[ZT] 10 Reasons to Rally

George25

10 Reasons to Rally - 01/10/12

The U.S. stock market is likely headed higher -- here's the fuel for that move.
I have rarely been accused of being an economic/stock market cheerleader, but I believe the U.S. stock market will surprise to the upside in the near term for the following fundamental, technical and sentiment reasons:

1. Poorly positioned market participants: Forget put/call ratios, Investors Intelligence and AAII readings -- investors (of all shapes and sizes) are now negative and could be caught offside. Watch not what they say; watch what they do. And the dominant investors (retail and institutional/hedge funds) are underinvested and/or skewed disproportionately in a "flight to safety" into fixed income over equities. Individual investors have taken out $450 billion from domestic equity funds since 2007 and have added $850 billion into bonds; that swing of $1.3 trillion is unprecedented in history. Hedge funds, according to ISI, are now at their lowest net long exposure since the Generational Low of March 2009.

2. Technical breakout: As I wrote late yesterday, we closed trading on Monday right at resistance in the major indices. Given the sharp rise in futures overnight (+12 handles), we will easily pierce through resistance at the open and break out of the recent trading range. This action will encourage technically based chasers of market momentum.

3. Big rotation: The rotation from high-octane, high-beta leadership (Priceline (PCLN), Google (GOOG), Baidu (BIDU), etc.) has investors poorly positioned. Google's sudden weakness, in particular, has scared a number of hedgehoggers I know into materially raising cash in recent days. Meanwhile, financial stocks have been meaningfully outperforming in 2012. Don't market historians tell us that a better tone for the financial sector is a necessary condition and reagent for a better stock market? Yet that turnaround of the financial continues to be treated with skepticism by most. (How many times have you heard that the sources of banking revenues are greatly reduced in "the new era" for banks (see bank analyst Mike Mayo's comments on CNBC over the past few weeks as an example) and that return on capital is destined to be in the single digits given that the industry is a regulatory piñata in an era of populism?

4. Mispaced preoccupation with Europe: The European situation has improved. Timid policy response is moving toward "shock and awe" -- yet investors are still scared to wake up every morning to rising sovereign bond yields, and that fear is keeping them sidelined. Unicredit's deep discount rights financing (and the specter of more dilutive bank refinancing) have especially scared investors in the last week. But who cares at what price Unicredit and others finance ... as long as they finance! Deep discount capital raises dominated the U.S. banking landscape three years ago, and now our banks are positioned well in terms of liquidity and capital (and most experienced outsized market advances in their shares following their 2008-09 refinancings. As to the weakening euro, as I mentioned in yesterday's opening missive, a weak euro and a strong U.S. dollar only helps our capital markets as more investors buy American at the expenses of other non-U.S. markets. I see the rotation into U.S. stocks and out of non-U.S. stocks as a dominant theme in 2012.

5. Recent earnings cuts discounted: Yesterday we heard on eight separate occasions on CNBC that earnings cuts are at a near-record level. But we heard it principally from those who failed to see a more worrisome economic and stock market climate (contraction in valuations) last year. Enough said. Memo to negative strategists: The market has likely already discounted (with a 15% decline in price-to-earnings ratios in 2011) a diminished profits outlook.

6. Likely regime change in the U.S.: Though the odds of a Republican presidency have improved, most investors are ignoring this "market friendly" development that could occur within the next 12 months.

7. Better economic data: Consistently ignored have been improving domestic economic releases (PMI, consumer confidence, housing, automobile industry sales and jobs). Fourth-quarter real GDP growth should be 3% to 3.5%. But more important is that the prospects of a self-sustaining U.S. economic recovery have been more solidified in the past six weeks. (I continue to be of the view that ECRI's Lakshman Achuthan's recession call is wrong-footed.)

8. Contained geopolitical risks: Investors remain justifiably fearful of North Korea and Iran. But, geopolitical risk will be a constant risk in our life and in our investments. We should monitor but not let geopolitical issues predominate our investing thinking.

