Jeff Saut: Short-Term Uptrend for S&P 500
By MV Respect Dec 22, 2008 10:30 am
But sustaining it is like walking a tightrope.
Winter officially began yesterday morning, with the arrival of the winter solstice. Recall that solstice means “standing-still sun;” and on December 21st at 7:04 a.m. (EST) the sun “stood still” over the southern Pacific Ocean (Tropic of Capricorn). At that time the sun’s rays were directly overhead, giving the impression that the sun was truly standing still.
No one is quite certain how long ago humans began heralding the solstice as a turning point, but a turning point it is: The sun sets a minute or 2 later each day from here until the summer solstice (June 21st), which just happens to be the shortest night of the year.
I paid tribute to this year’s “turning point” by facing the sky and screaming at the top of my lungs. It was one of many such screams emitted over the past year, as we watched the S&P 500 (SPX) lose nearly 52% of its value since October 2007. However, my sense is that the economy, and the various markets, are near a turning point.
That sense is driven by last week’s slashing of the Fed Funds rate, which will allow it to “float” between zero and a quarter of 1%. The operative word here is zero, as the Fed is effectively offering the banks “free money.”
With the Fed Funds target rate down to the 0-25 basis point level, the Fed is now “out of bullets” with regard to conventional monetary policy. Consequently, the Fed felt compelled to announce that it “will employ all available tools to . . . preserve price stability.”
As Bloomberg Television put it, “The Fed is all In!” “All In” indeed: It now appears the Fed is moving to influence other interest rates. As MaroStrategy’s Bob Parenteau notes:
“The prime monetary policy operation becomes the Fed’s ability to use its infinitely expandable balance sheet to purchase longer maturity Treasuries, GSE debt, mortgage backed securities, and in the extreme, even equities and corporate bonds with the objective of getting private market interest rates down and asset prices up.”
To be sure, this Fed is being much more aggressive than the Bank of Japan following Japan’s “bubble bust,” as well as more aggressive than the Fed of this country’s Depression years. I think the Fed will be successful in getting private-market interest rates down and asset prices up.
Accordingly, I think last week’s Fed action will mark a “turning point” for the real economy, and would argue the equity markets tend to lead economic turning points by roughly 6 months.
Position in EWJ, FXI
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2008-12-22 11:43:31
Heh.
"Stocks are battered and cheap. You'd better buy now." It's the new Wall Street mantra. If you use the trailing twelve months of earnings data, they have a point. However, when you cut those earnings in half or more to account for what's coming, their logic goes to hell in a hurry.
These are the same clowns that said profits don't matter during the tech bubble, real estate prices would never fall, AAA ratings were solid, and we'd have a soft landing in 2008. Yet, we never tire them writing their own books at our expense.
These are the same clowns that said profits don't matter during the tech bubble, real estate prices would never fall, AAA ratings were solid, and we'd have a soft landing in 2008. Yet, we never tire them writing their own books at our expense.
2008-12-22 12:27:45
Wishbone investing risks
Sory Jeff, but you let readers astray. I too was fooled by the "bottom" and paid a price. Earnings revisions are pushing the S&P toward a $55-60 per share average run rate. At 12X earnings for 2009, you get an index at less than 700 as a leading indicator. Deflation is still running strong and cheap stocks may stay cheap for years to come. I rarely see sell-side executives discussing the merits of short to intermediate bonds and Ginnie Mae's. I guess there isn't sufficient profit in it, but it works for diversified investors like myself. The only stocks worth holding are ones with a decent dividend and balance sheets with low leverage.
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