Are the Equity Tides Rising?

Bloomberg reports today that CEO's are more optimistic in their outlooks than at anytime in the past eight years, based on the number of companies raising their outlook compared with the number reducing their outlook. Bloomberg reports that in the current quarter, the number of CEO's increasing their outlooks was 10% compared to 4.1% who lowered. I don't think I can can conclude anything except that there seems to be an optimistic message coming from CEO's. And I guess there had better be considering the number of jobs they hacked off to improve shareholder value!

The Case for Deflation Described and Challenged

Curious George has offered another post for me to assemble. It is so interesting that I want to frame it as a debate between the primary author, Gary Schilling, and the debater, Curious George. Gary Schilling has posted a very good description of deflation that you can link to. The title of his post is 2010 Investment Strategies: Six Areas To Buy, 11 Areas To Sell. For anyone who wants to see what a deflationist outlook is, this is the spot. Curious George introduces Schilling and then challenges his beliefs. I'll use colors to distinguish the two, Schilling's beliefs in orange, Curious George's challenges in green.

Gary Shilling is a long-time Forbes prominent investment advisor and economist. He is mostly a stock market bear and deflationist. While there is much to agree with in his 2010 forecast, there is plenty to debate. Shilling is far more experienced and credentialed than I but he is not beyond questioning.

We see the 2010 investment climate dominated by weak economic growth here and abroad, led by U.S. consumer retrenchment. More government fiscal stimulus and continuing Fed policy ease are likely in this setting. So is low inflation or deflation.

A Pair of 2010 Outlooks From Different Perspectives

Leading economic indicators are numerous and important tools for analysis of economic trends. I understand their importance and will create a scheme to monitor some of them while I learn more about their applications. In exploring the site of the Economic Cycle Research Institute (ECRI), I discovered a video clip from December 31, 2009 of a CNBC interview of Lakshman Achuthan from ECRI and Patricia Chadwick from Ravensgate. Here is a link to the CNBC Video, the title is Market Task Force. They are making 2010 outlooks coming from two different perspectives, empirical economic indicators (ECRI) and fundamental analysis with an emotional reality factor (Ravensgate). Despite these different approaches, they may arrive at the same place.

All eyes on the Fed in 2010

If there is a common thread through the numerous outlooks I have read, it is that there is widespread optimism for investor's in 2010. It is cautious optimism, without doubt. Many experts are, in one way or another, agreeing that the stock, commodity and bond markets are not functioning as they are designed to, but they are functioning, and they are rewarding risk taking. What that might mean is that the functioning of the markets is being administered to a desired outcome, despite the will of free market forces. That is what it means to me.
Who might be the administrator of the markets and what is the desired outcome? Let me see if I can find an answer, using his own words.

Risk receptive or risk averse? What is risk?

Today I am reading an article by John Hussman titled "Clarity and Valuation" that, among other things, describes very simply his definition of risk and when he feels receptive and averse. John Hussman is a mutual fund manager and so his point of view has daily value to him and his investors. He is analyzing the probability of risk as opposed to forecasting risk based on fundamental analysis.

What is risk, first of all? When describing risk to a client I would say, the historic returns for this investment over a certain time period are this number. The relevant index for the same time period resulted in this number and the potential for a different number, higher or lower, is the 2X standard deviation number, normally a big number. The larger the standard deviation, the higher is the range of potential returns. What Hussman does is reduce the expected returns to the typical outcome associated with the conditions observed in the economy at this point in time, and includes a range of other possible outcomes as well. Here is more from the Hussman article described earlier...

2010 Outlook from a dollar watcher

Axel Merk manages mutual funds specializing in currencies. He too has posted an article on Safe Haven to describe his analysis of the statements coming in the follow up analysis of the recent Fed Open Market Committee meetings. His article is brief and to the point. Read it here.

Axel Merk is saying what I think is most likely, assuming no unexpected financial shocks. The expected ones (CMBS, RMBS, other defaults) are still coming! And he is using his world wide perspective.

As a result, it seems that the Fed may indeed halt the massive balance sheet expansion at the end of the first quarter of 2010, but such a break is not indicative of tightening, but a pause at an extraordinarily accommodative level.

In our assessment, the Fed is continuing to ease at a time when the European Central Bank (ECB) has already withdrawn liquidity and central banks ranging from Australia to Norway have raised interest rates. It seems rather unlikely to us that the Fed will have a tighter policy than the ECB in 2010. Of course, the eurozone faces challenges in Greece, Ireland and Spain, amongst others; but the U.S. will also face substantial headwinds, for example, commercial real estate. Ultimately, the global tightening wave many market observers are predicting in 2010 may be far weaker than priced into the markets.

2010 Economic Outlook

It's time to post some economic outlooks from sources not affiliated with mainstream investment companies. The mainstream can be readily identified by their marquis brand names and reputation for being on the speed dials of the Bernanke and Geitner phones. Is it possible that there is someone employed by a high profile employer, who would acknowledge the conflict of interest that employment places them in so that objective analysis is plausible? Yes it is possible, but I am not interested.

Today, I am reading the work of Paul Kasriel, Director of Economic Research at Northern Trust Co. He has posted his economic outlook on Safe Haven and a link to it is here. I find his analysis to be a little more optimistic than many of the opinions I am reading. His forecast, in my opinion, assumes there are not going to be economic shocks during 2010 and that the modest improvements we have noticed during the past few months will be sustained, leading to no improvement in unemployment. So it is not rosy by any means. Here is a sample from his outlook to give you a flavor of his GDP outlook and inflation forecast.

2010 is going to be one miserable year for nearly everyone

Today, Mish is writing about the steepening yield curve . He points out it has reached its steepest slope since 1980! He does not stop there and by the end, Mish has made a sweeping prediction for investors in 2010. Please be seated.

"In the absence of a war outbreak in the Middle East or Pakistan -- and/or Congress going completely insane with more stimulus efforts -- I think oil prices are likely to drop, the dollar will strengthen or at least hold its own, and the best opportunities are likely to be on the short side," he writes. "2010 is highly likely to retrace most if not all of the ‘reflation' efforts of 2009. If things play out as I suspect, 2010 will be the year of the great retrace as the economic recovery disappoints."

If his outlook plays out, I expect to use short equity strategies and high grade corporate bonds with durations on the 1-2 year range. Commodities will get some time off, and gold may take on a new purpose. Jurrien Timmer, a market strategist and portfolio manager at Fidelity has said that if we are in a deflationary market environment, he would move to just money markets, treasuries and gold. Might it come to that? Stay tuned, it's not time to rest. Scanner