Monday, June 15, 2009

Green shoots or just some government installed artificial turf?

Our view regarding the market and the economy has not changed. It is simple - there remains a possibility that the light at the end of the tunnel could be an oncoming train and that the "green shoots" may not necessarily sprout, especially if they are merely some artificial turf "planted" by Obama and the government. Believe it or not, such greenery may require much more maintenance than naturally sprouting greens. Below are reasons why we remain skeptical:
  • Recovery in consumption will take more time.
    o Savings rate must and will likely go higher to match historical average
    o US lost $1.3 trillion in wealth during Q1 (according to the Fed)
    o Stringent credit standards, with which we agree, will limit consumption
    o Rising unemployment
  • Unemployment rate continues to rise. The so-called stabilized weekly jobless claim filings could be a head fake.
  • No recovery yet seen in the housing market

The bullet points above resemble our reasoning used when S&P 500 was at around 800. We certainly did not jump in after it broke through that level. Of course, we missed a great opportunity. But we expect a similar opportunity before Q4, as we believe the latest run-up has raised expectations, which we believe the US economy will have difficulty meeting. We believe the equity market remains a trader’s market and do not recommend long-term investing for regular retail investors. We must note there are some names that are attractive in this environment, and we will try to point those out in the future.

We will provide detail and additional support for the bullet points above during the next few days.

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