Core fundamentals -- interest rates, liquidity, confidence measures
remain positive and support continuation of an "easy money"
cyclical bull market.There has been some slippage in the indicators.
This is entirely normal and I note that the erosion is from nearly
unprecedentedly strong levels.
Corp. earnings remain in a strong uptrend and continue to accelerate
relative to the long run trend. Importantly, profits, though rising,
remain well below levels that would signal a cyclical peak and
fundamental trouble for the market.
My SP500 Market Tracker, which started to bottom a year or so
ago with a value of 655, has jumped to the 1190 level on a dramatic
recovery of earning power. For most of the cyclical bull run since
3/09, the SP 500 actual has traded at a substantial premium to the
Tracker value. With the recent sell-off, however, the market is
currently running at a 9.6% discount. So, the market is now
attractive relative to fair value as the Tracker has caught up with
and surpassed the index. Estimated Tracker value based on full
year 2010 expected earnings is just shy of 1350 and I do not have
an issue with that number at this time.
Now for a couple of secondary indicators. The sharp run-up in the
real price of oil off its 2009 low did not appear to have damaged the
market. Moreover, the oil price has recently sold off sharply along
with the stock market. Thus, the oil price indicator has not been
useful so far. The other secondary indicator concerns financial
liquidity and this requires some discussion.
The large liquidity tailwinds the stock market enjoyed over 2009
have ended. For example, combined retail and institutional money
market funds aggregated a record $3.50 tril. in 3/o9. By the end of
April, 2010 the combined mm fund total stood at $2.66 tril., or 24%
below the '09 record. In turn, the $2.66 tril. of 4/10 compares with
the $2.9 tril. on hand in mm funds at y/e 2007. In short, the large
build up of cash that occurred over the recession and the deep bear
market has been more than fully drawn down. Also note that total
system financial liquidity has been shrinking mildly while real
economic output has been rising. Thus, the liquidity tailwinds
have reversed course viv a vis the stock market, and are now
headwinds. This is a short term issue for the stock market, but
you have to be careful not to draw dire conclusions yet, since
economic recovery will prompt mm fund growth and, eventually,
private sector credit growth, which will expand the base of liquidity
available to the capital markets. However, suffice it to say that since
the Sp 500 is dramatically above the 2009 cyclical low, plenty of the
bucks available have been put into play.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!