On a closing basis, the S&P; 500 stopped going down right at the 1,091


level, which has acted as key support four times now since last November.  Now that the index has found support in the short-term, traders will focus on the 50-day moving average as the next level of resistance, which is about 13 points above the index’s current level.

Bespoke Investment

Dennis Gartman is not optimistic that it will hold:





An excellent read, as usual. I do not agree that the market is worth 850 (see US EQUITIES VALUATION ANALYSIS: DUCK, YOU (HAPPY) SUCKERS!) , but all else is vintage Grantham. Read it all and more here.

My view of the economy’s future is boringly unchanged: “Seven Lean Years.” I still believe that after the initial kick of the stimulus, we will move into a multi-year headwind as we sort out our extreme imbalances. This is likely to give us below-average GDP growth over seven years and more than our share of below-average profit margins and P/E ratios, so that it would feel more like the bumpy (bumpy, but not so disastrous) 1970s than the economically lucky 1990s and early 2000s.

In contrast to predicting the impossibly difficult real world, predicting market outcomes is relatively straightforward. Profit margins and P/E ratios always seem to pass through fair value if, and it’s a big if, you can just be patient enough.

(…)  But the bigger danger is that once again the Fed is playing with fire!
Whenever the Fed attempts to stimulate the economy by facilitating low rates and rapid money growth, the economy responds. But it does so reluctantly, whereas asset prices respond with enthusiasm. In our studies of the Presidential Cycle we have shown that, historically, where
modest Fed stimulus and some moral hazard hardly move the dial on the economy in the third year of the cycle, they  push stocks up almost 15% a year above normal and risky stocks even more. (…)

Now, though, after our massive stimulus efforts, the Fed’s balance sheet is unrecognizably bad, and the government debt literally looks as if we have had a replay of World War II. The consumer, meanwhile, is approximately as badly leveraged as ever, which is to say the worst in history. Given this, we would be well advised to avoid a third go around in the bubble forming and breaking business.

Up until the last few months, I was counting on the Fed and the Administration to begin to get the point that low rates held too long promote asset bubbles, which are extremely dangerous to the economy and financial system. Now, however, the penny is dropping, and I realize the Fed is unwittingly willing to risk a third speculative phase, which is supremely dangerous this time because its arsenal now is almost empty.

I do not regret the bailout, although half as much to bankers and more to people with hammers insulating roofs would have been better. With ships lining up by the hundreds outside Singapore harbor, unloaded for want of letters of credit and other basic financial services, our financial leaders had better have acted fast. And they did. Not efficiently. Not fairly. And certainly not frugally. But they thawed the global real world, which was freezing rapidly.

I thought in return for the pain we had all learned some lessons. I was naïve. Congress will probably stay in the pocket of the financial world, and few useful changes will  be made. Investors, traditionally reluctant to burn their fingers badly twice in a generation, line up to buy risk and bid down spreads as if eager to suffer for a third time in a decade. (…) Normally, investors appear to have longer memories than rabbits, but not this time! And the Fed, having learned nothing, still worships at the Greenspan altar. Overstimulus was painful in the 2000 break and extremely painful in 2008, but the Fed soldiers on with its failed strategy like Field Marshal Haig in World War I (“The machine gun is a much over-rated weapon.”).

So all investors should brace for the chance that speculation will continue for longer than would have seemed remotely possible six months ago. I thought last April that the market (S&P; 500) would scoot up to 1000 to 1100 on a typical relief rally. Now it seems likely to go through 1200 and possibly higher. The market, however, is worth only 850 or so; thus, any advance from here will make it once again seriously overpriced, although the high quality component is still relatively cheap. EAFE equities seem a little overpriced, emerging markets more so, and fixed income seems badly overpriced, especially cash, which is awful. Exhibit 2 shows our current 7-year forecasts.

The real trap here, and a very old one at that, is to be seduced into buying equities because cash is so painful. Equity markets almost always peak when rates are low, so moving in desperation away from low rates into substantially overpriced equities always ends badly. So this is a dilemma. In 2010, value purists will have to struggle increasingly with the Fed’s continued juicing of the markets. In order to control real risk – the risk of losing money – they will be forced to take the increasing  career and business risk of lagging a rising market. Our choice – by no means a “solution” – is to only very slightly underweight global equities on the grounds that, when tilted to quality, they are still adequate in terms of
return potential. We also have to swallow our distaste for parking the rest in unattractive fixed income. And if the equity markets are indeed driven higher in the next six months, which, unlike my view of last summer, now looks to be at least 50/50, we will very slowly withdraw
equities: eight times bitten, once shy, so to speak, for in these situations we typically beat a much too rapid and enthusiastic retreat. If we do see a substantially higher market in the next few months, we will probably underperform, but likely not by much.

