Bulls and bears
by Peter Switzer
However, there’s a bull story which I don’t think is bull and it’s supported by David Darst the Head of Investment Strategy at Morgan Stanley Smith Barney in New York.
On the negative
But, to be balanced, let’s start with the negative bear stuff:
- US Government stimulus has been important but is waning.
- The housing sector is still weak and not promising.
- New home sales slumped 32 per cent (300K) in May but it was linked to the end of the tax credit program.
- No more rate cut incentives possible given the official Fed rate is 0.25 per cent.
- Any significant US Budget spending could spook markets.
- The rising greenback is not helping US growth.
- Europe’s debt problems and austerity programs will slow down global growth.
- The Fed last week said: “Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad.”
- Financial regulations will hurt banks and the oil leak has spooked US markets.
- And finally, durable goods fell 1.1 per cent in May and this has been a positive indicator.
- Economic growth has been strong for three quarters in the US.
- Unemployment has fallen from 10.1 per cent to 9.7 per cent.
- The ISM Manufacturing reading has gone from 32.5 in Dec 2008 to 59.7 May 2010. (That’s a high level based on recent decades!)
- The formerly lower US dollar plus Asian growth plus US business investment helped.
- US corporate profits plus good productivity also helped.
- Durable goods figures are a good indicator for business investment and these bottomed in April last year and have increased 23.6 per cent to May.
- Real US consumption rose four per cent (annualised) in the three months to April.
- Private jobs growth from February and March was 376,000 but in April it was down to 41,000!
- Consumer sentiment rose to its highest level since January 2008.
- Corporate profits were more than double the prior estimate, rising five per cent.
- But GDP has been revised lower.
(Many of these figures came from a David Bassanese article in the AFR 26-27 June.)
As you can see the likes of durable goods, which have been healthy, along with GDP, are turning down along with jobs but this could be temporary. I have learnt not to trust one month’s or even quarter’s figures.
The Darst view
David Darst remains bullish pointing to US mortgage rates at 4.69 per cent and thinks this will help the US consumer. He says the financial meltdown that went with the US recession means the healing process for the consumer will be longer but likes the signs for US corporate profits.
He says corporate profits, according to the consensus, is tipped to be up 48 per cent this year.
Liquidity in banks is the highest since President Kennedy was in office and that was 1963!
Interest rates and inflation are low and mergers and acquisitions, as well as buybacks should help the stock market.
He says the bears are looking at more long-term issues such as sovereign debt, higher taxes, austerity programs, de-leveraging and financial regulation but the short-term has potential stimulation still in the pipeline.
Darst told CNBC that the Case-Schiller Price Index and the jobs numbers were big watches this week.
His calculations say earnings for US companies will be up 27 per cent for the second quarter and that could turnaround negative sentiment.
A smart communiqué out of the G20 could help markets and some good economic news out of China would also help a market affected by increasing doubts.
Darst did say that the Baltic Dry Index was down 40 per cent since April suggesting a slow down in China but he argued there wouldn’t be a hard landing. The Chinese can often legislate to avoid such things!
I liked consumer sentiment rising in the US to its highest level since January 2008 as a nice omen and corporate profits rising better than expectations.
The case for going negative is still not there and so I remain cautiously positive and I’m buying great companies on the dips.
Finally, the best news I read over the weekend was Citigroup chief economist Paul Brennan suggesting Aussie home loan interest rates could be on hold until December! He thinks inflation will be benign. Let’s hope he’s right.
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Published on: Monday, June 28, 2010blog comments powered by Disqus