The U.S. Needs to Do Some Laundry
I decided to try and be bullish this morning. I tried to look at the world through rose colored glasses. I wanted to come up with all sorts of reasons to be excited about the U.S. markets. I wanted to see if the U.S. is the “cleanest” shirt or even “least dirty shirt”.
I struggled to do that.
The U.S. political situation seems as bad as it has been in years. Obamacare, at one time a concern is so far off the radar screen it is almost comical. Fiscal Cliff, Debt Ceiling, and Gun Control are the topics de jour. While not all directly related they give Washington the chance to show off just how partisan they are. The “Debt Ceiling” is a subtle reminder that at some point someone in government thought there should be a limit to how much we can borrow. Given the paper thin construction of the debt ceiling it won’t be an issue, but should be a reminder that debt is serious.
The economy is muddling through. In spite of some hype, too much economic data points to only an OK economy. Jobs are coming, but slowly. Consumers are spending, but at relatively tame rates. Housing is doing better, but only getting back to levels where a lot of inventory is coming back to prices where the senior lender can get their money back. Ben is pushing on housing and jobs, but there is a complex chain of events required for him to be successful.
The market isn’t cheap. From what I can tell the S&P is trading at a P/E of 14.4 and a dividend yield of 2.25%. Not extremely expensive, but hard to say that it is mouth watering cheap. Especially in an economy that is only muddling through and a global economy that isn’t doing much better (if not worse) and is trying to export its way to prosperity. From a simpler measure, the S&P is back to 2008 levels more or less and not too far away from all time highs. We can’t say the same for a lot of other countries.
Crowded QE Trades. QE is sighted more often than any other reason as why the U.S. markets look attractive. Sometimes it is QE, sometimes it is Fed, sometimes it is commitment to jobs, but however it is referenced, the story is the same, the Fed in one form or another will drive up asset prices. I too believe that will happen, but think we have run out of steam on this rally, the conviction of this trade needs to be tested and then we can reload. Most out of favor seems to be treasuries, yet, as I delved into this weekend, that seems wrong. On the credit side, CDS, while having moved a lot tighter, seems to offer better value than bonds.
A Contrarian’s Delight
So I can’t get bullish U.S. markets here. I can find more reasons to be bullish elsewhere, but I think it is time to continue to be small to medium bearish. Not so bearish as to be really looking to profit from a move down, just bearish enough that you can get much better entry points for being long, or that you can add to shorts at better levels.
I don’t think we are going to see any lasting pop from fiscal cliff resolution. I don’t think we are going to see great 1st quarter earnings. I don’t think we are going to see exports improve as our currency gains strength against some areas, and the areas we are losing to, don’t have the money or growth to import our goods.
I’m looking for markets to weaken over the next few weeks with a target of 1,375 to 1,400 on the S&P 500 and then would look to cover shorts with out of favor assets like Spain, CDS, and bank CDS. In the meantime remaining small to medium short and continue to like treasuries here.
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