Friday, October 25, 2013

"I'm So Bearish I'm Bullish"

The title of today's post comes from Michael Hartnett, chief investment strategist at Merrill Lynch.

As I mentioned earlier this week, I went to see Hartnett on Tuesday when he gave a lunch presentation to a packed room.

I have written about Hartnett's views on several occasions, so I am obviously a fan.  While his work is less quantitative-driven than several other analysts, he does have a unique way of turning macro trends into interesting market thoughts.

His theme recently has been "I'm so bearish, I'm bullish".

Hartnett points out that while Wall Street mostly recovered from the credit crisis, Main Street America continues to struggle.  Real income growth has been negligible, and the unemployment rate remains stubbornly high.

This means that Federal Reserve policy will remain very accommodative. Heir apparent Janet Yellen seems to favor the current Bernanke policies of using monetary policy to try to increase employment.

Meanwhile, corporate America seems to be doing just fine.  Record profit margins have continued.  Corporate cash surpluses represent about 2% of GDP according to Hartnett, which is also at record levels.

In fact, Hartnett views can best be summed up by this quote that I saw on the blog Business Insider:

"If the central bank stays accommodative and earnings keep doing what they’re doing, why not?"

That's from Dan Greenhaus of BTIG from his latest note to clients....

There aren't any huge, obvious risks on the horizon (Europe isn't blowing up, the U.S. fiscal fights have been pushed back and the GOP probably won't take a stand the way they did this month). Earnings are doing fine and there's no inclination that any major central bank is in the mood to tighten policy.
So obviously the thinking is to buy stocks. Why not?

Besides being bullish on equities, Hartnett sees real estate being a winner in the next couple of years.

On the other hand, he thinks that interest rates will gradually increase over the next 18 months as more signs appear that the global economies are finally showing signs of strength.  Such an environment would obviously be bad news for bonds.  Rising U.S. interest rates would also increase the value of the dollar, which would be negative for emerging market stocks as well as gold.