Submitted by Tyler Durden on 04/09/2012
‘There is no free-lunch - especially if that lunch is liquidity-fueled - is how Gluskin-Sheff's David Rosenberg reminds us of the reality facing US markets this year and next. As (former Fed governor) Kevin Warsh noted in the WSJ "The 'fiscal cliff' in early 2013 - when government stimulus spending and tax relief are set to fall - is not misfortune. It is the inevitable result of policies that kick the can down the road." Between the jobs data and three months in a row of declining ISM orders/inventories it seems the key manufacturing sector of support for the economy may be quaking and add to that the deleveraging that is now recurring (consumer credit) and Rosenberg sees six rather sizable stumbling-blocks facing markets as we move forward. CHALLENGES FOR THE MARKET
there is liquidity — this major catalyst for equities since last October
looks set to subside with the Fed seemingly backing off from a QE expansion, at
least over the near-term. And the ECB is back talking about inflation so it
doesn't even look like a rate cut is coming despite escalating recession
there is the
Third, there is the rapid slowing in corporate earnings (Alcoa kicks off the reporting season tomorrow). In Q4, we had the YoY trend in S&P 500 operating earnings slip into single-digits (+9.2%) for the first time in two years, and absent Apple, the pace would have been 6.2% (see the front page of the Investor's Business Daily). Only 62% of companies beat their estimates, which is far below average. As for Q1, the consensus is all the way down to +3.2% on a YoY basis — well off the +5.5% expectation at the turn of the year and the +12.8% forecast in the mid-part of 2011. Strip Apple out of the numbers, and you are talking about earnings growth of practically nothing— +1.8%.
Not only has earnings growth basically evaporated, but
the ratio of negative to positive guidance has risen to levels we last saw two
years ago, margins are poised to shrink to a two-year low as well, and only
three S&P 500 sectors are actually seen raising their earnings from
year-ago levels. Now the question is whether or not the market can
move up with earnings contracting and the answer is — of course! We have seen
that in the past, as rare as it may be. Just go back to 1998, when the Asian
meltdown and strong U.S. dollar severely pinched
We have the two rounds of French elections looming
(April 22nd and May 6th) and the new government is going to have precious
little time or margin of error with regard to delivering a fiscal package that
will pass the 'sniff test' for Mr. Market. It is very clear that, in
On the macro front,
Fifth, there is the poor technical picture. The large number of distribution days of late. The number of stocks making fresh 52-week highs is on the decline. At last week's highs in the major averages, divergences were popping up everywhere. One particular glaring anomaly was the surge in global equities in Q1 and the sharp rise in government bond yields at a time when the CRB index faltered — if the first two asset classes were actually prescient in the view of global reflation, wouldn't it have shown up in basic material prices given their inherent cyclical sensitivities?
Sixth, valuation support is less of a positive than it was six months ago. The cyclically-adjusted P/E at 22x for the S&P 500 is nearly 40% higher than the long-run average of 16x. The forward P/E ratio at over 13x now is about in line with the historical norm. Some nifty analysis cited on page B6 of the weekend WSJ (Why Stocks Look Too Pricey) found that when real rates are negative, as they are today, they tend to represent periods of economic turmoil and as such, the typical P/E multiple during these times is 11x — versus today's trailing multiple of 14x. On this basis, the market as a whole (keeping in mind that we don't buy the market, just the slices of it that we strongly believe are undervalued) is overpriced by more than 20%.
On this basis, the market as a whole is overpriced by more than 20%.’