The Bull and Bear Case

In the format of our weekly Succinct Summations, here are the overall Bull and Bear Cases for the markets:

For the Bulls:

1) Assuming deal (House still needs to pass whatever Senate sends over) , DC just bought itself another 3-4 months.
2) Celebrate the Yellen put which will likely be no different than the Bernanke and Greenspan one.
3) 2014 consensus eps is expected to rise 10.6% y/o/y putting the market multiple at a reasonable 14x 2014 estimate.
4) Interest rates have headed higher because the economy is getting better with ISM manufacturing at more than a two yr high, vehicle sales doing well, jobless claims are low, European economies stabilizing and with China hanging in.
5) If bonds keep selling off, we’ll see rotation into stocks.
6) Companies have record cash levels to buy back stock and increase dividends.
7) With interest rates still historically low, there is no other place but stocks.
8) This rally gets little respect.

For the Bears:

1) My Vegas odds are 2:1 that the conversation on Shutdown and debt ceiling over the past 3 months will be fully repeated in the next 3-4 months. The explosion in the national debt is now getting very scary.
2) We’ve already priced in QE so many times this year as evidenced by the P/E expansion notwithstanding the diminishing returns of QE. Stock price increases in 2013 are so far above the dollar size of Fed purchases and the growth in the actual economy and earnings.
3) With nominal GDP at 3% and profit margins now peaking, there is no chance we’ll see 10.6% eps growth in 2014 and with margins 70% above its historical mean, stocks are very overvalued at current levels on normalized eps.
4) Interest rates have headed higher because the Fed is losing control of the long end of the curve. Even with full speed QE for a while longer, the 10 yr yield is still 100 bps off the May low. All the Fed is doing now is just monetizing our budget deficits and then some.
5) The US economy is not getting better. It’s still stuck in the 1.5-2% range. ISM services down sharply in September, housing gains moderating, retail sales sluggish and now government spending a drag.
6) Higher interest rates are kryptonite to markets and an economy that are addicted to low rates. Rotation concept is nonsensical as for every seller of a bond there has to be a buyer of it and there is someone selling that share of stock that is bought. It’s the aggressiveness of the buying and selling that matters.
7) Corporate debt is at record highs and companies are still reluctant to spend on property, plant, equipment and labor.
8) Cash is an asset class if fundamentals are challenging and stocks are richly priced.
9) Outside of perma bears, there are no bears. Everyone wants to buy the dip as measured by the weekly Investors Intelligence data.




Peter Boockvar, Chief Market Analyst
The Lindsey Group LLC
Main: 703-621-1170

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