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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 !!!

Tuesday, December 20, 2016

Stock Market

Consensus View
The e-inbox is stuffed with market forecasts for 2017. Based on a rather broad survey, seers
are looking for the market to range between SPX 2300 - 2500 for next year, with 2400 a suitable
mean. the hope is that a Santa rally will allow the market to close out this year at new highs. A
popular idea is that corrective action will set in sometime shortly after the new year as skirmishes
with Congress are set off after the inauguration when Trump rolls out his fiscal policy programs
and his cabinet appointments are debated. However, the overall view is that Trump will get the key
tax elements of his program through and that the economy will thread the needle in the new year
via moderate economic progress that is not sufficiently rambunctious to trigger off a sharp rise
of inflation or nasty action by the Fed. Because economic growth will not be that strong, we will
witness a sort of dwarf goldilocks economy. Presently, economic indicators are positive and there
is an as yet not adequately tested longer run cyclical trend line that runs out to 2500 at y/e 2017.

Most fundamentals - based forecasters seem to expect SPX net per share to reach a range of $125 -
$130 next year but there is some considerable disagreement over what p/e ratio is appropriate
to select based on differing views of how much inflation the US will get and in turn, how
aggressive the Fed will be in boosting rates. But, very few forecasters see a p/e ratio below 18x.
I think this stems from the idea that 2018 will see another year of strong earnings.

My Thoughts
The consensus view is too elegantly crafted in my view. Total business sales have improved, but
are still very modest. And, if orders do continue to pick up and inventory excesses are further
trimmed, eventual pipeline filling will put surprisingly strong upward pressure on prices, thus
forcing the Fed's hand. Plus, we are talking Trump in 2017. Maybe he will succeed in putting
more money in peoples' pockets, but he is easily 30 years behind the times and the macho
buffoonery elements to his 'America First' view cry out for geopolitical challenges. He is set
to make the US and rest of the world more volatile. I see egomania and a penchant for
insistently fanciful thinking. The US is sharply divided and his antics could create additional
social pressures.

The SPX chart shows an intermediate term overbought condition is developing.  SPX Daily

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