CREDIT SUISSE: TWO BULLISH DRIVERS FOR 2012
Just expanding on the previous QE3 post here. Looks like Credit Suisse is working under a similar theory. They see the QE3 catalyst and the movement in tail risks as bullish trends in 2012 (via Business Insider):
“We stick with our benchmark of equities and keep our 2012E year-end S&P 500 target of 1,340. Equities will likely be guided by two key issues in 2012: a)investors moving into equities as a deflationary outcome is averted when there is de-facto co-ordinated QE in late Q1; and b) the movements in tail risks (which we see predominantly coming from the Euro crisis, aggressive fiscal tightening in the US and Chinese housing).
Excess liquidity is rising strongly – and this is before there is more QE in 1H2012E from the [Bank of England]], Fed, BoJ, with the ECB initiating QE in late Q1, in our view.
…
Two months ago, the FOMC were split 7-3, with the minority in favour of a tightening policy. Now, the FOMC split is 9-1, with the 1 dissenter (Evans) clearly favouring an even looser monetary policy (making Fed tightening contingent on a certain level of unemployment or inflation target being met). As we mentioned above, our economists expect QE3 to start in 1H2012.”
Source: Credit Suisse
why equities should rise sustainably after QE3? It has been 2 times tried, how will 3rd be the charm?
ECB doing direct QE would be something. Not sure about the rest however..
Two keys here: move into stocks is after QE3 when, in theory, they will be at much lower levels. However, and I hope I am right, a surer QE3 bet is bonds and the time to buy would be now, not after QE3. Diz equity strategist boyz have a twisted way of thinking.:-)
qe 2 was announced in Aug 2010. 30 bond yields bottomed at ~3.4% in Aug 2010 and topped in Feb 2011 at ~4.8%. If I know Qe3 is coming sell bonds buy commodities
QE3.0 is not coming……. prepare for several to many defaults. Bernanke has already stated clearly that there will be no FED rescue of European banks!!
@Octavio, “a surer QE3 bet is bonds and the time to buy would be now, not after QE3″. Is that because the Fed and other CB’s will be buying bonds as they implement their coordinated QE? However, won’t the hedge funds and large financial institutions be selling their bonds and buying riskier assets, in order to be part of a bull rally initiated by QE? If I remember correctly, bond yields have fallen in between the bouts of QE, and yields have risen during the first couple of months after QE was initiated.
Yes, it ain’t that simple but I do say that an equity bet based on a qe3 rationale would come later at a point when equities are lower, not now. IMO, no rush to jump in, you will have the time. Recall as well that historically it has not being a good idea to be in stocks until ECRI changes his business cycle call to positive. Buy and read their little book, which I have, btw, ignored frequently to my own detriment. They do have something going on in the investment style they recommend.
Going back to bonds. Yes, they are volatile, one would have to reasses the situation dynamically, but if qe3 comes it is because the economy is a mess and since qe does not work bonds usually resume their downward trend. If you are In a medium duration bond fund, e.g. 5 years, remember the rule of thumb: 1% change in rates generates a price movement equal to that chage times the duration. In a slow economy there is virtually zero risk of a rate increase, ergo, I see bonds being a lot less risky despite what the talking heads continually tell you on tv. The time to get out f bond will come but u will have a lot more time to get out at a low loss (not zero but not big) getting out of stocks with a low loss is more difficult.
@Octavio, thanks for your insights. For the record I am 55% in bonds now, but was looking to reduce that position, not to increase it. I recently place limit orders to start selling some of my bond ETF’s when the price reaches a certain limit. I’ve got a decent paper profit now and don’t want to lose it if there is a new massive coordinated gov’t intervention in Europe and worldwide. Although I tend to agree with you that over the next 6 to 9 months it appears we will work our way down to lower bond yields and higher bond prices as we see a twin slowdown both in China and in Europe. The China slowdown I’m not too sure about.
the only reason not to be sure of a China slowdown is that their government statistics are at least as manipulated as ours, and probably more. Actual on the ground slowdown seems very likely. 60% of China’s exports go to Europe. Condo prices in the big cities are falling. Their real estate bubble is starting to look at least as big as ours was, and maybe bigger.
While the growth of consumer spending there has been impressive, the way they were able to keep growing when their export markets were hurt by weak economies, was government spending. It is hard to predict when, but at some point they will simply run out of dams, highways and high speed rail lines to build.
It is very impressive that the Beijing airport is the largest airport in the world. I have been to the Guangjou airport and it was very large and very nice. But these are now built, as are similar airports elsewhere. Their highway system now has approximately the same number of divided highway miles as the US. Their rail system is much more developed than the US. At some point building skycrapers on spec, even with government money, runs its course and collapses on you. And in China, they have built whole cities on spec, that remain unoccupied. They have built the largest shopping mall in the world, and it is less than 1% occupied.
Morningstar thinks that China’s rate of growth will slow to around 5% per year over the next 10 years. Personally, I think they are overoptimistic.
I have about the same in bonds. Rest in cash looking for an opportunity. Perhaps after the NY
Any doubt qe3 is coming? Read this. My latest post from the FEDEX rosy post above.
Octavio Richetta
Work, do you want an A+ answer to your question? READ THS! This is THE BEST analysis of the EU crisis from an investing point of view I have read todate. As I have said many times, you are now starting to see people saying this is worse than 2008. My words here:
THIS IS A SOVEREIGN. DEBT CRISIS COMBINED WITH A TOTAL FAILURE OF THE BANKING SYSTEM PLUS THE BREAKUP OF THE SECOND MOST IMPORTANT CURRENCY AND ECONOMY IN THE WORLD.
So this is NO JOKE, this is a PERFECT STORM and the lobster boat has already been lost (did anyone read the book? Lobster boat sailing out of Gloucester; I lived and sailed a 40 ft sloop not too far from there) I hope Cullen posts this “one of a kind” interview.
http://www.zerohedge.com/news/founder-30-billion-hedge-fund-bluecrest-says-most-euro-banks-are-insolvent-euro-situation-much-
Reply12/15/2011 at 1:32 PM
http://www.youtube.com/watch?v=lvuZ7CQIkJo
Vid version of aforementioned ZH link.