Anthony Peters, SwissInvest Strategist
THE EQUITY RALLY continues apace with the S&P closing on Thursday at 1,563.23, another 8.71 points higher on the day and up 4.7% in the 13 sessions since February 25. Meanwhile, the much narrower Dow is well above 14,500 after a full 10-day winning streak.
Year to-date, the S&P index is up 9.61%, which is dandy, but if one annualises the figure, it comes out at a little over 58%.
I would sincerely hope that there is nobody out there – and even less anyone reading this – who believes that we can achieve that annualised result and therefore it must be clear to all that there is a correction in the offing somewhere.
Nonetheless, based on the price of put options, the chance of a serious setback in the index is being discounted as less and less likely. September 1,450 strikes are now down at US$33 from US$80 at the beginning of the year when they were still more or less at the money.
To many, the current rally is a clear statement of intent and, as ever, there are plenty of analysts tripping over themselves to justify the move.
They might like to consider some other US economic numbers that I was made aware of last week. Yes, the Dow is back to 2007 levels, but other stats are very different:
- GDP Growth: Then +2.5%; Now +1.6%
- Gas Price: Then US$2.75; Now US$3.73
- Americans Unemployed (in Labour Force): Then 6.7m; Now 13.2m
- Americans On Food Stamps: Then 26.9m; Now 47.69m
- Size of Fed’s Balance Sheet: Then US$0.89trn; Now US$3.01trn
- US Debt as a Percentage of GDP: Then ~38%; Now 74.2%
- US Deficit: Then US$97bn; Now US$975.6bn
- Total US Debt Outstanding: Then US$9.008trn; Now US$16.43trn
- Consumer Confidence: Then 99.5; Now 69.6
- S&P Rating of the US: Then AAA; Now AA+
- VIX: Then 17.5%; Now 14%.
There is of course an element of cherry-picking in these particular statistics – and we should bear in mind the adage (usually assigned to anyone vaguely quotable) that there are lies, damned lies and statistics – but one does get quite a shock looking at the comparison.
It tells us little about the reasons and justifications for a Dow at 14,539 points, but it does lay bare the staggering deterioration in the nation’s overall financial position. It also makes us aware of just how impossible it will be for the Fed to embark on a tightening cycle, irrespective of what insipid inflationary pressures might rear their ugly heads. Fed Chairman Ben Bernanke’s near-zero interest rate policy is the glue that holds these divergent but scary figures together.
Ben Bernanke’s near-zero interest rate policy is the glue that holds these divergent but scary figures together
EQUITY ANALYSTS – AND I will be the first to admit that as a fully paid up fixed income beast I never have and probably never will begin to understand the equity tribe’s way of thinking – tell us that their market is forward-looking, that stock prices are discounting future positive developments and that earnings are now of a “higher quality” than they were in 2007. Sorry, chaps, I don’t get any of that.
What I see is a simple case of a steady asset allocation shift into equities and (by way of the likes of the putative delisting of Heinz and Dell and talk of stock buybacks financed by excessively cheap bond market funding) more paper leaving the big board than joining it. To me, the stock market currently looks more like a roulette table where all numbers are red than a source for businesses to raise money.
WE SHOULD NOT underestimate the ferocity of the rally as, back in 2007, the banks were all flying high. Bank of America, now a healthy US$12.55, hit a low in May last year of US$6.72 and an overall low of US$2.53 in February 2009. However, when the market peaked it was well above US$55.
Citigroup, no longer an esteemed member of the Dow, hit its high of US$570 in December 2006 and is now trading at US$47.74. These are large chunks of market cap that are missing in the indices, which makes the breaking of old record highs even more impressive.
The Fed’s agreement to both Citigroup and Bank of America effecting share buy-backs doesn’t look like changing that situation in the near term.
I understand that up and down this country (and most other ones too), asset allocation committees are currently holding their quarterly meetings where they will surely be patting themselves on the back for coming into 2013 overweight equities and underweight bonds.
That this ubiquitous positioning turns the market call into a self-fulfilling prophecy is beside the point, but I think I can say with near-certainty that nobody out there is going to suddenly begin to reverse that tactical asset allocation and that therefore we are a long way from the end of the move.
The market is in hugely bullish mood, a frame of mind that cannot be easily removed, be it through Italian elections, the near-death experience of Cyprus or the effective death of the city of Detroit. At other times, these events would have caused CIOs and money managers sleepless nights. Not now.
Even tactical shorts don’t currently look like the clever way to go unless one were wishing to discount an unexpected flock of black swans appearing on the horizon. So, stay long and go bird watching.