“Since the end of last August, we have argued that 10-yr US Treasury yields would not be able to sustain levels much below 2% in this cycle. Yields have traded in a tight range around an average 2% since September, including so far into 2012. We are now of the view that a break to the upside, to 2.25-2.50%, is likely and recommend going tactically short. Using Mar-12 futures contracts, which closed on Friday at 130-08, we would aim for a target of 126-00 and stops on a close above 132-00.

…At this stage of the cycle, growth expectations are in the driver’s seat: The value of intermediate maturity government bonds can be related to expectations of future policy rates, activity growth and inflation, and a ‘risk factor’ highly correlated across the main countries.

…Bond valuations are already stretched relative to consensus growth expectations: Around the turn of the year, the outlook on economic activity was buffeted by cross-currents reflecting the adverse credit conditions in the Euro area on the one hand, and the upward revisions to US GDP growth on the other.

…The FOMC statement could provide a near-term catalyst: According to a client survey by our US trading desk, around half of those polled expect the Fed announcement to ease financial conditions further, with only 12% expecting a tightening.”

Source: Goldman Sachs

As I’ve long been saying, I still think the large budget deficit makes the likelihood of a technical double dip low in 2012, but risks are increasingly high that that could change in 2013 as the budget deficit peels off (I’ve been playing this by ear as quarterly deficit estimates are released).  The main point is, we remain in a balance sheet recession which appears to be showing slow healing signs and as long as the government supports the de-leveraging consumer with high deficits the economy is unlikely to experience any sort of substantial decline.  I still think my 2013/2014 end date is not far off.

Of course, Hussman is working from a totally different macro framework than I am and I’d be a fool to claim that there’s no chance that he ends up right and that my macro framework falls apart in the coming years given the numerous inputs that could change the outcome.  Dr. Hussman elaborates on his current outlook:

“The interpretation best supported by the data is that recession risk remains very high based on the leading evidence and the typical outcomes that have resulted, but that the rate of deterioration has eased significantly, and it is simply unclear whether this is a temporary pause or a reversal. Rather than overstating the case one way or another, we remain strongly concerned about recession risk, but recognize the recent stabilization and the potential for a low-level continuation of that. On the indicator front, the economic data over the coming week could be informative (especially the introduction of the Conference Board’s revised LEI, the Chicago Fed National Activity Index, and unemployment claims), but if the new data also muddles around near the flat-line, it will essentially reinforce the overall view that the global economy is close to slipping into recession, but is at least temporarily stabilizing.

Importantly, the recession risk we’re observing is evidenced in a wide variety of indicators, various sets which we’ve reviewed in a number of recent weekly comments (see Dwelling In Uncertainty ). For example, the chart below shows three widely-followed leading indicators: the OECD (Organization for Economic Cooperation and Development) Leading Economic Indicator for the total world, the OECD LEI for the U.S., and the ECRI (Economic Cycle Research Institute) Weekly Leading Index growth rate. All are presented in standardized form – zero mean, unit variance. The blue shaded areas are actual U.S. recessions. The yellow brackets depict what we call a “discriminator” – a variable that strongly discriminates between two groups of data, in this case recessions versus expansions. This particular variable shows the points in history when all three of those leading indices were below -0.5 (based on standardized values), and the average of the three was less than -1.0. Recessions have always produced this condition, and this condition has only been associated with recessions. Notably, this discriminator is active at present.

Despite the record of this and other indicators, we have to suspend the inclination to view recession as a certainty. It’s still possible that this instance is different, and that the modest stabilization we’ve seen in recent economic data will be sustained enough to avoid a recessionary outcome. But in my view, the downside risk is high, and it entirely strains the evidence to say that we can discard recession concerns on the basis of the more comfortable data points we’ve seen in recent weeks.”

As always, Dr. Hussman’s full letter is quite good….

There are certain times when the markets just seem to disconnect.  Right now that disconnect is between the US dollar, US interest rates and US equities.  Since the end of November we have seen a growing disconnect – primarily between equities and other asset classes (see figure 1).

Is it strictly related to money flowing into US assets regardless of what they are, or is the market setting itself up for a large correction.  Seems to me that one side of the equation is going to get hurt by a reversion to normalcy.  At this point, who are you going to place your bet on – bond buyers or equity buyers/vol sellers?

