I share with you recent emails to colleagues and clients. The audience is more professional and thus the communications somewhat different than my usual posts. But I hope this provides a sketch of my current outlook.
22 June 2009.
Sent as a follow-up to a recent email, 10 June.
We might be at a pivot point and reversal in the [stock market] recent uptrend. On a technical basis, the SPX [S&P 500 Index] is below its 20-day moving average, has broken below the 200-day and is flirting with the round number 900. Fundamentally, forward P/E [price-to-earnings ratio] on next 12-months operating earnings seems a tad high at 18x, assuming, of course, that those earnings estimates are reasonable.
The weak dollar play is premature, in my view. Other fiat currencies vis a vis the dollar appear more weak, making the dollar the continued safe haven. Should the dollar shore up, even remain flat, then the commodities play appears legless, particularly since the fundamentals do not support a rise in prices. Having said that, although the dollar can be seen as strong relative to other currencies, it might also weaken on an absolute basis as worldwide purchasing power declines and deleveraging continues. If so, then gold might be the play. Below $900/oz, gold stocks might be attractive. Give it a couple of months because this thought might also be premature.
Please be wary of China. It is an economic paper tiger. While China stocks have risen, there’s no fundamental support for such a strong rise. Urban real estate excesses and export inventories on the docks imply that China still has problems. Reports are coming from China that demand for commodities has largely been due to nothing more than stock piling rather than based on increasing aggregate/end demand. In the future, should China enact another stimulus package, it could take away from demand for dollars and Treasurys, and possibly raise interest rates in order to entice demand for the stepped-up need for public debt to offset the decline in private aggregate demand (Keynesian economics).
Bloomberg reports today that insiders have been selling into this rally at a pace matching June 2007, two months before the credit markets [initially] froze. And during this rally, many fundamentally weak corporations — banks and REITS — sold additional shares to offset [pay down] debt, diluting [current] shareholders. While the success of these follow-ons propped stocks further, dilution concerns might reverse share prices.
My earnings capitalization model suggested a fair value on the S&P 500 at 810. That was when 10-yr Treasury was bumping against 4.0% (see June 10 email). At 3.60-3.70%, the model implies 858 as fair value. Technical breakdown, a tad high forward P/E and lack of improving corporate profits and growth supports at least a move to that level, in my view.
I remain in cash. Protecting principal and gains is paramount. Returns are a luxury.
From: Chris Monoki
Sent: Wed 6/10/2009 7:41 PM
Subject: An interim top?
Believe we might have seen the top of the current rally. Banks seem to have finished correcting from their near-demise price levels. Consumer discretionary [stocks], particularly retail and restaurants, have stalled, even after a decent consumer sentiment report. Technology has taken a back seat as well. The energy and commodity sectors have become the leaders, probably because of the prospects of a weak dollar, but certainly not on fundamentals. [The] 10-year US Treasury rates is near 4%, which has become increasingly attractive vis a vis equities.
I see no fundamental improvement on corporate profits. Aggregate demand has shifted down and to the left. Deleveraging of over-indebtedness continues. Corporate top lines remain weak; profits have largely come from expense controls. Valuations, in general, have risen to levels my earnings capitalization model had (1004 on the SPX). But with increasing interest rates and a technical stall in equities, stocks seem poised to go lower.
[My] earnings capitalization model [is] now at 810.
I remain in cash.