Sunday, January 16, 2011

Commentary from

Here is a copy of the posts I made on Thursday while filling in for Doug Kass on Below are the first four posts from that day. I will post the second four later--

The Folly of Forecasts1/13/2011 7:30 AM EST
It's always nice to be filling in for Doug in The Edge. I'll try to give readers an update on how the market looks from where I sit and also offer a few ideas. I also want to take some time to answer any questions readers have, so feel free to email me, and I will do my best to answer them all.
It is that time of year when all the market strategists put out their forecasts for 2011. First off, these forecasts should be taken with a grain of salt since all of the strategists are generally bullish and put out positive forecasts. After all, they earn their living in the markets, so it's in their best interest to be upbeat and positive. Second, no one ever goes back and takes them to task if their predictions are way off. To wit, all of the strategists were bullish heading into 2008, but we won't bring that up. Right?

I actually do an annual blog poll of my own. I do this partially for fun but also to see how real life portfolio managers' sentiment compares to the consensus. I recently completed my poll for 2011, and the participants I talked to are bullish, but less so than the consensus.

You might have seen that the average strategist polled by Bloomberg forecast the S&P 500 to close 2011 at 1,379, for a 9.6% gain. Merrill was more bullish with a forecast of 1,400, and Goldman even more so with a forecast of 1,450 (up 15%). The fearless forecast from my group of money managers was for the S&P to rise to 1,332, for a 5.9% gain.

This would be a below-average gain for the stock market, and thus one can conclude that my group is somewhat cautious on the year ahead. Of course, the real reason why we don't place too much emphasis on these forecasts is that no one invests their portfolio based on them and then just sits there until the end of the year to see how they did. The key to solid investment results come from staying on top of your investments and actively managing your risk in your portfolio.

Fundamentals Get an 'A'1/13/2011 10:01 AM EST
I want to provide an update today on our view of the "">market stool," which we covered the last time we had the helm on The Edge. We tend to look at the four legs of the stool as:

the fundamentals;
the technical picture;
the sentiment backdrop; and
the overall macro picture.

For the fundamental component, I think the market remains on solid footing. We are just entering earnings season, so we will have to watch to see how corporate profit reports come in and how confident managements are in their guidance, but so far the overall level of corporate profits is high and stable. Standard & Poor's has current EPS forecasts for the S&P 500 at roughly $94.79 for 2011, and these estimates have been stable.

That leaves the market at a still very reasonable valuation of 13.5x earnings. This seems to be a low multiple to us relative to past periods in history that demonstrated similar characteristics of low interest rates, low inflation, etc. So we think it is likely that we could see some multiple expansion in the market as the economic recovery continues and the hangover from the Great Recession continues to dissipate.

Corporate balance sheets are also in wonderful shape, with cash balances higher than they have been in decades. Most companies have also refinanced their debt at lower rates, increasing their cash flow and improving the outlook for continued high levels of share buybacks and dividend hikes, as well as continued M&A activity. As such, I would probably have to give the grade of an "A" to the fundamental aspects of the market today.

Technicals Also Get an 'A'1/13/2011 11:06 AM EST
The technical picture for the market looks pretty good as well. We look at a lot of things, but let's start with where the market is trading in relation to its medium- and long-term moving averages -- namely, the key 50-day and 200-day moving averages.

Looking at the S&P 500, the senior index is trading comfortably above both its 50-day and 200-day averages. Moreover, the slope of these key moving averages is important to note as well, and in that light, they are both showing nicely positive upward-sloping shapes.

We also look at the price/volume action in the market, or the accumulation vs. distribution days. On this front, there has been very little high-volume selling of late, and at least a few rallies that have come on higher volume. This is another good sign for the market, and we would expect that before we see any sort of top in the market (even a short-term one), we would see some sort of cluster of distribution days.

Looking at new highs vs. new lows in the market, we see that new highs continue to greatly exceed new lows and that the absolute number of both have been fairly steady of late. Breadth has been positive, and, again, right now we are not seeing any major chinks in the armor. Last, we closely monitor the action of "leading" stocks. Our motto is, as goes the leaders, so goes the market. So the fact that the market leaders have held up well, and continue to break out to new highs is another indicator that falls on the bullish side of the ledger.

I don't want to get off on too-Pollyanna-ish of a note this morning, but I'm afraid that I would probably have to give an A to the technical picture also. It's funny that I phrased my last sentence that way, but these days it's almost as if you feel apologetic for being too bullish. But that is something I'll touch on in a later post when I delve into sentiment.

Positive Signs From the Eurozone1/13/2011 12:11 PM EST
The euro is bouncing for a third day after another bout of solid demand for bond auctions. Earlier this week, it was Portugal, and today Italy's auctions were met with solid demand. More notable is the action in the credit default swaps (CDS) market, where CDS prices for Greece are down 5%, Italy has fallen 8%, and Spain is down 9%. This is a good sign, and hopefully it will continue.
ECB President Trichet has urged eurozone governments to "get ahead of the curve" in dealing with their debt issues. He also wants to improve the "quality and quantity" of the European Stability Fund. So is it possible that the euro crisis won't be the calamitous market event everyone is expecting?

Look, the sovereign debt issues in Western Europe are serious matters, and as such they are not being taken lightly by the markets. But it is possible that they will be dealt with without a huge amount of fallout in the other parts of the global financial markets. Not every crisis leads to a market crash. It might just be that the market will price in these events, yields will move higher for those affected nations, and in the end, we will look back on it as just another stone in the wall of worry that bull markets like to climb.

We are not there yet, so I will continue to monitor the CDS action of the sovereign debt in Europe. But right now, it is not causing us to alter our plans or how we are approaching the market today.


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