Some ideas to bet on a reversion:

• Short equities, short 20+ year treasuries
• Long volatility, short 20+ year treasuries

Sizing the trade is the tricky part…

]]> http://pragcap.com/benefiting-from-the-market-divergence/feed 6 http://pragcap.com/the-ultimate-2012-investment-predictions-outlooks-list http://pragcap.com/the-ultimate-2012-investment-predictions-outlooks-list#comments Mon, 02 Jan 2012 22:23:40 +0000 Cullen Roche http://pragcap.com/?p=41503 It’s that time of year when investors are prepping for the new year and economists and advisors are offering their full year perspectives.  I tend to think that full year macro and micro outlooks can be misleading since I don’t believe in the ability to accurately forecast the economy 12 months in advance, but these sort of reports can certainly help one in generating a macro perspective and strategic approach.  The following is a broad array of macro outlooks and strategic approaches to the markets in 2012.  Enjoy.

Macro Outlooks and Predictions

Predictions are hard, especially about the future….

Top equity strategist outlooks for 2012 –  Business Insider

Difficult 2012 for fixed income?   -  Morgan Stanley

How to trade emerging markets in 2012 – CitiGroup

2012 global strategy – Bank of America

2012 Market outlook – Ed Yardeni, Yardeni Research

10 surprises for 2012 – UBS

Recession in 2012?  Flip a coin – SF Fed

2012 Forex shocker – Nomura Research

Will 2012 Be Europe’s Minksy Moment?  – PIMCO

2012 outlook – Jim Rogers

5 key questions for 2012 –  Goldman Sachs

2012 – the year of diminished expectations – Mark Zandi, Moodys

2012 Global outlook – Morgan Stanley

2012 – The Year of the reckoning – Peter Schiff

The 6 biggest questions of 2012 answered – Bob Janjuah, Nomura

Richard Bernstein’s favorite picks for 2012

Bob Doll – 10 predictions for 2012 - BlackRock

Will the shorter business cycle lead to recession in 2012?  -  Deutsche Bank

Continued volatility, but no recession in 2012 – Jeff Saut, Raymond James

5 Consumer challenges heading into 2012 – Gluskin Sheff

2012 outlook on China – The Telegraph

Forecasting Italy’s Borrowing needs in 2012 – Sober Look

The three recession risks – Credit Suisse

Europe to double dip in 2012? – Capital Economics

Sluggish growth to continue –  CEO & CFO surveys

The “Doomsday view of 2012″ – Binghamton University

Eurozone debt redemptions will force Europe to act in 2012 –  Credit Agricole

Depression will lead to collapse of the Euro – Felix Zulauf

Recession is still coming – Lakshman Achuthan, ECRI

No way to avoid recession in 2012 –  Hoisington

2012 will mirror 2009 –  Societe Generale

The global economy to slow in 2012 – ScotiaBank

5 important global trends to watch in 2012 – Nomura Securities

Moderate economic expansion to continue – FedEx Corp

The risk of recession has come down – Goldman Sachs

Still no recession in the foreseeable future, but a balance sheet recession – Cullen Roche

Growing signs of a disinflationary 2012?  -  Cullen Roche

The 2012 earnings outlook – Zacks.com

5 macro trends for 2012  - Council on Foreign Relations

Strategy, Risks & Top Trades for 2012

Bridgewater – buy treasuries and gold, sell stocks…

7 Calls for 2012 – Nomura Securities

15 surprises for 2012  - Doug Kass

A bullish outlook for gold in 2012 – Deutsche Bank

House prices to drop 30% in 2012?  -  RBC

8 Risks to equity markets in 2012 – Morgan Stanley

10 outrageous predictions for 2012 – Saxo Bank

4 risks in 2012 – Bank of America

Oil to rally again in 2012  - CitiGroup

10 market risks in 2012 – Nomura

2012 is shaping up to be a good year for equities – David Kotok

Stay in the equity game – PNC

The Dow:Gold ratio will hit 1:1 – Bob Janjuah, Nomura

10 for 2012 - Byron Wien, Blackstone

Gold is the ultimate bubble and could be on the verge of massive bear market – George Soros

2012 investing outlook – Kiplinger

How to invest in 2012 – JP Morgan

Oil prices just can’t fall much –  Barclays

Europe’s banks are insolvent - Michael Platt

Credit strategy 2012 – CitiGroup

2 bullish drivers for 2012 – Credit Suisse

Morgan Stanley 2012 commodities outlook – Morgan Stanley

6 reasons to remain bullish –  Jeff Saut, Raymond James

The 2012 commodities outlook – Diapason Commodities

Is QE3 on the way?  -  Cullen Roche

Still long gold and copper – Goldman Sachs

A sober look at natural gas – Sober Look

5 Investment themes for 2012 – Richard Bernstein

The consensus gold outlooks – Zero Hedge

7 investment ideas for 2012 – David Rosenberg, Gluskin Sheff

5 Risks heading into 2012 - David Rosenberg, Gluskin Sheff

Key Euro Crisis milestones ahead – DJ FX Trader

5 reasons to overweight the UK relative to EMU - Goldman Sachs

Top trades for 2012 - Goldman Sachs

The US equity market is poised for a near-term rally. It is a difficult statement to make, given all the headwinds, but the signs are there.