There is perhaps, though, one saving grace: the risky stocks have already been driven to extreme overpricing. Further attempts to drive the market higher (they may not be deliberate attempts, but does it matter?) will probably result in a much broader advance in which high quality stocks should hold their own or even outperform. Believe it or not, they can outperform on the upside, and these times tend to be: later in bull markets, or when they are relatively cheaper than the rest of the market, or both. (More quantitatively, high quality stocks have outperformed in more than 40% of up months and approximately 60% of
the time when they were relatively very cheap, as they are now.) For the record, they also outperformed in 1929 and 1972, at the end of the first two great bull markets of the 20th century, and held level in 1999. In a continuing rally, even level pegging for quality would be a great
improvement over 2009. And, if the market surprises me and goes into an early setback in 2010, then quality stocks should outperform by a lot.

What could cause an early setback would be some random bunching up of
unpleasant seven-lean-years data: two or three bad news items in a week or two might do the trick. This would suit me – cheaper is always better – but given the Fed’s intractability, it seems less likely than some further gains. For the longer term, the outperformance of high quality
U.S. blue chips compared with the rest of U.S. stocks is, in my opinion, “nearly certain” (which phrase we at GMO traditionally define as more than a 90% probability).

GMO 7-Year Asset Class Return Forecasts*
As of December 31, 2009



Equity Pullbacks Are Part of Every Recovery Year

Despite rebounding gaining 0.5% on January 25, the S&P; 500 is still down 4.6% from its January 19 cyclical high of 1150. At this juncture, it is important to keep in mind that equity pullbacks are part of every economic recovery. As the table below shows, the amplitude of the average pullback twelve months after the end of a recession is13%, or
8.8% if we exclude 2001. The reason we do not view the 2001 episode  (-33.8%) as a probable scenario this time around is back then, the S&P; 500 was trading at 21 times forward earnings. This is well above the current valuations of around 14 times. As such, we would not expect to see a larger-than-average recovery pullback in the coming months. The improving economic backdrop remains supportive of equities.




It’s still relatively early in the Q4 earnings season, with about 20% of S&P; 500 companies reporting. We’ll have a better view on Q4 earnings after next week as 130 S&P; companies and 12 Dow companies report.

Outside financials, which are bungee jumping off a super-depressed base of a year ago earnings, eps are tracking 9% YoY.

So far, nearly 80% of companies that have reported have beat expectations, which is significantly above the long-run average of 60%. On average, companies have beat analyst expectations by about 21% (long-term average is 2%).

While earnings have been strong, revenue results have lagged. On this basis, the blended rate is 5% year-over-year, which is lower than last week’s rate of 7%. Once Financials are stripped out, revenue growth is sitting at the grand total of 0% — down a percentage point from a week ago even as bottom-lines improved. The question going forward is how much more companies can cut costs – at some point sales need to increase in order to increase earnings. (on that, see the “profit” section of US EQUITIES VALUATION ANALYSIS: DUCK, YOU (HAPPY) SUCKERS!)

David Rosenberg



(…) Note then the chart thisimage  page of the NASDAQ which has rather clearly broken its upward sloping trend line that extends back into the
lows of last March. Note further that as prices have fallen in recent sessions, the volume has exploded to the upside. Volume waned as then market rose, but it
is rising as the market falls. This cannot… absolutely cannot… be viewed bullishly!

Dennis Gartman



Dennis Gartman minces no words. His trader view is very negative on US equities and the US dollar.

In a show of anti-capitalist audacity we cannot recall having heard from an American president in our lifetime, and which we hope never to hear from an American President ever again, President Obama said that it was his intent to reform the nation’s banks, to outlaw the notion of proprietary trading within any of the nation’s banks, to fundamentally shift the notion of what a bank is and what it can do… and he finished by say that if the banks wished to “fight him on this, [he] will fight.”

Upon listening to his comments we were completely taken aback. We were stunned by the vehemence of the comments he made. We were astonished at the virulence of the anti-capitalist “line” he was taking. We were shocked by the vitriol. We were amazed at the fact that he seemed not only not to have been chastised by the election loss suffered by the Democrats in Massachusetts earlier this week, but he instead seems to have chosen an aggressive counterattack. To say we were shocked is an understatement of the first order, but shocked we were and dismayed the market shall be.(…)

President Obama used almost precisely the same language (than Kennedy) when taking on the “bankers” yesterday, and indeed in reviewing what President Obama said yesterday we were struck by the fact that it seemed he might well have lifted the text of President Kennedy’s attack upon the steel companies and simply inserted the word “banks” for “steel companies” at almost every turn…except he added his vehement “I fill fight you” language to make certain that everyone, everywhere understood his intention.

