S&P to go to 1620-1650 in 2013

Business Insider had some nice slides where several gurus showed their chart of the year. The above of Matt King shows how the S&P500 marched up with the balance sheet of the FED. A $1000 billion QE was enough to get the S&P500 320 points higher.

It is not at all clear how much Money the FED will throw to the markets in 2013. they promised $85B each month for the time being, less is not possible with current fiscal spending cliff uncertainties. But what to do when the economy recovers in H2, or worse when the confidence in the FED to prevent inflation will go down? Then QE will stop. For the time being it is estimated that the FED will buy between $500B and $1000B. Let us say $750B, then the S&P could rise 240 points to about 1650.

This chart of Kleintop showed how well the S&P tracked the average presidential cycle of the last 28 years. This could continue and should mean about 15% for the S&P in 2013, or about 1620 for the S&P500.


15% in the first year of a president is more than average since WWII (there were several nasty bear markets in the first six/seven quarters of a president cycle) , but maybe it is possible with the of Bernanke. Profit growth will be much lower in 2013 but expectations for 2014 could improve.

So 1620-1650 is an educated guess according to the president and monetary cycle.

Overpessimism is back: reconnection of Nasdaq/Topix analogy

For a long time the collapse of the Nasdaq after March 2000 followed the collapse of the Japanese Topix since December 1989.


Since November 2011 there was a disconnect between Nasdaq and Topix lagged with a bit more than ten year. The Nasdaq went up, while it should have gone down according to the believers in the Japan scenario. They had to wait a bit, but now they are screaming victory: the Nasdaq will reconnect to the Topix movements ten year ago and so it will fall about 60% from now on before you can dream again of a big bull market.



The number of doom and gloom stories is exploding. They are emphasing now that the Japan scenario is now insanely overoptimistic for what we will see in the coming years. Sovereign bond yields are saying loud and clearly that there will be no growth in the world for the next 30 years, for decades you will not get positive real interest rates (as is priced in now). Never will the equity market go up structurally unless deleveraging has been finished enough and that will not happen in the next thousand years because governments have to pay for care and healthcare and trillions a quarter to keep the banking system a life. They don’t see a way out. The ICT-revolution is not leading to progress but decay. Governments were out of their mind when they privatised so much because governments are so much more efficient, not making profits.

Seriously, people proposed to buy put on bonds priced at zero % interest rates for short dated maturities, because interest rates have to fall deeply below zero and option models don’t take this into account and calculate too low prices for puts. It est prices for put at interest rates of zero are too low.

Soros with his speech how badly Europe is doing went viral. Everybody is saying this is the wisest thing they have ever heart about Europe (maybe with the exception of Reinhart/Rogoff). Patiently he explains the euro is a bubble that is going to implode. Italy and other PIGS voluntarily agreed to be downgraded to an Emerging Market that cannot lend in its own currency they can’t manipulate.

http://www.businessinsider.com/george-soros-speech-goes-viral-2012-6#ixzz1woFygyv5

Hedge funds finally know it fors ure: the good old times are gone forever. http://www.businessinsider.com/raoul-pal-the-end-game-2012-6#

The retiring boss of the worldbank agrees totally now he is allowed to say what he really thinks.

http://www.businessinsider.com/world-bank-boss-impending-catastrophe-a-rerun-of-great-panic-of-2008-2012-6

Lombard Street Research was talking about:

The looming cliff for asset prices

It is abundantly clear, let us migrate to Mars.

Chinese equities were a disappointment compared to the high GDP growth. Will they do better now!

In the Financial Times (http://www.ft.com/intl/cms/s/0/4c38bfc4-92b3-11e1-b6e2-00144feab49a.html#axzz1u0KENQdr China stocks battle the growth paradox) , was again an article that demonstrated good economic growth is not always a good equity market. The most grateful example for this is the Chinese market where since 2001 the equity market rose only 46% while the value of the output as up almost five times.

In general I agree with the thesis that the relation between the growth of the GDP and the stockmarket often is not that good or not there at all, but one should not too automatically take that as a certainty based on numerous scientific studies. Who could forecast well the economic growth in the next two quarters in the US could have earned lots of money with that in the previous few decades (more precisely: one should have avoided big losses: when you see a recession arriving you have to get rid of your equities).

The Chinese equity market is a difficult one with it’s a and B shares where you as foreigner are a B investor. Insiders that know what the government will do have a big advantage.

