Market Musings


The global economy and stock market remains fragile. To make some sense of it all we have compiled comments and thoughts from some of the smartest economists, analysts and other so called experts.

All eyes seem to be on Europe right now as they struggle with seemingly insurmountable debt.

Appearing live on CNBC’s “Squawk Box” on Monday morning, Warren Buffett said he’s not sure Europe can or will do “whatever it takes” to resolve the debt crisis.

He said Europe isn’t “going away” and that the European economy will be stronger in a decade regardless, but he warned on CNBC that getting from here, in the midst of the crisis without resolve, to that point in 10 years may prove difficult.

Debt threatens to bankrupt several Southern European countries. Investors hoped a solution could be found, but when the stark reality sunk in that a quick deal was unlikely, stock markets plunged.

The many reasons for optimism or pessimism remain. Let’s consider both arguements:

Reasons to be (mildly) bullish

  • Central banks will stimulate economies with printed money at the slightest hint of trouble, and this has the side-effect of increasing demand for assets such as shares
  • Economists are already talking about a third round of quantitative easing to boost the market
  • Europeans appear somewhat united in averting a full blown credit crisis
  • Corporate earnings appear to be very solid across the board
  • Shares look very cheap versus bonds
  • Inflation is on the rise and a period of gentle price pressure can be good for equities
  • The emerging market boom might continue, keeping the West out of recession

Here are a few specific investment guru comments.

Firstly, let’s consider some recent optimistic business outlooks from top company CEO’s:

Caterpillar just raised its dividend and reiterated its possitive guidance.

Cummins says that domestic demand is increasing for their trucks.

3M reiterated its bullish outlook and raised its growth targets.

Eaton CEO Sandy Cutler is optimistic and she is the one who predicted the slowdown in 2008 before the market crashed.

Honeywell says its business segments are going strong.

United Technologies – says it’s seeing no slowdown in business, if anything it’s accelerating.

A number of top investment pundits see reason to be upbeat….

Bill Miller of Legg Mason remains bullish. His outlook is that despite fears of another recession, Miller pointed out that the economy continues to expand. In addition, by and large companies are reporting good numbers and retail sales have been solid.

J. Kyle Bass, portfolio manager at Dallas-based Hayman Capital Management LP believes that the US housing market’s losses had largely been absorbed. “You can see that the pig has moved through the python in terms of U.S. housing losses,” he said.

Fifth wisest investor in the world according to a Bloomberg poll, Dr Marc Faber is bullish about the outlook for the US dollar because of current global liquidity tightening (although he believes global growth itself will stagnate).

Warren Buffett confirmed that his investment company Berkshire has been buying aggressively during the recent market turmoil. He said on Monday that his company has spent $10.7 billion to buy more than 5 percent of IBM’s stock this year, a surprising move by the billionaire investor who has long shied away from investing in high technology companies.

Twenty-one of 22 analysts surveyed by Bloomberg expect bullion to rise on the Comex in New York next week, the third consecutive increase and the highest proportion in data going back to April 2004.

Sandler O’Neill principal Jeffery Harte said the market has hit its low point and that means risk assets, including the banks he covers, will do well into early next year.

Bearish signs

  • The good news is all factored into prices
  • A fresh boom in China helped pull the world economy back from the brink. That economic charge may be slowing – the jury is out
  • A recovery in house prices has ended. A second wave of falls, leading to more bad debts, could spark another waves of bank failures or another credit crunch
  • Governments took on too much debt in the boom years, and bad debt from banks, and some could fail to meet repayments
  • Spending cuts in the UK could hamper demand, particularly if it creates greater unemployment
  • Deflation may take hold, leading to a falling spiral of consumer and asset prices, including shares.

Some guru’s remain cautious:

China Vice Premier Wong offered uncommon candour this weekend: “The one thing that we can be certain of, among all the uncertainties, is that the global economic recession caused by the international financial crisis will be chronic,” Wang was quoted by the official Xinhua news agency.

Dylan Grice and ultra bear Albert Edwards from SocGen suggested the US stock market was 50 per cent to 60 per cent overvalued.

Money Week’s Merryn Somerset Webb says shares are overpriced based on ‘the only reliable indicator of market performance’… ‘cyclically-adjusted price-to-earnings ratio’ (CAPE)

The highly regarded economist Robert Shiller, who came up with the concept of CAPE, estimated in September 2011 that the US market was 21 per cent too expensive, based on CAPE.

Our take:

At TriDelta we remain concerned at the crippling government debt and weak economic prospects due to slowing global growth, elevated unemployment, US housing market concerns (also Australian and European) and ageing populations that will hamper recovery.

This suggests that developed nations are likely to see wealth stagnate for a few years. Rates will likely remain low and assets such as property and shares will not generate the wealth we have come to expect in previous decades.

As such we have significantly reduced risk in our portfolios and remain focused on protecting clients capital by maintaining a prudent and conservative investment strategy.

Having said this, we believe there are certain sectors of the Global market that are getting very cheap by historical standards. Technology and Drug companies are now trading at historically low levels and paying solid dividends. This will be one of the areas that we initially focus on when putting some of that cash back to work.

It is important to remember that the market always works in cycles, and the best time to invest is when things look the worst. We think that there is worse to come, but that also means that we believe that the time to put cash to work is getting closer as well – especially where strong companies are available at 4%+ dividend yields.

Prepared by Anton Tucker – TriDelta Financial