Basis For Better Market Seems Likely

[boont]

Doug Kass, Street.Com

A combination of a higher U.S. dollar and Japanese yen, the vortex of selling and unwinding of long commodities positions (by pension plans and endowments, corporations, hedge funds and managed commodity funds) and renewed evidence of a deepening recession have served to accelerate the decline in commodity prices.

According to the lynx-eyed Denny "The Man" Gartman the DJ-AIG Index is "down a stunning 18.6%, and the month is only three-quarters over! For the year, the index is down 26.2%."

Remarkably, the CRB Index, which includes energy product prices, is now back to its late 2004 level. The CRB Raw Materials Index, which excludes energy product prices, is back to its level last seen in summer 2006.

In the aggregate, the energy, materials and related sectors only account for about 25% of the S&P 500's profit, so the remaining 75% of the S&P is poised to benefit from the cost relief associated with lower commodities prices. This, combined with the continued tame year-over-year change in unit labor costs (of around 1%), will produce a marked deceleration in headline and core inflation.

While the outlook for top-line revenue growth in 2009-2010 remains problematic, the above cost trends will, in the fullness of time, act as a headwind to a sharp mean regression in corporate profit margins.

For now, a bull market in fear, concerns regarding a "Great Recession" and the continued indigestion in the hedge fund and fund of funds industries remain front and center. Over time, however, the basis of an improving intermediate-term market picture seems likely to reassume center stage based on the following considerations:

* Inflation is ebbing.

* The Fed is and will remain market-friendly.

* The credit markets are thawing.

* Fiscal stimulus appears on the way.

* Financial institutions' capital bases are being shored up (posthaste!).

* Stock valuations are subdued.

* Investor sentiment is at record negative levels.

* Forced selling by executives, individuals, hedge funds and fund of funds has historically marked a market bottom.

Color me uncertain about the market's near-term outlook but more bullish about the market's intermediate-term outlook.

 

[Frugality_of_Apathy]

Wow he must have been laying the roase coloring on his glasses extremely thick to get that.

Inflation is ebbing? The just approved the largest cost of living adjustment SS in addition to creating 1.2 trillion dollars out of thin air.

The fed already has the rates at near zero, the only place for the interest rate to go is up unless we are looking to intentionally create hyper-inflation.

Fiscal stimulus? Didn't that already happen a year ago to no great effect? What makes him think doing the exact same thing that didn't work a year ago will work this time?

I think everything else he mentioned can be covered by the fact that most of the 5/1 ARMs still have a 3 more years until everything bought until the peak of the boom resets. And in those years more and more people took out ARMs. Even when they reset most people try to tough it out for a couple years when over their head until it's just not possible to keep up. So foreclosures have got a few more years worth of artillery to hammer the market with.

 

[dex]

Wow he must have been laying the roase coloring on his glasses extremely thick to get that.
Inflation is ebbing? The just approved the largest cost of living adjustment SS in addition to creating 1.2 trillion dollars out of thin air.

Cost of living for SS lags actual inflation - the recent adj. announced include the $140/barrel oil. The 1.2 trillion - majority borrowed.

The fed already has the rates at near zero, the only place for the interest rate to go is up unless we are looking to intentionally create hyper-inflation.

Inflation requires more than just low interest rated - e.g. - low unemployment, high factory usage, shortage of raw materials.

Fiscal stimulus? Didn't that already happen a year ago to no great effect? What makes him think doing the exact same thing that didn't work a year ago will work this time?

Beneke suggested another one would be a good idea - so it must do something.

I think everything else he mentioned can be covered by the fact that most of the 5/1 ARMs still have a 3 more years until everything bought until the peak of the boom resets. And in those years more and more people took out ARMs. Even when they reset most people try to tough it out for a couple years when over their head until it's just not possible to keep up. So foreclosures have got a few more years worth of artillery to hammer the market with.

++++
It is difficult to have perspective as to what is happening now - because we are too close to it and we do not know what might happen next.

Just as many did not see it coming; we do not see how it will end.

He is stepping back and looking for the past signs that have signaled a bottom in the market.

 

[audreyh1]

Wow, Boont! Something positive about the markets and future!

Kass has been a pretty strong and vocal (screaming) bear until very recently.

Inflation will be low for the near future. No predictions for a couple years out - depends on how deep this recession is.

I'm no longer worried about the folks with ARMs - lenders are going to be furiously renegotiating loans. May not cause foreclosure rates to drop, but there will be a large force working to mitigate the situation that wasn't there a couple of years ago.

Audrey

 

[Donzo]

I also believe it will be mostly up from here. At 8% growth per year (excluding dividends) it would take 5+ years to get to where we once were. I think that is reasonable -- but its going to be a very bumpy ride. I think there will continue to be vicious ups and downs - but the trend will start to be up.

 

[Lusitan]

(deleted - posted in wrong thread)