Am I Bearish – Part II: Very Much Not – For Now

As I detailed in my post from 10/21, the resolution to the European sovereign debt crisis has played out according to what I had anticipated.  Merkel had sufficiently lowered expectations to allow for a plan the market would embrace.  U.S. corporate earnings are benefiting from the same mechanism: beating lowered expectations.  With bearishness so high, as expressed in cash not just sentiment, the market was spring coiled for a pretty strong move higher.   I had raised the prospect of a knee jerk sell on the news, always need an “out,” but that was not my high probability case and I did say I would have added on that momentary decline.  I dont’ expect same reaction in US markets as we had in Europe.  Asia type pop is more likely today.

But that is just for today, we will go up by 10-15% from here.  How do I get to my upside: market basically flat on the year despite S&P earnings up approximately 15% this year and forecast up 13% next year.   So we’re behind by that 15%, at least.

So where are we now?  Europe is in a recession and it will deepen.   In order for the banks to get to 9% Tier 1 ratios, they will begin by pulling in credit lines, removing that portion of  their liabilities.   This will lead to a further stifling of credit. Austerity measures will further crimp spending.

But most importantly we face the overhang of the details.  But at this point there is no reason not to believe that the EU will work out sufficient details to support the plan.  Maybe Washington can take a lesson on getting a plan to the finish line from the 17 EU currency countries. Nonetheless the trend of the market is higher. I am still sticking with high quality defensive stocks for the most part: WLP, KO.   After today, junk will still be junk and quality, still quality.  NFLX still overvalued, RIMM, despite all its problems, still cheaper than NFLX.  At least they are making money during an all out assault on their business model.  Hold sold most of NIHD before release given high expectations and big run but will buy tight here, down 14%.


2 Responses to “Am I Bearish – Part II: Very Much Not – For Now”

  1. 1 Ben Hoben October 27, 2011 at 10:42 am

    It’s somewhat of a confusing market. On one hand you have CAT blowing away earnings and raising guidance but then you have what I would call consumer “tech growth” companies like AAPL and AMZN missing. While AAPL may have seen sales delayed due the a new iPhone coming out they still missed on iPad sales. And AMZN lowered guidance for the 4th quarter which is where they have shined the last couple years.

    I think some are mis-interpreting the strenght in some of the industrials such as CAT because their earnings are coming from overseas and emerging markets. What AAPL and AMZM may be foretelling is a slowdown in the US.

    The big question is will this solution in Europe fix the problem or is it just a patch and we see another crisis 6-18 months down the road? Will it keep them out of a recession or will it just prolong a recovery?

    I think gold is telling us something. Money printing is going to be back on the rise which will fuel money going into commodities which won’t be helpful to a recovery.

    To me things may still come crashing down at some point but the market doesn’t seem to want to price anything bad in anymore.

    Thanks for the new blog. I enjoy it.

    • 2 stephenlweiss October 27, 2011 at 3:05 pm

      I don’t believe you can correlate AAPL and AMZN to the market. I agree on the other points with the exception that the market is a discounting mechanism and had discounted a lot of bad news, not necessarily by the averages alone but by the amount of cash and the short interest. With that news being so well disseminated and Merkel having done a great job lowering expectations it was off to the races. The problems that exist now are manana problems that provide some headline risk but otherwise off to the races for now.

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