I am giving a presentation later this morning to an investment committee; here's a copy of my notes:
August 21, 2012
· Growth sputtering globally. China and emerging markets in particular cause for concern;
· Europe remains very fragile. Policy managed to keep euro alive for now, but still very uncertain. Austerity programs in France, Spain, et. al. very unpopular. Unemployment high in most countries (Germany a notable exception);
· US political atmosphere still very poisonous. Little chance of meaningful change soon. Fiscal cliff at year end could hurt US economy in 2013;
· Widespread cynicism re: financial system. Facebook IPO debacle soured investor moods. LIBOR scandal showed worst side of finance. Large losses at JP Morgan suggest that even the banks don’t know their risks;
· Some positives: Housing rebounding; auto sales robust
· Interest rates at record lows globally. Negative rates in Germany and Switzerland reflect widespread fear;
· At same time, investor desire for yields remains huge. High yield bonds trading at historic lows in US and Europe despite concerns about economy. Investment grade bonds barely yield more than US Treasurys;
· Monetary policy remains very accommodative but unclear whether further easing would offer any help. Mortgage rates in US at record lows, but could be lower if banks priced at same spread vs. Treasurys;
· S&P 500 up more than +14% year-to-date (+9.1% LTM), and trading well above its 50- and 200-day moving averages. On the other hand, market gains very narrow. Larger cap stocks continue to march higher, smaller and mid cap stocks lagging significantly;
· On an equal weighted basis, the prices on the S&P is up only +6.9% YTD (+1.9% for 12 months) vs. +9.7% YTD (+6.7% for 12 months);
· Best performing sectors YTD have been (in order): telecommunications; consumer staples; and utilities. Investors looking for income and safety in stocks, not growth;
· Market volume on New York Stock Exchange has hit 2012 lows in recent session and is about half of where it was for the same week a year ago;
· Fund flows remain skewed towards bonds: equity funds, including exchange-traded funds, lost $6.3 billion last week while bond funds took in $3 billion. Stock funds lost $11.5 billion in the second quarter while bond funds gained $55.4 billion, according to Lipper;
· Second quarter corporate reports showed slowing revenue but consistent earnings. Margins remain elevated relative to history;
· Other signs of how disenchanted Main Street is with the stock market from technician Ryan Detrick (courtesy of The Reformed Broker blog):As we've been saying for years now, this market is headed higher for two reasons: First, price action continues to be constructive; and second, overall expectations are still too low. Remember, lowered expectations make it much easier to have good news and thus, buying pressure.
Here's a list of a few of the bigger-picture things I've noted recently as reasons to look forward to higher prices.
· CNBC's low ratings show no one is interested in this bull market
· 75% of high school students believe the market is rigged
· Bill Gross thinks stocks are a Ponzi scheme and the "cult of equity is dead"
· Short interest is high and rolling over
· Wall Street strategists are at 15-year lows in stock allocations
· The American Association of Individual Investors (AAII) sentiment poll just had 13 straight weeks of more bears than bulls
· There are huge outflows from equity mutual funds in the face of higher stock prices
These examples have all occurred over the past several months. Let's take a closer look at this. We have Wall Street avoiding stocks, we have Main Street avoiding stocks, and we even have the potential for a whole generation of stock investors who think the whole thing is rigged. Yet, the Dow Jones Industrial Average (.DJI) is about eight percentage points away from a new all-time high! Simply amazing when you think about it.