Let’s start by looking at US based factors that should impact the S&P500. 

1. The US economic data coming in has been quite decent. The initial jobless claims are at the lows.  We all know the issue with the US unemployment figures, but the trend is unmistakable.

Initial Jobless Claims (Bloomberg)

2. US equity valuations look attractive on a historical basis.  The next chart shows the S&P500 P/E ratios, both trailing and projected plotted over time.  The last time we were at these levels was in early 2009.

PE ratios (Bloomberg)

3. Interest rates, and in particular the mortgage rates are at historical lows.  The 30-year fixed conforming mortgage rate is now below 4%.  This will generate some refinancing for those who are able, adding some disposable cash to the system.

Source: BankRate.com

4. Commodity prices, particularly food and energy have come off sharply.  Corn, wheat, cotton are near recent lows. This should be a positive for both the US consumers and many corporations.  Having access to abundant cheap domestic natural gas should be helpful as well.  The chart below shows the CRB commodity index.

CRB Commodity Index (Bloomberg)

5. A technical concern weighing on the markets has been the issue of option expiration. This Friday (12/16) is the largest option expiration of the year with about $950 billion worth of S&P500 options (on futures and ETFs). Investors are uneasy about large short gamma positions distorting the market. This overhang will be out of the way next week.

Source: Goldman Sachs

Now let’s consider the developments in Europe that have been holding down US equity valuations. 

6. Europe has gotten serious about their fiscal integration plan. France and Germany are driving the process and the eurozone is on board – at least for now.

7. We had two critical auctions – one for Italian bonds and one for Spanish bonds. The yields are high, but these nations were able to sell all the debt they planned and as far as we know the debt was sold to private investors. That gives the eurozone hope that these countries can in fact roll their debt without the EFSF, the ECB, or the IMF – at least in the near-term.

8. The upcoming sovereign downgrades by the S&P have been clearly telegraphed to the markets.  And now with the auctions out of the way, the ratings may actually come in better than expected given the results.

9. Central banks have shown a willingness to provide unprecedented support to financial institutions.

Clearly tremendous risks remain and we may yet revisit the “dark days” of September. But in the near term the overall picture looks positive and the S&P500 has a “green light” to rally.

* Walter Kurtz is a credit specialist at U.S. based hedge fund.  

“We underline that markets are already pricing in a Contraction phase, and as such, we resist a “knee-jerk” change in asset allocation. More specifically, over the past 7 Contraction phases, equities have on average underperformed bonds by 10% in the six months up to the beginning of a Contraction phase, while cyclical equities have underperformed defensive ones by 8% over the same period, although this underperformance tends to start reversing in the six months after the Contraction period starts.

“In this respect, we highlight our balanced approach to equity sector strategy – and the neutral tactical and positive strategic views on equities as stressed by the Investment Committee.

This week’s recommendation is about quality, relatively safer companies, which tend to perform fairly well in an environment of slower growth. Beyond the usual reasons for defensiveness, we recently found that investing in quality, safer companies is actually a profitable strategy, especially over longer-term investment horizons. For this Research Weekly publication we have selected 11 “quality” stocks from the consumer staples, health care and telecommunication sectors, which look fundamentally attractive over a 6–12+ month investment horizon, but also look interesting on a shorter-term horizon (1–6 months): Baxter, General Mills, Gilead Sciences, KPN, Novartis, Pfizer, Roche, SABMiller, Tesco, Vodafone and Wal-Mart.”

Source: Credit Suisse

As previously discussed, no double dip, but instead continued sequential quarter to quarter gdp growth with q4 possible better than q3 as well, helped by lower gasoline prices.

The 8.5% federal budget deficit continues to provide fundamental nominal support for GDP and the domestic credit sectors are still too weak to subtract much if they do pull back.

And it still seems to me that the chances of a euro area event reducing aggregate demand in the US are reasonably low.

US Views : OK for Now, But Slowdown Ahead

By Jan Hatzius
October 9 (Goldman Sachs)

1. After the sharp slowdown earlier in the year, the US economy seems to have grown at roughly a trend pace over the summer. Our GDP “bean count” now stands at 2½% for the third quarter, the ISM indexes are broadly stable in the low 50s, payroll employment is growing at a pace of around 100k per month, and the unemployment rate has been flat for the past three months.

