I am giving a presentation later this morning to an investment committee; here's a copy of my notes:
Market Overview
August 21, 2012
Macro Backdrop
· 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
Capital Markets
·
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;
Equity Markets
·
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.
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