January 4, 2010
– BREAKFAST WITH DAVE
Based on the market commentary we have gleaned, there also seems to be thisinterpretation out there (mis-interpretation, in our view) that in separatespeeches yesterday, Messrs Bernanke and Kohn sounded “hawkish” because they mentioned that monetary policy should be pre-emptive and forward-looking.If Bernanke is truly the mogul over the 1930s that everyone claims he is, thenan early withdrawal of rate stimulus seems like a low-odds event unless hewants to risk a repeat of 1937-38.
Everyone is pre-occupiedwith the Fed’s exitstrategy this year … butin our view there is nosuch strategy
It still amazes us, more than six months after making the transition to the ‘buyside’, as to how many ‘sell side’ economists and strategists out there whohyperventilate over the moment, can’t for some reason see much beyond thenext quarterly GDP or ISM report, and are so clueless over the lessons thathistory have to provide in the aftermath of a credit collapse.
REVIEWING SOME 2010 MACRO AND MARKET THEMES
Everyone is pre-occupied with the Fed’s exit strategy this year. But there is nosuch strategy because it is evident that the economy will never be able to recoverwithout sustained doses of government stimulus. Interest rates are either going tobe in a trading range or trend lower. We had mentioned emphatically a month ago that the Treasury market was at near-term risk, but looking ahead, bull flattenersin bonds are very likely going to be the best strategy, if for any other reason that the consensus is positioned the other way.We had also warned that the bearish stance on the U.S. dollar was too broad and that we could see a near-term countertrend rally that would cause a reversal incommodity prices and gold, which would open up a nice buying opportunity; that time has come.There are several troubling aspects to the outlook for equities.
We opine that we areabout to see a nicebuying opportunity incommodities and gold
From a valuation perspective, the S&P 500 is discounting a 5% GDPgrowth performance in 2010, which seems hardly likely.2.
The general public has stubbornly resisted to join the party and as such, the flow of funds landscape looks circumspect now that the shorts havebeen covered and the hedge funds have made up for their 2008 disaster,which means they can now afford to be more risk averse.3.
Sentiment is wildly bullish.4.
Equity market technicals look tenuous stalling at the 50% retracementlevel for the S&P 500.5.
The policy backdrop out of Washington is increasingly interventionist, and just as Japan accentuated its multi-year malaise by not allowing zombiecompanies to go belly up, current initiatives by the Administration is ineffect thwarting a durable recovery in real estate by enacting measures that delay the foreclosure process.Concerns over health care reform and taxation are substantial hurdles for thesmall business sector too, in terms of hiring plans and capital spending intentions,and this is on top of near-record low levels of industry capacity utilization levels.
Page 2 of 17