysts is David Rosenberg of Merrill Lynch. His forecast for reported earnings for 2009 is now down to $28. That puts the P/E for the S&P 500 at 30.
He also projects "operating" earnings to be $55 for 2010. And, as he writes today:
"For those looking for a silver lining, at least we are going to have a deeper bottom to bounce off. Applying a classic recession-trough multiple of 12x against a forward EPS estimate of $55 would imply an ultimate low of 666 on the S&P 500, likely by October if our estimate of the timing for the end of the official downturn is accurate."
That is a 20% drop from today's close of 829. That is not what you will hear from "sell-side" managers who want you to invest in their mutual funds and long-only management programs.
I noted the problem with the rest of the world earlier. 40% of the earnings for the S&P 500 are from outside the US. It is hard to see how those earnings are not going to be deeply affected. Let me reiterate my continued warning: this is not a market you want to buy and hold from today's level. This is just far too precarious an economic and earnings environment.
Given the probable ongoing bad news from financial and consumer stocks, plus the depressing news on bank losses coming down the road, why take the risk?
Friday, February 13, 2009
Oil Price Projection
Lower oil prices should provide a modest offset, boosting consumers’ discretionary spending power. Our commodities team expects WTI crude to average $35/bbl over 2009 − lower than today’s $40/bbl − while recovery will lift quotes back to $55/bbl in 2010 (see Global Oil Outlook – 2009: The Global Engine, Stalled and Flooded, February 2, 2009). Lower oil prices are only one factor behind the plunge in inflation. The deepening downturn has intensified the risk of deflation, as rising economic slack increases the prospective US output gap to more than 7%. Slack overseas will put downward pressure on import prices, and the dollar has strengthened. We think aggressive monetary policy, a global rebound, and increased commodity prices will prevent US inflation from slipping below zero − but the risks, especially over the next year, are tilted toward lower inflation.Morgan Stanley - Global Economic Forum
Saturday, January 10, 2009
Forecast 2009
: Deflation, Deleveraging, and the Stimulus Effect For a very long time, I have been adamant that deflation is in our future. In the next few pages I outline how inflation might come back, but I doubt it will be this year. For now, deflation is the economic factor that the Fed and central banks will be battling. And believe me, it will be a very large and controversial battle.Thoughts from the FrontlineMany auto plants, both in the US and abroad, are simply going to have to be closed. "Super-efficient Toyota expects its first operating loss in 70 years in the fiscal year ending March 31. Weak sales in China will probably force many of her 80 automakers to merge. Russian sales dropped 15% in November and 25% in Brazil from a year earlier." (Gary Shilling)
Just as there are too many auto dealers and too much auto manufacturing capacity, there are too many stores for a country whose consumers are in retreat. Consumer spending could easily drop 7% as the saving rate heads back up to 5% (or even more). It is estimated that over 70,000 retail stores will go out of business in the next six months. That would be in line with the 140,000 that closed doors last year. The economy and its businesses have to adjust to a new level of spending that will be the first serious consumer recession in 26 years.
Unemployment could rise to 9-10% or more this year and on into 2010. That means we could easily see another 3 million lost jobs over the next year. That is going to put a lot of negative pressure on consumer spending. It also means that wages are not likely to rise, and we have already hard evidence of wages falling in many industries as companies try to find ways to remain solvent.
I would be a buyer of quality bonds, both corporate and municipal. The key is to have a bond analyst who knows what they are doing and not just looking at ratings. There are some real values in the bond market today.
I would not be a buyer of US government debt. Treasuries, if not in a mini-bubble, have little upside potential and just don't yield enough. Why would I hold a ten-year treasury for 2.39%? I like TIPS at these prices. TIPS are pricing in deflation for ten years and, as I outlined above, I don't think the Fed will allow deflation to take hold.
With all the massive printing of money, you would think I expect the dollar to crash. I don't. The question is, what will it fall against? The euro? Really? The pound is better valued, but England and Europe are going to have to cut rates and apply massive stimulus as well. Every developed country will have problems. I can see holding Canadian, Australian, and other commodity-country currencies, but the leverage needed to make it a reasonable investment potential is too risky for individuals.
I can't see the Japanese letting the yen get too much stronger. China seems to want to halt the rise of the yuan, and the rest of Asia will devalue their currencies to maintain whatever they think of as a competitive advantage. Longer term, I like Asian currencies.
After a year of bouncing around, gold may be poised to rise against all major currencies. We could easily see new highs in the next year.
I think oil is going lower (and maybe much lower -- can you say $1-a-gallon gas?) in the near term. As I have written about before, oil is now in the steepest contango on record. That means oil is cheap today and more expensive in a few months. That is not normal. Oil is bidding for storage. You can make 20-25% on your money in a few months if you can buy oil and find somewhere to store it. At least 25 supertankers have been leased to store oil, and sources say another ten are being bid for. It remains to be seen if OPEC can really cut enough to make a difference in the near term.As for the other metals, I think it is quite likely copper and its industrial allies will fall in price at least for the near term, until production can be cut and demand in Asia begin to rise again. I would not be a buyer of long-only commodity funds for the near term. Someday the bull market in commodities will return, but not until Asian demand picks up.
Wednesday, January 7, 2009
The Oracle of 2009
The SPX should rally to 1150 or so and then decline to at least 600It is likely that we will reach the 1994 previous wave lows of SPX 430 before this Bear ends in 2010 to 2011, but in 2009 a more realistic target is the next support area near the 1996 lows of SPX 600.Safe Haven | The Oracle of 2009
Since we dropped 50% from the highs in 2008, we will probably do the same in 2009 and that means a rally to the SPX 1140-1200 level in the first half of the year before we decline to the 550-600 level in the second half. Since this Bear is more severe and unfolding faster than I expected, we must also consider a darker scenario that sees the highs of 2009 closer to the 1000 area and a second half decline to the SPX 500 level in 2009.
Wednesday, December 31, 2008
Stock Market Forecast and Strategy for 2009
Going forward for 2009 then the best way I see to make money will be to short the market averages once/if the S&P 500 rallies above the 1,000 level. If this rally continues into the first week of January I'd expect it to come to an end by mid-February at the latest. If we get in on the short side then cover and take profits on a move back down near the November low.Then sit back and see how the sectors evolve. If they still don't perk up short the next rally. If more of them get into bullish configurations then do the research on individual stocks and companies with a plan to buy in big. If the bear market is over then on a retest we'll start to see some sectors stop falling with the market averages and a positive divergence begin to firm in the NYSE advance/decline line. That will be a sign that we need to shift our attention to buying individual stocks in the best sectors to prepare for a new bull market.Safe Haven | Stock Market Forecast and Strategy for 2009
Monday, December 22, 2008
6 New Ways to Triple Your Exposure With ETFs
6 New Ways to Triple Your Exposure With ETFs | ETF Trends
- Developed Markets Bull 3x Shares (DZK)
- Developed Markets Bear 3x Shares (DPK)
- Emerging Markets Bull 3X Shares (EDC)
- Emerging Markets Bear 3x Shares (EDZ)
- Technology Bull 3x Shares (TYH)
- Technology Bear 3x Shares (TYP)