About Me

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 !!!

Sunday, September 27, 2015

Stock Market -- Fundamentals Through 2016

My little business outlook through next year would ordinarily be regarded as the plainist of plain
vanilla, but in today's sloppy environment, it seems positively heroic. There is sufficient monetary
liquidity / credit availability in the US financial system to support business sales growth of 5%
and SPX net per share growth of 6% by year's end 2016. This estimate includes improved physical
volume growth and an increase in pricing power from 0% today up to 2%. I expect the WTI oil
price to average in the mid - $50s per bl. and for global economic supply and demand to come into
modestly better balance as demands lifts a bit and on an expectation that shut ins of unprofitable
capacity accelerates. I am looking for the $USD to lose ground down to the 85 - 90 area and for the
the Fed Funds rate to rise up to 1.00% by year end 2016 as the Fed gradually restores normalcy
to the system. The key assumptions in all of this is that US monetary velocity or turnover stabilizes,
and that consumer, business, and banker confidence will support it.

I figure that SPX net per share will increase from $115. this year to $122 next year and that the
p/e ratio for 2016 will be at 17.7x. Thus I look for the SPX to close out 2016 at about 2160 or
modestly above the earlier in this year record close of 2135. If these projections are well in
the ball park on profits growth, inflation and the Fed, the market could receive an extra boost
from significant rotation out of bonds into stocks.

I do have a simple fair value model of the SPX based on longer term assumptions of business
volume growth, the inflation rate and earnings plow back rate. The model has the SPX fairly
valued at 1870 for 2015 and 1985 for 2016.

Every 7 - 10 years the world seems to go through a period when Murphy's Law -- Whatever
can go wrong, will -- begins to nip away at our institutions, economy  and markets. The US
stock market has sometimes sailed right through these periods, but you folks need to be extra
vigilant in the years straight ahead to see where Old Murph might surface, and what disturbing
developments might do to confidence and the markets. We are definitely moving into a period
where shit assuredly happens!

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