Wall Street Whispers: A Rally As Real As Santa Claus
NEW YORK (
) -- If the Santa Claus rally of 2010-2011 looks anything like the previous one, smart investors may want to lay off the eggnog.
Whether it's the economic data or holiday spirit that's infused the market with optimism, all sorts of equities have been sailing higher in recent weeks.
Blue-chips - and lots of them - are shooting north, with nearly half of the
Dow Jones Industrial Average's
30 components hitting fresh 52-week highs in recent weeks, or comingwithin spitting distance. The upside represents a broad mix of sectors: Industrial companies like
Caterpillar
(CAT) - Get Report
, energy companies like
Exxon Mobil
(XOM) - Get Report
, consumer-goods makers like
Procter & Gamble
(PG) - Get Report
, communications providers like
Verizon
(VZ) - Get Report
and there were even some financial and housing bulls driving up the stocks of
Travelers
(TRV) - Get Report
and
Home Depot
(HD) - Get Report
. For that matter, the government's biggest bailout case,
AIG
(AIG) - Get Report
, has been hitting adjusted highs for the past two weeks not seen since before its near-collapse- on
fundamentals this time,
rather than speculation.
Meanwhile,
Apple
undefined
is issuing
bullish sales forecasts ,
GE
(GE) - Get Report
is
lifting its dividend and stock pickers are offering upgrades galore, indicating more upside ahead.
The reason for this bullishness is part relief, part fundamentals. The elections are over and so are the major battles over financial reform and health-care. Consumers are spending and everyone just got another big tax break. Manufacturers are making things for them to buy. Rates are low, if a little higher than they had been. Inflation is in check. M&A activity appears to be percolating. The last of the big banks with bailout funds are paying back the government and the healthiest are expected to announce dividend hikes as soon as next month. Forecasts are getting sunnier by the day.
"Looking to 2011, our leitmotif is 'recovery becomes expansion,'" says
Morgan Stanley-Smith Barney
(MS) - Get Report
Chief Investment Officer Jeff Applegate.
Applegate believes real GDP next year will top 2007's peak and suggests investors buy into stocks, commodities, REITs and get out of liquid safe-havens a.s.a.p.
Jan Loeys, global head of asset allocation at
JPMorgan
(JPM) - Get Report
suggests much the same. In a recent report, Loeys wonders whether stocks might finally "return from Siberia" in the investor mindset.
"Equities became the hated asset class this past decade as it failed to deliver on a promise to guarantee a rich retirement," says Loeys. But, "The fear of equities then pushed investors into fixed income, driving real government yields to near zero. At these yields, bonds are not the solution either for crisis-ravaged funds. Together with rising fears of inflation and the lack of safety in public-sector debt, the probability is rising that end investors will again turn to equities as the mainstay of their long-term investments."
Loeys suggests investors aggressively buy into equities, commodities and high-yield bonds while shifting out of government and other high-grade debt. His colleague Nikolaos Panigirtzoglou, a flows & liquidity strategist at JPMorgan, predicts the S&P 500 will return 18% next year, with retail investors particularly diving back in.
Yet there's room to poke holes in some of these bullish forecasts.
The recent leg of this equities rally took off in earnest after surprisingly strong consumer confidence figures on Nov. 30. It gained traction in mid-December after the Commerce Department indicated consumer sales had risen. The stock market even maintained strength in spite of surprisingly disappointing employment data and ongoing stress in the housing market.
The trends look similar to last year's Santa Claus rally, which took off in late-2009 as economic forecasts grew increasingly optimistic, only to fall apart in April. The collapse was due to concerns that have become all too familiar in the post-subprime reality: Bailouts, regulatory crackdowns, political uncertainty and the realization that fundamentals hadn't actually improved all that much.
This time around, there's a decent chance that investors are once again getting a little too confident about economic data that are shouting "Not horrible!" rather than "Great!"
For instance, recent data do indeed indicate that consumer spending is on the mend, up 0.8% in November. Credit-card processors and retail research firms predict much sharper increases for the overall holiday season.
Yet spending is rising from depleted levels in a shopping season full of deep discounts. Anyone entering a mall or superstore can tell that retailers are offering some products at a loss to get people in the door, with the expectation that they'll buy higher-margin items, too. Several large retailers, including
Walmart
(WMT) - Get Report
,
Radio Shack
(RSH)
and
TJX
(TJX) - Get Report
have
offered deals on popular Apple gadgets, for instance, even while Apple has kept prices firm.
