Friday, September 2, 2011

Dow 13,600, Here We Come?


Early Friday, Bloomberg reports that stocks extended losses, sending the Standard & Poor’s 500 Index down for a second day, while Treasuries and gold rose after a report showed American employers added no jobs in August. Oil retreated and the Swiss franc strengthened versus the US dollar (my advice: stay long risk assets/short gold and volatility and long USD).

The weakness in the jobs report is no surprise, and I just keep buying the dips. Bloomberg also reports that Gene Sperling, director of the White House National Economic Council, said President Barack Obama will propose tax and spending initiatives next week that will have a “significant” impact on boosting growth and creating jobs. Hope he's right because if these initiatives don't spur “significant” job growth, President Obama is cooked or in the fight of his life to win a second term.

And for once I agree with Bill Gross, Focus on Growth, Not Debt:
Pacific Investment Management Co.’sBill Gross said he favors longer-maturity debt with the FederalReserve likely to seek to narrow the difference between short-and long-term borrowing rates as employment growth stagnates.

“We’ve advocated hard duration; that basically meanssomething beyond five years,” Gross, manager of the world’sbiggest bond fund, said in a radio interview on “BloombergSurveillance” with Tom Keene and Ken Prewitt. “The front endof the curve, in the U.S. at least, is inert. You have to moveout into longer duration, harder duration.”
I agree, the front end of the curve is inert and you have to move into longer duration at this point. There is no bubble in bonds, and as today's weak jobs report shows, the risk of deflation is still the main threat. All those fools worrying about debt better start worrying about jobs because without jobs, the US debt profile will continue to worsen.

But here's some cheery news to usher investors into the long Labor Day weekend. One of Wall Street's most eminent analysts, Sam Eisenstadt, is forecasting an 18% return for the stock market over the next six months:
If he's right, the Dow Jones Industrial Average will be trading around 13,600 by next February, and the S&P 500 index will be above 1,420.
The analyst is none other than Sam Eisenstadt, the former research director at Value Line. Prior to his retirement in late 2009, Eisenstadt had spent 63 years at that firm. At the time, its flagship publication, the Value Line Investment Survey, was in first place for risk-adjusted performance over the three decades the Hulbert Financial Digest had been tracking advisory performance.
Though in retirement, and well past the age when most others have long since given up following the market's daily gyrations, Eisenstadt remains as close a student of the stock market as ever.
One of his areas of focus is a complex econometric model that forecasts where the market will be in six months' time. The inputs to his model are monthly readings of numerous economic and financial variables over the last six decades — back to 1952, in fact. While Eisenstadt stresses that no model is perfect, he reports that the model's track record over the last six decades have been statistically quite significant.
(For the statistically minded among you, he reports an r-squared of 0.55 for its six-month forecasts since 1990.)
During the time that I have been reporting Eisenstadt's forecasts on this website, they have for the most part acquitted themselves quite well:
• In December 2009, Eisenstadt forecasted a 20% return for calendar 2010. The Wilshire 5000 actually gained 17.2% for the year, after dividends. Not bad.
• In December 2010, Eisenstadt forecast an 11.9% return for the first half of 2011. The actual return of the Wilshire 5000 total-return index: 6.1%. Again, not bad.
• This past July, I reported that Eisenstadt's model was forecasting a 5.7% return through the end of the year. Though four months remain in that forecast, the market since then has fallen 8%. The best you can say in this case is that the jury is still out.
In an email earlier this week, Eisenstadt reported that his model his sticking to its bullish guns — forecasting an 18% return over the next six months.
Eisenstadt conceded that such a return "sounds too good to be true."
But, he added, he's learned over the years "not to question the numbers [produced by his model] nor attempt to rationalize them."
Eisenstadt's forecast is consistent with the bullish conclusion I reported earlier this week from a contrarian analysis of advisory sentiment.
You might wonder, however, how his forecast can be squared with September's reputation as being bad for the stock market. Note carefully, however, that even if this coming month turns out to be a disappointing one for equities, there will remain five more months after September for the market to live up to Eisenstadt's forecast.
We can only hope that it's on target.
Last month, another great investor/strategist, Steve Leuthold, whose Leuthold Global Fund (GLBLX) beat 92 percent of its rivals in the past year, spoke on Bloomberg Television saying that political uncertainty has pushed U.S. stocks into a bear market even as the economy may still be growing:
“We are in a bear market,” Minneapolis-based Leuthold said today in an interview with Betty Liu on “In the Loop” on Bloomberg Television.
“I am not so sure that it is an economic bear market -- we actually may have a couple more quarters of expansion here.”
...

“We are in a bear market,” Minneapolis-based Leutholdsaid today in an interview with Betty Liu on “In the Loop” onBloomberg Television.
“I am not so sure that it is an economic bear market -- we actually may have a couple more quarters of expansion here.”
I don't have a clue about where the Dow will be in the next six months but nothing shocks me anymore. I've lived through the tech bubble, the tech crash, the 2008 crisis and the only thing I can guarantee you is that fear and greed will remain the constant forces that drive markets. I see a tremendous amount of liquidity out there and the wolves are hungry -- very hungry.
And I'll tell you something else that a former senior portfolio manager I used to work with told me yesterday. "High frequency trading is creating more volatility around trends, but trends still exist." I agree which is why I love trading these markets and pay attention to price action and what elite funds are buying and selling. Those of you who want to follow my intra-day comments can follow me on Twitter (@PensionPulse).

Below, permabull, professor Jeremy Siegel, shares his thoughts on why he sees the odds of a recession at just 25% and why he thinks this market is cheap. Also, Pimco's Mohamed El-Erian and Gene Sperling, director of the National Economic Council, spoke to Bloomberg Television's Betty Liu this morning about the unemployment report.

Update: Reuters reports that U.S. government bond investors see Federal Reserve action to boost the flagging economy as practically a done deal after Friday's dismal jobs report.