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All's Rosy From Deutsche Bank's View


Bank forecasts better times ahead, for the economy and stock market.

Yesterday morning, while you hustled to work, we schlepped down to 60 Wall Street to hang out at Deutsche Bank (DB).

Over orange juice and a bagel with a roomful of other financial reporters, the bank's economists and strategists broke down their views for how they see 2010 playing out.

Generally speaking, this is a relatively positive platoon of professional numbers crunchers: They forecast better times ahead for the economy and the equity markets. In fact, they're flummoxed, quite frankly, that more folks don't agree with them.

Plenty of you doomsayers might quibble with many of their claims, but we figured it was worth at least giving you a CliffsNotes version of the presentation if only to test your own worldview a bit.

The heavy hitters offering their two cents included the always well-tailored Joseph LaVorgna, chief US economist, and Binky Chadha, chief US equity strategist.

In sum, the team at Deutsche Bank argues that the economy has now entered a moderate recovery phase and it's likely to grow a lot more rapidly than the recent consensus view has forecast, but noticeably more slowly than it has following past deep recessions.

Key drivers of growth, economists there say, will initially be fiscal stimulus and inventory swing, followed by consumer durables and business equipment spending, followed by residential investment as each of these areas of spending recover from unusually depressed levels.

The median consensus view has growth remaining in the range of 2.5% to 3% over the year ahead. Those economists with more pronounced dour dispositions expect us to trip into a double dip with growth slowing to between zero and 1%.

LaVorgna's forecast is near the optimistic end of the spectrum for the year ahead at about 4%. His baseline forecast has the unemployment rate receding into the low nines by the end of 2010.

What does LaVorgna see Ben Bernanke and his PhD-carrying gaggle of buddies doing about that rock-bottom rate policy?

The economist says that, with above-trend growth and declining unemployment, he sees the Federal Reserve starting to raise rates by late next summer with the Fed funds rate at 1.25% by the fourth quarter.

Fact is, LaVorgna believes, the worst is now behind us.

"Things will be better," he told reporters. "I think you have to look at whether the environment will support better growth…It seems to me, given the backdrop we have had and the stimulus thrown at the problem, I am too low."

What could derail his thesis?

A terrorist attack, he says, or an ugly piece of protectionist legislation that somehow makes it through Congress. Another risk, he argues, is the continued uncertainty about health-care legislation in this country.

"Until we get complete resolution about what it looks like," the economist says, "that could be an inhibitor of investment decision-making and hiring."

Binky Chadha, chief US equity strategist, chimed in that he also thought uncertainty coming out of the Beltway poses potential problems.

"The biggest risk for the recovery is all the policy uncertainty that exists across sectors," he says. "Companies don't know, in terms of thinking about hiring and spending, what their future tax rates will be. They don't know what the health costs of a new employee will be."

Still, across asset classes, Chadha sees the greatest upside for US equities. His EPS estimates for the S&P 500 in 2010 of $80.8, combined with his long-run fair value trailing multiple of 16.4, imply a year-end target of 1325.

Across sectors, his largest overweight remains the Financials. Three factors, he says, argue for the sector's outperformance: Its current underperformance exceeds that even in the Great Depression; it's the cheapest sector on normalized earnings; and it's the best way to position for a recovery in the labor market in 2010.

Those investors who agree with this thesis could play along by putting money to work in an exchange-traded fund such as the Financial Select Sector SPDR (XLF), with holdings including Bank of America (BAC), Goldman Sachs (GS), JP Morgan (JPM), and Morgan Stanley (MS).
No positions in stocks mentioned.
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