When President Kennedy made his attack upon the steel companies, the Dow Industrials at the time were trading 765, and they plunged that day and for days thereafter. Before the bitter fight between our then very young President and the steel companies ended several months later, the Dow had tumbled to 710… a drop of 7.2%. It was, to that point, one of the most severe, steepest and frightening decline in the stock market in the decade of the 60’s, and appears on the charts as a virtual “spike” downward.

Once the situation was resolved in early ’63, stock prices rose massively, but until that situation was resolved, panic was in the air and prices went into free fall. President Obama’s attack upon the “bankers” is even more fundamental and more stridently anti-capitalist than was President Kennedy’s attack upon the steel companies for banks are even more central to the economic well-being of the nation than was steel then.

Banks are at the very epicenter of what powers the capitalist system; they are there to create the funding for growth; they are there to facilitate trade internationally… and they are under attack by a President now frightened that his own constituency may be abandoning him. In order to make certain that he has his Left-ward flank covered in the aftermath of the governors races in Virginia and New Jersey that went so badly against the Democrats, and more in light of the loss suffered by the Democrats in Massachusetts this week, the President has lurched leftward in his rhetoric and his actions.

What we fear is that this President is uncommonly politically “savvy,” and he knows full well that he can push the country leftward most readily by launching an attack upon highly paid “bankers” whose salaries and bonuses do indeed dwarf that of the average American worker. The President has chosen to leap leftward and to begin an overtly class-conscious “fight” that shall pit him and the lower classes against the upper classes here in the US. This will play very well in Peoria, as they say in the theatre business, and the public will be swift to pick up the cudgel and join the President’s “fight” against the bankers specifically and capitalism generally.

As we said above we shall mince no words here; The President’s very frontal attack upon the “bankers” is a front attack upon capitalism, and his rhetoric shall fuel any urgency on the part of those otherwise predisposed to exiting dollar positions to do precisely that. Further his urge to “fight” shall be sufficient to keep those who might otherwise have been drawn to the sophistication of the American capital markets on the sidelines. As we have always said, it takes buying and lots of it to put a market up; it takes a mere lack of buying to put a market down.

The President’s demeanor yesterday will serve as a siren call to those on the Right and those who support free and open capital markets to choose to look elsewhere for the capital. Rather than being invested here in the States, that same capital will look elsewhere and for other investments than US equities.

To that end, we are rescinding our WATERSHED shift in sentiment toward the US dollar that we invoked in early December of last year. We may invoke it again at some point in the futures, but in an arena where the President is taking such a pointedly anti-capitalist position we chose to stand down. Others will do the same. Money will seek investment elsewhere until such time as the battle between the President and the “Bankers” is won by one side or the other. Yesterday was but the first salvo in what we fear shall be an ever increasingly rancorous war.


BUY LOW-SELL HIGH: Emerging Markets Appear Fully Priced

Short history chart but nevertheless very telling and compelling from my standpoint.

Emerging market stocks are no longer cheap and already reflect a lot of good news, leaving them vulnerable to even minor disappointments.
Emerging market (EM) equity multiples have moved significantly higher in recent months, based on various valuation measures. A further multiple expansion in the developing markets would represent an overshoot of valuations from fundamentals. Indeed, there are two potential scenarios for EM stock prices: either a full-fledged mania will develop with multiples continuing to expand, or, a setback/period of indigestion will occur before a new upleg develops. Currently, the odds of a mania-type pattern developing in emerging markets are not significant. If a mania were to develop, Chinese stocks would be at the epicenter because China has the fastest growth rate. However, Chinese share prices (both domestic and investible stocks) have been trending sideways since July, and the investible market has underperformed the emerging market benchmark. Bottom line: At current valuations, EM stocks will be increasingly vulnerable to even minor negative surprises. Stay tuned.

BCA Research



David Rosenberg made this interesting table to support his bearish stance on US equities. I will not argue the secular bull market case; obviously, there is no case for major PE or Price/Book revaluation here and a return of inflation would definitely hurt PE ratios.

However, there is a case for a better economy and better profits in 2010 which, if inflation stays low, would translate into higher equity prices. Using trailing 12-months eps is pretty convenient to show that equities are expensive but it fails to take into account the highly unusual fact that Q4 2008 were negative and that profits have nicely recovered since. Annualized Q3-2009 eps are $63 (18x PE) and annualized Q4-2009 estimates are $66.50 (17x PE). See US EQUITIES VALUATION ANALYSIS: DUCK, YOU (HAPPY) SUCKERS!

These are arguably not bargain valuation levels but, under the Rule of 20, the most appropriate valuation tool, fair value is between 18-20x, leaving some room for further appreciation in the S&P; 500 Index. Certainly not the outrageous valuation levels claimed by the very bearish observers.