Wit IPO’s the prices are often way exaggerated obeying to the wishes of government that places again and again more shares of state companies. That continued dumping is also very bad for prices. So Joe Sixpack is very disappointed about equities and prefers to make money with art, porcelain, stamps etc. .

Government has dumped bad state companies at the markets. Especially banks had to finance these loss making state companies with lots of loans and so the banks were saddled with mountains of bad debt.

Because of the high GDP growth a lot has improved for the banks. The state companies are more efficient now and there are now more normal private companies at the market. So the quality of the Chinese equity market is a lot better than before say 2000.

 Until 2006 the Chinese equity market was doing horribly because of all those garbage, but in 2006 one started to realise that the quality of the companies had improved tremendously. Suddenly everybody started to buy and the Chinese started to gamble with stocks, believing the fairy tale that earnings would grow with at least the high nominal GDP growth. Then the credit crisis arrived and gone where the profits.

At the end of  2008 the Chinese government started to make investing in equities more attractive again with lower transaction taxes etc., not only with high infrastructure investments. As investor one can better believe the government (even more tha in the US don’t fight the FED) and so you had to buy.

The chart in the FT (http://im.media.ft.com/content/images/13065c62-92f3-11e1-b6e2-00144feab49a.imgc) suggests that the Chinese government thinks share prices are too low and that they want action, less insider trading etc. and the Peoples Bank of China will of course follow suit. Especially when you believe China has a soft landing you should maybe obey again to the Chinese government and buy Chinese equities!

All time highs for total return indices: FT all shares UK yes, SP almost

We are used to watch only the price indexes of equities without the dividend income.
When you watch the total return indexes you get (of course) a more positive impression. You see then that the relentless proceeding crash of 2000-2003 thanks to the dividends was entirely overcome in 2007 in most countries. In 2012 a lot of total return indexes are near all time highs or setting all time highs. The UK all share total return has set a new high and the S&P500 is only about 3% away from the all time high.
Several European indexes have done worse, for example the Dutch AEX that did (just) not set an alltime high in 2007 and now is still quite far away of the levels of 2007.

Risk appetite can increase a lot further but when Roubini is starting to get optimistic…

Several sentiment indicators signal an overbought equity market, but there are a lot of exceptions. One of the most important is the risk appetite index of Jonathan Wilmot of Credit Suisse (see chart via http://www.businessinsider.com/a-beautiful-chart-showing-3-decades-worth-of-panic-and-euphoria-2012-2#ixzz1lmPiHI7j). Already for decades that produces a reasonable picture how depressive investors are or how much they are in euphoria. At the moment the CS risk appetite index indicates that a big further improvement seems to be in the cards (when you have enough patience).

Since this week even Roubini provokes investors to become bullish for the short run (but after June the doom and gloom will retrun with a vengeance is his warning) many contrairy thinkers have had a heart attack. When even Roubini is bullish who is left to become bullish (and you need to convert bears to get new money in the markets)? Answer: nobody, so you have to sell.

That reminds me at January 1984. The most important Dutch guru in that time was Jacques Post of then ABN (not yet merged by AMRO or destroyed by Fortis). He had made excellent forecasts about the interest rates, that they should go to levels much higher than seen in everybody’s lifetime at the first and second oil crisis. Equities were something from the past and no longer suitable in the time of the coming social ideal state of Labour. He was a super bear and at long last after a huge bull market since August 1982 he became bullish in January 1984. In that time I just had bought my first equity call options. At that moment I had a big profit on those positions and I was persuaded by Post to become even more bullish: he had after all very good arguments that the markets should rise further. Of course the market went down almost immediately, about 15% (the phase DE in the four year cycle). In the end my calls became worthless. I had become a wiser man in investing, but I could also have been a few months of salary richer.

Equity market capitalisation by country

The US occupies a proud, uncontested first place in the table from Bespoke of equity market capitalisations. Because of the strong relative performance in 2011 the weight of the US even has risen. Still, the weight is much lower than at the end of the nineties or before 1980 when the weight was substantially more than 50%. The fall of the weight of the US is nothing compared to Japan after 1990, when it had a weight of c. 40%.
Also the UK had long ago a market cap of more than 40%. Until 1730 also the Netherlands had a high weight, but that is never well calculated (but it must have been the case in the time the VOC was the only quoted company in the world). Now the Netherlands (without Shell) has a nimble weight of only 0.5%.
Eye- catching is also that the weight of China (only B-shares) has diminished in 2011, while there were many IPO’s. Together with Hong Kong China occupies the second place.
Because of the excellent performance in the last decade of materials and energy and RIM Canada has risen a lot and given its market capitalisation it deserves a place in the G7 of developed countries.

