There once was a well-known hedge fund trader, Macro Mike, who was legendary on The Street for his trading prowess, as well as his extracurricular hugely successful gambling at the track, at the tables and on football games.
While Mike knew every statistic, chart pattern, inside whisper, injury report and impending stock movers, he also was famed for depending on his highly accurate “gut instinct” calls.
One morning Mike slept through his alarm a bit after a late night out with clients and cursed as he saw it was already 5:55 am. He raced through a shower and dressed quickly, hopping into his 3-year old leased Porsche. He was surprised to see the mileage sitting at 55,555 and knew it was time to turn the car in. As he turned on the radio, he noticed that it was tuned to 55.5 AM. He could not help noticing each speed limit sign denoting 55 MPH on the parkway and was now hardly surprised to hear the temperature was 55 degrees, as pulled into his office garage off 55th St.
Mike was uncharacteristically distracted in his morning meetings, but perked up when he heard his firm’s ranking had now moved up to 5th place in overall assets under management and got a text from his son that his batting average in HS ball had soared to .555. Mike couldn’t wait to take the late afternoon off and head to the racetrack. Eyebrows were raised when Mike placed a small fortune on the #5 horse in the 5th race to win, since this wager was unusually large even by Mike’s standards.
And, guess what? Mike’s horse came in 5th.
My apologies for a long way around to the point but I thought that a “cute” story I recently heard on the radio.
What I really want to talk about is the big picture for the market, once one gets beyond the non-stop coverage of the U.S. “debt crisis”, and whatever the short-term market reaction will be this week. (I see the futures rallying hard Sunday evening as I write this).
There is no shortage of analyst/pundit/equity strategist analysis of the market’s next major move, with the bull and the bear camps both well-represented and very vocal. And like Macro Mike, they are rather self-assured that “they” know the market answers going forward. I’ll try to keep this brief and simply summarize the major arguments being made.
The Bull Argument
- The worst cases of the European debt crisis, Japan’s issues and the U.S. budget situation have already been priced into the equity markets.
- Without the short-term “blip” of Washington inaction, the equity indices would be sitting at fresh 52-week highs right now.
- Bottoms are being put in on the employment and housing situations in the U.S., as recently demonstrated last week by some more favorable data in each case.
- Corporate earnings will continue to power the market higher in the 2nd half of 2011 and going forward. With 66% of S&P 500 companies reporting, 72% overall have surpassed expectations,
and 85% of tech companies have done so. Earnings growth is +18% year over year versus a +13% forecast.
- The “muted reaction” by the market to Washington’s follies and some recent soft economic data proves the market’s overall resiliency. The end of QE2 was a “nonevent”.
The Bear Argument
- The bottom is far from in for housing and unemployment and the overall trendlines are still weak. Bank lending to homeowners and small business is still stalled out and consumer spending
and confidence are hardly back to where they should be in a growth scenario.
- The macro situations in Japan, the U.S. and Europe are obviously shaky and unstable, with one or two more “surprises” leading to a major market “event” to the downside. The price of gold
tells you all you need to know.
- Despite an admittedly stronger than expected earnings season, many large industrials and some large techs have issued ominous forecasts going forward. Earnings continue to be driven by
cost-cutting more than revenue growth, Major layoffs are announced every week, not major hiring programs.
- The overall “strength” of the equity indices in 2011 is being driven by a relatively small number of market leaders. Of the 100 most active stocks and ETF’s by volume traded in 2011 on
American stock exchanges, 44 were positive in the 2nd quarter and 56 negative, despite the S&P being up almost 5% (the argument is essentially a variation of the 80/20 rule, which would
state 20% of overachieving stocks are accounting for 80% of market gains).
- There are indications of major hedge fund “derisking” accompanying three straight down months in the market (which has not occurred since 2008).
- And most importantly, the 2nd Qtr. GDP figure of 1.3% growth was anemic and well short of 1.8-2.0% expectations (and a +3.3% forecast as recently as May). Since 1970, 6 out of 7 times the real GDP has slipped below 2% growth year-to-year, it has signaled the onset of a new recessionary period.
So, quo vadis? Where are we going? I wish I knew. But I think we can all learn a lesson from Macro Mike and understand that “absolute certitude” can be dangerous in this ever-changing investment environment.
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