This blog post originally appeared on
on June 6 at 8:21 a.m. EDT.
Ma nishtana ha-laila ha-zeh mi-kol ha-lelot?
(Why is this night different from all other nights?)"
-- Passover prayer
The investment mosaic is always complex, and my opening missive today cannot possibly cover all the bases that culminate an overall investment viewpoint.
"Ma Nishtana," the Jewish prayer above, comprises the four questions asked during the Passover seder. In Hebrew, its meaning is "what has changed?" -- in English, it is referred to as "the four questions."
Over the past weekend, many investors were asking themselves the following four questions in order to determine what (if anything) has changed and whether the consensus economic and stock market forecasts are still intact:
- Will the domestic economy proceed in a smooth trajectory, be self-sustaining and capable of maintaining itself in line with the historic length of previous economic expansions (lasting nearly four years)?
- Will S&P 500 profits meet the consensus earnings forecasts of $95 a share for 2011 and $100-plus per share for 2012?
- Is the consensus forecast for a year-end S&P target of 1450 still a reasonable expectation?
- If the answer to the first three questions is no, does that mean we are entering a bear market?
My answers? No, no, no and no.
Inconsistent Domestic Economic Recovery Will Be the Mainstay of 2011-2012
Above all, it remains my view that the optimists may be incorrectly viewing the strong resurgence of corporate profits and benign credit metrics in isolation -- somewhat similar to the mistake that was made in early 2008, when the bullish cabal (despite reams of data, tables and valuation models that seemed to be supportive of higher stock prices) grossly misinterpreted the consequences of the unprecedented housing speculation (and abuse in mortgage lending) as well as the financial damage from the proliferation of derivatives.
The world economies in early 2008 and (to a much lesser degree) in 2011 resemble the frail psyches of Cleopatra and Marc Antony, Kurt Cobain, Marilyn Monroe, Ernest and Margaux Hemingway, Hunter S. Thompson, Vincent van Gogh, Billie Holiday, Diane Arbus and Virginia Woolf. All were talented, most were respected, and many were beautiful. They appeared fine externally, but a depression haunted the very core of their existence. All succumbed to suicide.
History doesn't repeat itself, but it often rhymes.
Papering over problems (quantitative easing) over the last year has certainly raised animal spirits and share prices, but it has done little to resolve several consequential and fundamental issues that have resurfaced.
Excessive debt and the expected fiscal austerity (needed to rebalance the global fiscal imbalances) are not the ingredients to a smooth and vibrant recovery, so the recent soft patch could prove more problematic than many recognize.
In the current cycle, the optimists might be understating the influence of some challenging nontraditional headwinds that are beginning to assert themselves. Structural unemployment; an unprecedented 30%-plus drop in home prices (and a housing market still challenged by an expanding shadow inventory of unsold homes); fiscal imbalances at the local, state and federal levels (which will, as night follows day, bring with it austerity and rising tax rates); and the tail risk of the last cycle (manifested in the latest contagion of the sovereign debt crisis) are but some of the reasons this economic recovery is different this time.