This Is What Makes a Market

There has been no shortage of widely conflicting opinions on the future direction of the equity markets, as I am sure you have seen, heard and read over the past week. State of the Markets has recently featured summaries of the positions of several prominent bulls and bears, which can be found in the archived articles.

I will state here that I do not think I have ever seen a moment in time in the market where the camps are so widely split or where the gap is as large between best and worst cases. We are talking "utter doomsday double-dip recession scenarios" versus "best buying opportunity since March of 2009."

However, most commentary is somewhere in the middle and by my unofficial reckoning is running about 65%/35% to the bullish side. Two common themes seem to keep recurring:

• “A great time to be buying large stable multinational dividend paying stocks…even if market does test down a bit further, you are getting paid better than bonds while you wait for the inevitable rebound.”

• “If the situation in Europe hits a real breaking point and leads to another 2008 global credit/banking crisis, all bets are off.” (as if we will know exactly when that point is…)

Let’s take a look at some additional commentary from last week and this weekend for some specifics (sorry for the length but important to get the overall flavor..)

• Saturday’s Barron’s Roundtable: “Our professional panel is buying up stocks after a wild week of trading. But they say the markets will fall further unless policymakers in Europe and the U.S. take decisive action to curb sovereign debt issues.”

• Michael Darda, MKM Capital: “Recent widening of high-yield spreads precedes declines in earnings expectations by 3-6 months, ECB is dooming Europe to recession and contagion.”

• Michael Santoli, Barron’s: “In the absence of a true credit or systemic crisis, the VIX over 40 signals a good time to buy historically.”

• Bridgewater Associates: “There is a high probability of an unmanaged banking and sovereign debt crisis in Europe” (notable as Bridgewater generally considered the world’s premiere hedge fund, but notably tight-lipped as to its complex strategies, i.e., they could be net long equities with a variety of hedging mechanisms in place).

• Ned Davis Research: “The Ned Davis Research ‘cycle composite’, blending historical one-, four- and 10-year patterns, has turned negative.”

• Arthur Levitt, former SEC head: “The stock market does not have the uncertainty of 2008.”

• Doug Cliggott, Credit Suisse: “It is inevitable that we will see an earnings growth slowdown.”

• Tobias Levkovich, Citi: “Investors should be nibbling at the market at this time.”

• Bruce Kasman, JPMorgan: “The Fed is trying to create an environment which favors risk”.

• Bob Doll, Blackrock: “We do not believe the economy is facing weakness that would lead to a new recession…we are cautiously optimistic on stocks, which have priced in a more negative scenario than we expect.”

• Rob Kapito, Blackrock: ‘Remain calm, there is opportunity. Need leadership out of Washington and Europe to dispel lack of confidence. Diversify in dividend stocks, corporate bonds and commodities.” (Blackrock notable as world’s largest asset manager).

• David Rosenberg, Gluskin Sheff: “The latest financial shock will slow growth and show up in earnings later. We are staring a recession in the face and it is not priced into the cyclical part of the market.”

• William Irving, Fidelity: “The market is pricing in a 25-50% chance of a recession...the key for our clients is maintaining a well-diversified portfolio.”

• Art Cashin, UBS Floor: “Bottoming is a process which may take some time. We have to hope nothing further comes out of Europe which is even worse, but we will survive that too. Jackson Hole Fed meeting will be the most watched event.”

• Jim Cramer, CNBC and TheStreet: “The exaggerated moves and velocity of the moves not a sign of market health. The end of week rally may have created a false sense of security. The worst could be far from over.”

• Jeremy Siegel, noted Wharton economist; “A huge mistake for the Fed to be trying to set interest rate policy for 24 months at a time. No one knows how the situation will evolve and either they have locked themselves into a policy they may not wish to pursue later or they will destroy credibility.”

• Doug Kass, SeaBreeze Partners: “I am the longest I have been in a year. The year’s low put in this past week at 1120, based on many indicators but also the fact the S&P downgrade will serve as a wake-up call to Washington.”

• Steve Liesman, CNBC: “Our most recent survey of economists, portfolio managers and strategists shows: 1) better than 50% chance of QE3 2) 1 out of 3 chance of recession and 3) S&P average year-end target lowered to 1252 from 1364.

Finally, please don’t hesitate to give us your thoughts by adding a comment to this article.

 

  S&P 500 - Last 12 Months

 

The Underground Trader posts are authored by a long-time friend and colleague who specializes in trading futures and options. The Underground Trader is a very close watcher of the indices and is a market junkie who cruises message boards, trading groups, news feeds and opinion sites for any edge he can get. Do not bet the ranch on any of his comments but they are usually interesting and definitely food for thought.