BCA: the bull market will climb the wall of worry further: the future will be better than we have seen, tail risk is exaggerated.

The equity markets rose nicely in the last few months, but still is everybody very cautious, seeing disasters and tail risks everywhere. People are not impressed by the macro numbers in the past quarters. Those were indeed not what was normal in economic recoveries, but that was the past and the only thing that counts is the future: that is what Zhao from BCA is saying, while one cannot accuse BCA of overoptimism in the past years.
The economic climate is improving while the tail risk in Europe is declining pretty fast.

Most people underestimate the favourable influence of the three years deposits (LTRO) from the ECB and the big monetary easing that China will give us. In the US small and mid sized companies at long last can get credits easier. Central banks are now creating liquidity more energetic than ever. In thepast investors knew what to do: buy, buy, buy.
Investors underestimate growth in the US. That will remain c. 2.5%. The housing market is improving and business is slowly getting more brave with investing.
The equity markets are pricing in a mild recession, while the ISM is pointing to an above normal economic climate.

Everywhere in the world pessimism reigns. Transport shares indicate that the world economy is not at all in a bad condition. The consensus hears the whole day long we are in a crisis.
The quantitative models of BCA are very optimistic, evrywhere it is green aaand BCA advices to buy lots of beta. The only cloud at the horizon is the strong dollar and its bad influence on US profits.
I think that equity market can rise further as long as the ISM goes up and in Europe no new disasters develop while Iran is not exploding.
The BCA story is of course approved by the club of optimists.

update four year cycle

I think we are in phase EF since the end of August. That is the recovery since the first equity correction DE since the (great) recession has ended.
The fase EF lasted on avarage 18 weeks. End of August until January should be normal. It can last somewhat longer, especially because the current four year cycle went too fast. In that pace is GH finished far before the president elections and ended at he end of 2011. (average of FG 26 weeks, GH 23 weeks), so very harmful for the chances of Obama to be reelected.
FG can last very long as was the case in the previous four year cycle.
The stroty of the high net demand for equities is so strong that it is difficult to believe EF will be finished in December 2010.
Another indication that EF can last longer: For quite some time the S&P500 follows the path of six years ago (see chart). When you extrapolates the comparisosn with 2004/5 the top F will arrive in March 2011. That can be the case but then EF will have lasted long. In 2004 you had a pause of about two months in EF with some stabilisation/ decline of the markets. Such a pause can occur now again.

The Coppock indicator is together with the S&P500 divided by its four year average in the upper chart. The Coppock gives some indiaction where you are on the four year cycle. The Coppock goes up just after A and becomes then less negative. Just after D the Coppock reaches his summit. After that it declines but remains positive and a horizontal trend starts just after F. When the Coppock becomes negative, that is an indication you are in Jl. So we are after D, but probably before F.

Deutsche Bank sees S&P500 of 1500+

Deutsche Bank (Chadha c.s.) think US equities are cheap at a PE of 14.2 and deserve a PE of 16.4 based on current low credit rates versus operational profits/ share price.
Stronger for a higher S&P500 is their story that net demand for equities will improve. There is a strong correlation of equity returns with net demand (see figure 7)
Net demand was bad: equity fund flows were negative and net buybacks were also negative because of forced new issuances of financials while M&A were negligible. (see figure 6)
Both net buybacks as equity fund flows will improve substantially (see figure 16). Net buybacks are already quite high.

The spell of Nasdaq following Nikkei broken

In March 2000 a sorceress(Meg Whitney ? to become over 121 months governor of California?) casted a spell over the Nasdaq causing the dot.com bubble to burst after Nasdaq's mojo seemed to be sold on ebay: Nasdaq thou shall follow the path of the Nikkei with a leg of 121 months.

And thus it came to pass. Until the powerful magician Bernanke at the end of August on the Jackson Hole conference broke the spell. With enough hundreds of billions of dollars, maybe trillions it seems to happen: the market has its greed back. The correlation Nasdaq / Nikkei is broken. Howard Simons van Bianco Research saw it (see chart). He wants 2.8% higher prices to be definitive, but you can already see that is stockmarket no longer is following the Japan scenario.

N.B.1 Japan started with QE1 in March 2001.
N.B.2: When Bernake proves to be not such a good magician and the equity markets starts again to follow the Nasdaq / Nikkei scenario (=double dip arriving), the equity markets wil go down tremendously.