Jack, while I am bearish "short term" meaning till about next summer or late spring, I really do not see the problems of imbalances as big as they seem to be looming. The fact of the matter is that the deflation in some products (semi, some basic natural resources, steel and even cars) will be balanced by a creeping inflation in US labor costs and the costs of the "service" and "information" economies. These sectors which are becoming a much larger portion of the economy are less prone to imported deflation (or exportation of labor to cheaper labor markets). The net results, will be a perceived low rate of inflation maybe at about 1% or so over the next few months.
Thus, I can see the long term interest rates actually declining to about 5.5% which will still be high by about 150 basis points if indeed inflation will be only at 1%. Now, this interest scenario does not include a short term spike up (which I think may occur late in spring or earlier) which will be the result, I believe, of repatriation of treasuries by the Asian economies, led by BOJ and probably China as well. If BOJ acts sooner, then the current decline will be much more severe, but the bear might be out earlier. These considerations lead me to the scenario that looks at a DOW around 6200 and long term interet rates at 5.5%, where suddenly, it will start to dawn on people that the return on long term bonds at 5.5% relative to the then true return on the Dow at close to 4% (and I am taking in the stock buy back as tax free dividends) is no longer that attractive.
The main question is if earnings are going to be drastically affected by a real slow down in the economy. In some sectors (the semi, and gosh, the semi-cap) earning will be much lower, but in other sectors such as drugs, telecommunication (both providers and suppliers of equipment) I do not see major problems with earnings.
Underlying these assumption is that we will not get a recession but just a slight cyclical slowdown to a growth rate of about 1.5% on average and not even a quarterly down (soft landing as AG has managed before).
The point I am trying to make is that by the end of this or next week we might very well be half way to the bottom of the pricing readjustment and staying bearish too long may be hazardous.
For the time being, however, enjoy the bear party, the next few days are going to be fun, and I'll have to keep lowering my sights, it was a close under 7400 by close on Friday, but I have a little squigly in my tea leaves starting to move foreward the next big halt to sometime in the next two days.
Zeev |
