Let me pass on several other brief bullet points that suggest to me that the bulk (if not all) of the market's advance and upside might be over.
- President Obama seems likely to win the November election. (He has risen to a multiyear high of 58.7% on Intrade.) A Democrat win will be seen as business- and market-unfriendly). Despite the odds of a Democratic presidential win, the election appears to be a cliffhanger -- the closer the vote is, the greater the animosity between the parties and the steeper the fiscal cliff might be.
- Third-quarter 2012 earnings will be challenging (probably down 4%) -- guidance has been cautious -- and profits will likely decline for the first time (year over year) since third quarter 2009. For the full year, earnings in 2012 should be up 6% or 7%, but next year the gain will be between zero and 5%. So, we need P/E expansion for the S&P 500 to make further progress, and I don't see it. (Note: Intel (INTC) warned this morning.)
- I remain uncertain about the U.S. fiscal cliff, debt ceiling, dividend, capital gains and tax policy.
- I remain uncertain about the eurozone's economy, banking union and fiscal integration.
- A Chinese economic slowdown not only threatens world economic growth and commodity prices but implies less demand for the purchase of U.S. Treasuries.
Hedgeye's Keith McCullough asked me how an investor deals with the storytelling and low volume.
My response was that in a market with no memory day from day, it ain't easy!
My biggest concern is that investors are not being entirely traditional in their investing; they are looking less at the real economy, and instead they are depending on and are guided by their reliance on effective policy (and a global easing put).
To me, risks are high of policy disappointment and/or missteps in policy implementation. I believe that the eurozone will fail to address the formidable and persistent cyclical and structural economic growth concerns, similar to failures in the U.S. with QE1, QE2, Operation Twist and its extension.
As I wrote
yesterday, while Draghi's plan will temporarily aid the transmission of monetary policy, we can look at the massive doses of monetary stimulation in the U.S. as a template. Despite unprecedented easing, we are now more than three years after the Great Recession of 2008-2009, and the domestic economy is growing (in real terms) at only 1.8%. Given the more dire state of the eurozone (accelerating inflation, decelerating economic growth and rising unemployment), how will it be possible for Europe to grow out of its debt problem? The answer is that it won't be able to without the heavy lifting and unpopular policies that could encourage growth by cutting expenditures and balancing trade. And I am concerned that Europe's wave (and deteriorating growth prospects) will crash on our shore in the year ahead, rendering vulnerable consensus forecasts for 2013-2014 corporate profits.
Keith went on to ask whether the U.S. economy and stock market stand today in a similar manner relative to 2007 or 2008.
I thought so, as, just like in late 2007, we are now witnessing a broad deceleration in global manufacturing activity that will adversely impact U.S. export growth.
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