2. Although the recent US growth news has generally beaten low expectations, we expect a renewed deceleration to just a ½%-1% growth pace in the next two quarters and see the risk of renewed recession at about 40%. The main reason is the turmoil in the euro area, where we switched to a recession forecast last Monday. To be sure, there is more talk in Europe about the types of action that we think would help, including a larger financial safety net for sovereign issuers (perhaps achieved by “leveraging” the EFSF), proactive bank recapitalization, and monetary easing. But policy continues to move very slowly relative to the building risks in the financial system and the deterioration in the real economy. A true turnaround in the financial situation does not yet appear to be in sight, let alone a bottoming in the real economy.

3. There are several channels through which the European crisis is likely to weigh on US growth. The impact via reduced exports is the most obvious, but it is unlikely to be very large. Exports to the Euro area account for about 2% of US GDP, so an impact of much more than 0.1-0.2 percentage point would probably require a much deeper European recession than we are forecasting. The bigger issue is the significant tightening in financial conditions and the availability of credit. Since early summer, our financial conditions index has tightened by more than 50bp, a move that might shave ½ percentage point from growth over the next year. In addition, there are some early indications of tightening credit availability including an increase in the percentage of small firms reporting in the NFIB survey that “credit was harder to get” last time they tried to borrow (the next update is due on Tuesday). Tighter credit could easily shave another ½ point or more, for a total impact from Europe on US growth of 1-1½ percentage points. Should the European recession deepen, the risk of further dislocations in the financial system and greater spillovers into the US would grow (for more on this, see Andrew Tilton’s US weekly dated September 16 at US Economics Analyst: 11/37 – Will the European Storm Cross the Atlantic?).

4. One key question is whether the European crisis—and the unsettled fiscal policy environment more generally—has caused a sufficiently large increase in uncertainty to lead companies to postpone hiring and capex decisions in a self-reinforcing manner. There is some evidence that corporate behavior may be changing, as online job ads have dropped off and the percentage of firms increasing employment in the nonmanufacturing ISM survey has declined at the most rapid pace on record over the past two months (data go back to 1997). No such deterioration was visible in Friday’s payroll numbers, but online job ads lead by a month or two and most of the ISM responses probably came after the payroll survey week, so the jury is still out.

5. The other key drag on US growth is the tightening of fiscal policy. Our baseline assumption remains extension of the employee-side payroll tax cut and passage of a small business hiring incentive; we do not assume extension of emergency unemployment benefits (although this is a close call), a further expansion of the payroll tax cut as proposed by the President, additional infrastructure spending or aid to state governments, or another foreign repatriation tax break. We also expect the Congressional “supercommittee” to agree on spending cuts and revenue increases that cover part of the mandated $1.2 trillion in savings over 10 years; the remainder will likely come via automatic cuts that take place from 2013. Overall, we view the risks around our assumption of just under 1 percentage point of fiscal drag (excluding multiplier effects) in 2012 as roughly balanced at present.

6. Even in the baseline case of no recession, we expect additional monetary easing as the Federal Reserve supplements “Operation Twist” with yet more purchases of long-term securities financed by creation of excess bank reserves (that is, additional QE). We believe that this could still boost growth a bit by further reducing the term premium in the Treasury yield curve and thereby ease financial conditions. But policymakers are clearly running into diminishing returns. If they want a bigger impact, they will probably need to supplement additional QE with changes to the Fed’s monetary policy framework. A relatively incremental version of this is the proposal by Chicago Fed President Evans to promise no monetary tightening until the unemployment rate falls back to 7%-7½% and/or inflation rises to 3%. A more radical version would be a temporary increase in the Fed’s inflation target or a move to price level or nominal GDP level targeting as discussed by Jari Stehn a couple of weeks ago (see US Economics Analyst: 11/38 – The Fed’s “Unconventional” Unconventional Options).

7. While additional easing is likely eventually, we currently do not expect a big move at the November 1-2 FOMC meeting. This is based partly on the somewhat better data and partly on Fed Chairman Bernanke’s remark in his congressional testimony that Fed officials had “no immediate plans” to ease further. Of course, since Bernanke also said that he saw the economy as “close to faltering,” it probably would not take a huge amount of new information to change his mind, but for now our best guess is that the next statement will be less eventful than its two predecessors.

“The past few weeks turned out to be very difficult for equity markets overall, driven by erratic news-flow surrounding
macroeconomic data releases and the peripheral European debt situation. We think that this market regime with huge swings is likely to continue for the next couple of weeks and months.

