About Me

Retired chief investment officer and former NYSE firm partner with 40 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, January 01, 2017

SPX -- Monthly

The market closed out the year nicely positive. My projection for the SPX, made 15 months ago, was
that the market would close out at 2160. Instead, it finished the year at 2238 or 20.7 estimated 2016
net per share. I foresaw rising earnings, but not the premium multiple. I expect net per share for the
SPX to rise to $120 - 130 for 2017, but accord only a p/e ratio of 17.6x based on a rise in the
inflation rate to 2.4% and a few more hikes in short rates. So, this puts fair value at about 2200 for
the SPX, or nearly 6% below the 2016 close. This value is well below the consensus range of
SPX 2300-2500, and reflects an adjustment to the p/e ratio for a pick up of the inflation rate,
something most other forecasters give short shrift to. I also assume that earnings benefits that
might flow from a Trump policy of fiscal stimulus will more likely arrive in 2018, and allow
risks to earnings from possible Trump restrictive trade and immigration policies not included in the
consensus calculations.

Now, one has to recognize that the SPX itself is on trend, when extended, to rise to 2500 by the
end 2017. Playing 'extend a trend', however implicitly, is no small pastime of Wall Street, so there
is a neat fit with the strong idea that the new administration is going to be very business friendly.

With the old adage that 'the trend is your friend' in mind, and with no red flags yet on probable
SPX net per share and the vigor of inflation, many investors and traders will probably go along
with this high powered projection. You might keep in mind that the SPX could decline this
month to 2100 and not upset the apple cart.

Monthly Chart
The chart shows a continuing cyclical bull but one with very subdued momentum since the end
of 2014. That's when the Fed tightened policy substantially by freezing the monetary base and
its own balance sheet. it also reflects a down wave in economic activity and in profits which has
started to reverse recently. Importantly, the monthly MACD has experienced a positive cross-
over and is trying to lift. The bottom panel shows a broad range oscillator and reveals the
best entry points for this market (when the oscillator falls below 50%). At present, the
oscillator is moving up toward an overbought.  SPX Monthly

Oh yeah. Happy New Year.

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