Market Insider: The Bear Equation
Published: CNBC - Tuesday, 15 Sep 2009
The more popular view on the street is that a selloff is coming, and that
economic data and earnings will not support the market's gains.
Among those who see a pull back is Citigroup chief U.S. equities strategist
Tobias Levkovich. Levkovich has been warning the market could sell off, and he
warned again at a press briefing that the third quarter earnings season could
be an opportunity for that to happen.
Levkovich was joined by Citigroup economist Steve Wieting and credit
strategists Darrell Wheeler and John Fenn. Wieting said third quarter earnings
will not show the types of upside surprises seen in the second quarter.
“Five-to-six percent is relatively easy," he said, but in the second quarter
earnings registered a record 15 percent upward surprise.
Levkovich said he expects the S&P to hit 1,100 in 2010. "The ISM, credit data
says we'll start off pretty strong, but it's the second half of the year that
could pull us back," he said.
There is a chance the economy could have a "W" shaped recovery, where it dips
down again after making stride, he said.. But that "W" would be on a plane,
with the second half potentially shallower in terms of the dip.
Year Later
Fenn follows the high-yield bond market and he said it has returned to a level
where it appears the Lehman bankruptcy never happened.
"There's no sense of a double dip in high-yield bond spreads," he said.
Some people believe the high-yield market has overshot, he said
"Our three-year total return forecast is roughly at about 12 to 15 percent," he
said.
A big area of concern for credit markets is what will happen when the Fed
removes liquidity, he said.
Asked what he's worried about most, he said: "We're watching the banking
system."
If the pace of tightening by lenders worsens, it would be "game over. You have
the formula for a double dip," he said.
Pimco's Tony Crescenzi, in an interview Tuesday, described the fragile progress
by the economy and credit markets a year after the government bailout of AIG
and the failure of Lehman.
He says compare the gains made to a small camp fire on a windy night.
Government officials are standing around the flame to keep it from blowing out.
"It's still very windy," he said, but there are signs of improvement in some
measures such as equities prices, credit spreads and yields outright. He also
points to improvement in ISM, the manufacturing survey which at a level above
50, now reflects positive growth. Crescenzi said he is watching weekly jobless
claims Thursday to see if they continue to show progress seen last week.
"The three month change in equities has a good correlation to retail sales. It
makes a difference when equity prices are higher," he said, pointing to the
surprising jump in August retail sales.
Another sign of healing could be coming from the commercial paper market. In a
sign that companies are looking to spend again could be the improvement in
commercial paper demand in the past four weeks. In terms of bank lending, Fed
data continues to show a sharp contraction and decline, but the pace of that
decline has slowed.
"There's still tightening of standards but it's not as abruptly as previously,"
he said.
Borrowing activity is as expected at this point in the economic cycle.
"This is typical at the early stage of recoveries when companies don't have
much need for working capital," he said. Commercial and industrial loans were
at an all time high in October, 2008, at $1.654 trillion. They are now at
$1.436 trillion.
On Wednesday, Crescenzi said he'll be interested to see how much foreign
investors have been participating in the Treasury market. The Treasury's TIC
data will show that, and it also comes a day before the Fed's flow of funds
report. That data last quarter showed a huge jump of U.S. household investment
in Treasurys.
Art Cashin: Markets Are Still Overbought
Reflecting back one year after the historic September that shook the financial
markets, Art Cashin, director of floor operations at UBS Financial Services,
offered CNBC his insights.
“In fact, the worse part of the crisis came after that,” Cashin told CNBC.
“The commercial paper market freezing up, people preparing to take trillions
out of money market funds. The Fed had to rush in and say [they guarantee
people’s money], forgetting that the FDIC was only guaranteeing them
$100,000-$150,000 in the banks—so we saw money run out of the banks.”
Despite the improvement since its levels during the March lows, Cashin said
markets still remain “rather vulnerable” and the economy is still “not out of
the woods.”
“They filled the patient with so much medication to stop the hemorrhaging,” he
explained.
“The hemorrhaging looks like it’s stopped, but now we’ve got to unwind all that
medication that the patient’s on without doing any more damage, and that’s
going to be tough.”
Cashin said he remains cautious because the markets are still overvalued and
overbought.