Next week, the Q3 2011 earnings reporting season starts in the US, with Alcoa set to report its Q3 2011 results on 11
October 2011 after the close of trading. Earnings momentum has decelerated sharply ahead of the upcoming earnings
releases, led by materials and financials as well as by Switzerland and Europe. We are not sure if the Q3 2011 earnings releases will provide the catalysts to turn earnings momentum around, unless companies give very good and convincing outlook statements, and we bear in mind that revisions of outlook statements are always lagging.

So, valuation is indeed fairly attractive on various metrics, even if we take potentially lower earnings following
downgrades into consideration, and our analysis indicates that equity prices now discount a typical recession. However, we think sentiment needs to turn before any upside valuation can be fully realized. While we would not rush into equities right now, we think that investors that are underweight the asset class could potentially use periods of extreme weakness and risk aversion to selectively build up positions with stocks of sector/regions we like and also topics, which we like: Emerging markets and beaten-down stocks.”

They list several of the usual suspects on their overweight listing in the USA including: Chevron, Anadarko, Halliburton, Freeport-McMoran, GE, Deere, Starbucks, Coke, Kraft, Phillip Morris, Baxter, Pfizer, Microsoft, Google, Oracle and Apple.

Source: Credit Suisse

“1) The USA Today consensus showed that strategists have cut their year-end S&P 500 target by 8%.

2) Wall Street economists are at 40% recession odds, which means if the heads of research allowed them to really say what the probability was it would be 80%.

3) Bank of America let its chief equity strategist go who was calling for 1,450 on the S&P 500 and the most bullish seer of out there (we wish him well).

4) The AAII investor sentiment suvey shows 30.2% bulls and 40.3% bears.

5) The Investors Intelligence survey also did a switcheroo, with the bull camp in the past week down 3.2% to 35.5% and the bear share rising the same amount to 40.9%. That is the largest number of bears since March 2009 (was 21.5% at the July market peak). And we have the fewest bulls since the August 2010 retest of the lows back then. The “spread” is now -5.4% between bulls and bears, well off the +28% gap at the July market peak.

6) Short interest on the NYSE and Nasdaq surged nearly 4% in the second half of August; these positions are now being squeezed, which is the “buying support” the market has been experiencing in the low volume rally of the past few sessions.

Remember, it is not at all unusual to see the stock market enjoy a relief rally after the initial 20% leg down in a cyclical bear market.”

Source: Gluskin Sheff

Interesting day so far – stocks down, interest rates down, commodities down, including gold (seems the found Hugo’s gold?) but the euro is up some, after falling some last week

With federal deficits too low most everywhere, it’s like a general crop failure, with the question being which crops will go up the most vs each other. Not easy to say, but the euro has to be a bit of a favorite given the sincerity and intensity of their commitment to austerity/deficit reduction? And their new good buddies, the Swiss, now helping out by buying euro as others buy their currency with their new cap in place.

However lower crude and product prices do help the US more than the rest, so that’s a factor that gives the dollar an edge. And the portfolio shifting/speculation/trend following in illiquid markets can overpower the underlying fundamentals as well medium term.

And the dollar and the euro are seeing bids from China and Japan now and then as those nations work to protect their softening export markets.

My least favorite currency longer term may be the yuan, with its inflation issue and ongoing deficit spending, both direct and via state bank lending, though they too seem to be cutting back some.
But until FDI (foreign direct investment) lets up, those ‘flows’ continue to support the yuan.

And commodity currencies are in a class of their own, weakening with weakening commodity prices.

It’s also noteworthy that the deflation is coming at a time when central banks, for all practical purposes, can’t be much more inflationary by (errant) mainstream standards of measurement.
Unfortunately, however, it’s not that they are out of bullets, it’s that the presumed lethal live ammo has turned out to be blanks, with mounting evidence that the gun was pointed backwards as well.

The obvious answer is a simple fiscal adjustment- just a few keystrokes on the gov’s computers can immediately restore aggregate demand/employment/output- but they’ve all talked themselves out of that one.

However it’s not total doom and gloom. For example, the US deficit is large enough to muddle through with decent corporate earnings and a bit of minor ‘job creation’ as well. And sequentially, GDP is slowly improving: .5 q1, 1.0 q2, and maybe 1-2% for q3. Good for stocks, not so good for people, but the bar is now set so low and the understanding so skewed that ‘blood in the streets’ isn’t yet even a passing thought, so don’t expect much to change any time soon.

And standby for the ECB writing the next check, no matter how large, to keep that all muddling through as well.