9. Market-friendly rates: Low interest rates around the world in 2012-13 mean that any model based on interest rates results in a very inexpensive market valuation. Risk premiums, for example, hit a 37-year high recently. We have to go all the way back to 1974 to see similar levels -- and in 1975 and 1976 the S&P 500 index returned 35% and 19%, respectively, after a similar spike in risk premiums. (I continue to expect a massive reallocation trade out of bonds and into stocks.)

10. Lower volatility: Crazy market swings scared off and alienated investors over the past year. Shouldn't the recent collapse in volatility help bring back investor confidence?

For these reasons, I continue to take the variant view that the U.S. stock market could surprise people to the upside in the near term.

福多多

He picked bull factors and ignored bear factors.

George25

It's published on Jan 10, 2012. But be cautious at present, as S&P downgraded European countries. Last Friday Jan 13, 2012 the market turned to negative and it seems the market is at the turning point, some kind of top or at least near to the top, at least in short term?

George25

market will increase volatility next week, which is also OE week.

福多多

回复 George25 的帖子

One day event doesn't change everything.  

What I actually criticized was the method he analyzed data.  One cannot cherry picked the data to provide readers with a reliable result.  This is not a mature analyst should do and it sounds like scam.

George25

Hold 23% in long position, 77% in Cash.
No short position.

George25

Recovery hopes dampened by jitters

Fund managers talk like bulls, act like bears

By Steve Johnson, FTMarketWatch

Last Update: 10:28 AM ET Jun 12, 2001

LONDON (FTMW) - Fund managers are upbeat about the prospects of global recovery and corporate earnings growth.

But they still remain hesitant when it comes to their own funds, with a growing number of managers holding more cash than their benchmark levels, suggesting they are still uncertain about the markets.

The monthly survey of 270 managers commissioned by Merrill Lynch uncovered the contradiction.

A net balance of 46 percent of managers said that corporate earnings look positive (up from 21 percent in May). And 79 percent agree that equities are the best asset class.

The net balance of fund managers anticipating a recovery in the global economy in the next 12 months is up from 11 percent in May to 37 percent now.

And less than a quarter of managers predict that the economy will be weaker than now in a year's time.

Cash still king

But a net 22 percent say they are overweight in cash, 5 points higher than in May.

A cynic may argue that this is a classic example of fund managers attempting to talk up the market.

David Bowers, Merrill's chief investment strategist, who authored the report Strategically Bullish, Tactically Cautious, disagrees. "I think fund managers want this to be a textbook recovery".

"With inflation falling and monetary policy easing, they feel it is time that they ought to be investing in the equity markets, but they are worried that it might be different this time, with lopsided easing of monetary policy [in the U.S. but not the Eurozone]," he added.

"There is still a degree of tactical caution in the short term. Fund managers believe the economy will recover, but they don't know when," explained Bowers.

Risk averse

This caution is reflected by the fact that the panel of managers puts the probability of a 10 percent correction in the markets over the next three months at more than 30 percent.

"There is still a high probability of a correction in the market," Bowers added. "Managers are carrying below normal levels of risk in their portfolios."

The choice of favoured sectors is similarly schizophrenic. Energy and cyclical industrial stocks are top of the list. But managers say they are shying away from telecoms and bank stocks.

Tech and energy favoured in Europe

A separate survey of 77 Eurozone fund managers found that tech, energy and banks are the favoured sectors, a curious mixture of cyclicals and defensives. Telecoms, autos food and drink, tobacco and pharmaceuticals are out of fashion.

On a wider level, the U.S. dollar has replaced the euro as fund managers' currency of choice. The yen, and the Japanese stock market, is the one they are steering clear of.

Some 51 percent of fund managers say that the highest 'quality' of corporate earnings (in terms of volatility, predictability and visibility) can now be found in the U.S., up from 36 percent in May.

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