HSH Associates, which tracks economic data, said in its weekly commentary on Dec. 17 that although sales have "firmed notably," purchases "seem more concentrated in the 'needs' rather than 'wants.'" The firm suggested that, in addition to buying necessities, consumers may be in a "replacement cycle" in which old goods - whether cars or clothing - are simply worn out and must be replaced.
Or, as Conan O'Brien put it on his talk show: "The biggest winner on Black Friday was
Costco
(COST) - Get Report
, which got a 9% increase in sales. Kids, I hope you're excited to rush downstairs Christmas morning and tear open a 12-gallon barrel of olives."
While verdict isn't in yet on holiday sales, improvements that average Americans need to start spending en masse simply aren't there.
The two significant things holding back the consumer are jobs and housing. Over the past four years and three years, respectively, neither has improved in any meaningful way. In fact, the unemployment rate rose again last month while foreclosures continued to pile up,
even if they're being delayed due to
servicers' legal woes.
In light of those economic realities,
Wells Fargo
(WFC) - Get Report
Chief Equity Strategist John Lynch says "too much confidence may not be a good thing" - at least for contrarian investors.
"We'll need to see a firming up of employment statistics and further signs of stabilization in housing to enable the domestic economic and market fundamentals to withstand the likely periodic bouts of global economic, political, and financial market instability that we envision in the coming year," says Lynch.
For instance, financial firms at the crux of the financial crisis are a lot better off than they were a couple years ago - but that doesn't mean they're out of the woods. Any company with major exposure to mortgages or commercial real estate is still facing elevated expenses from modifications and defaults, with full stabilization not expected until 2012, by optimistic estimates. Additionally, state attorneys general and various regulators with an axe to grind (
cough, cough SEC
) are sure to keep pressure on the industry - not to mention politicians in 2012.
In addition to those broad headwinds, large financial firms like
Citigroup
(C) - Get Report
, AIG and
Bank of America
(BAC) - Get Report
still have plenty of work to do in restructuring and revamping their business models before they are back to "normal" - whatever normal will be. The discussion of
Fannie Mae
(FNMA.OB)
and
Freddie Mac
(FMCC.OB)
has barely even begun.
Apart from the cost-side of the ledger, top-line growth will be hard to come by in 2011 for any company - at least in the U.S.
High-end consumers don't want loans and low-end consumers can't get them. U.S. corporations may be
holding $1.93 trillion in cash and liquid assets, but there's little chance they will aim that capital toward hiring and expanding at home - as
President Obama has been urging them - unless there's a clear signal that there's underlying demand in some part of the economy, outside of
iPads.
Moody's
(MCO) - Get Report
predicts "the most likely 2011 macroeconomic scenario to be a sluggish economic recovery with persistent high unemployment."
As a result, corporations will probably use excess liquidity to entice investors with dividend rewards and juice EPS with stock buybacks. It's a new phase for the earnings "growth" that's been occurring since 2009. Companies have been great at cutting costs through lay-offs and other efficiencies, but less great at boosting the top line. Similarly,
banks' "reserve releasing" has padded earnings and masked the fact that, for the most part, their fundamental business lines aren't growing.
BofA-Merrill Lynch's chief equity strategist, David Bianco, expects S&P 500 companies to boost dividends 20% to $30 a share in 2011 and still have $480 billion in cash lying around.
Goldman Sachs'
(GS) - Get Report
David Kostin expects those companies to boost buybacks by 25% to $340 billion next year, with dividends up 11% to $270 billion and another $240 billion spent on M&A.
While those firms will probably invest some cash in the U.S., it's more likely they'll seek revenue opportunities abroad, particularly in fast-growing emerging markets. Jeff Schwarte, who oversees Principal Global Investors' U.S. large-cap equity strategies, notes that Caterpillar, GE and other firms that seem as American as apple pie get a big chunk of revenue overseas.
"We can have a good equity stock market based on things that are happening outside of the U.S.," says Schwarte, noting that "30% of the revenue that comes from the S&P 500 comes from outside of the U.S."
Amid the recent bullishness, Lynch, of Wells Fargo, points out that several "technical signposts have been flashing favorable signals" recently. The portion of stocks traded on the New York Stock Exchange trading above their 200-day moving average is approaching new highs for 2010. The "VIX" volatility index - known as Wall Street's "fear gauge" - is near its lowest point.
But what was it that famed investor
Warren Buffett said about fear during the dark days of 2008?: "A simple rule dictates my buying: Be
fearful when others are greedy , and be greedy when others are fearful."
Indeed, the most recent portfolio shifts of his company,
Berkshire Hathaway
( BRK-B), indicate that
Buffett has been exiting positions in the blue-chip stocks that recently hit fresh highs.
-- Written by Lauren Tara LaCapra in New York
.
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