One of the questions I get all the time is: “Are you Bullish or Bearish?”
I know that its bad form to answer a question with another question, but in this instance, I must. My answer is invariably: “It depends – What’s your timeline?”
If you say “Short term” (0-60 days) than I’m Bearish. As of last week, the Nasdaq had been up 18 out of 20 days. The Financials have been ugly for several weeks now; They banks simply can’t get out of their own way, and they broke down on the highest volume in a week yesterday. (I mentioned this in my “debate” with Kudlow). Indeed, 82% of yesterday’s Nasdaq volume was to the downside. With no leadership from the financials, the rally’s traction starts slipping. The Semi-conductor index, took a 5.3% haircut yesterday. Add to that the high percentage of bulls for the past three months (over 60%), and the VIX below 20. All that is the recipe for a consolidation.
If your answer is “Intermediate term” – 2–6 months – then I am rather Bullish. Interest rates are still relatively low; fiscal stimulus is at historical levels; Former Fed Chair Paul Volcker observed “We have an amount of stimulus beyond anything I’ve heard of in history.” The long term down trend of the Bear Market has been broken; market internals, even after the past few days, remains mostly encouraging. It’s a battle of tide versus wind, and as long as the Fed has breath to blow money supply higher, they can hold the tide at bay – at least for now.
If you answer “Longer term,” (6 months – 2 years +) well, then I am less sanguine about the Bull case. My biggest concern is a lack of Job creation, which makes the sustainability of the recovery suspect. Without New hires, there’s less payroll money in consumers’ hands, lower consumer confidence, and eventually, weaker consumer spending. And, if companies are not spending on hiring, then they probably aren’t spending that much on CapEx.
Finally, I am least impressed of all by what may be the biggest issue impacting the markets and the economy: the nature of the recent tax cut package. I’ve discussed this in the past. The biggest positive is clearly the accelerated depreciation of capital goods (although including SUVs in that is a little disguised bit of corporate welfare for Ford and GM).
As we watch the impact of the cuts play out in the broader economy, my worst initial concerns are slowly becoming confirmed: Much of the tax cut program was focused on the stock market itself, instead of on the broader economy. That’s like treating a patient’s symptons, but ignoring the underlying disease. That may be manifesting itself in the stubborn jobless numbers 21 months post-recession.
The focus has been to move the market up, get consumer confidence higher to increase spending. The hope was to increase the confidence levels of the CEOs, a group that still suffers from bear market fatigue. Once the executives refind their lost nerve, then perhaps rehiring starts again. At least, that’s the theory; We’re still awaiting the outcome.
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Quote of the Day
“Globally, the biggest bubble is still the whole cult of the equity, that equities have to outperform over the long run.” –James Montier, global equity strategist, Dresdner Kleinwort Wasserstein
