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Thursday, October 20, 2011

Market Thought... detached emotions

Ever since I graduated from high school I have tried to put myself in a position to grow intellectually or emotionally.  After years of growth in Corporate America, I am expanding my intellectual and emotional base by starting a business.  The twists and turns are interesting, and have already learned a lot.  This drive is probably why I relate to trading so well. Conditions always change, assessments are never stagnate. If you do not adjust, you lose. period.

Each 'Market Thought' post attempts to assess the current situation as it stands, but a few recent posts transcend that purpose in order to form a basis.

The first is the 'market evaluation' post.  This post forms a worst-case scenario, as to what to expect if a US recession, China hard landing or EU inspired credit freeze takes place.

From the worst-case scenario, a more realistic assessment needs to take place. This is where the 'one-eyed man' post fits in.  The post gives a worst-case scenario a very very low probability of playing out.

By eliminating the worst-case we have to assess current and realistic future conditions to properly evaluate market expectations.  Here is where the 'tired, hungry and wounded' post fits in.  It gives a conservative below average market multiple due to stagnate US economic data, and slower global macro data.

Since Oct 16th a few outlier data points, imo confirm a stagnant story:

1. Earnings.  Qualitatively, earnings have been fairly robust, and guidance has been decent. Obviously, nothing to merit crazy momentum to the upside, but nothing that merits a collapse either.  Its blah.

2. Various Chinese action and data continue to point to soft landing.

3. Shipping and transports are now projected to be relatively flat. From an estimated 12% in Sept to near 2%, and 2.8% for this year's peak season. (This is from multiple ports, and confirmed from the CSX earnings report.)

4. German GDP for 2012 has been revised down to 1%, from 1.8%.

Detaching the negative emotions, the above observations continue to tell a weak economic story, that merits the market to continue to trade with a reduced multiple.  So I would continue to expect the SP500 to trade near a 13.5-to14 trailing multiple, and stand by the SP500 target of 1290-1300 by year end.

In 2012, given the current earnings story, continued global GDP growth and negativity, it is very reasonable to expect the SP500 to produce a $100eps. (Which is 10% lower then recent estimates.)  If a conservative 12-14 multiple range is placed on the SP500, next year we should be expecting a 1200-1400 trading range. (A flat year is not extravagant expectation.)

Right now, the market is just buying time, consolidating and continuing the bottoming process.  If the market decides to sell-the-news on the EU plan, I do not see the market breaking down below 1170-1180. (This assumes the EU leaders will produce something that squashes an EU credit freeze thesis. Despite the uneven chatter, their actions around banks suggest they will produce a solid plan.)

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