4Q10 Macro-Trends

Wed, Nov 3, 2010 - 11:21am


This is the first page of an in-depth analysis of macro-trends provided by Barry Banister, CFA. To continue reading please click at the bottom for the full pdf.

  1. A wall of worry is to be expected. S&P 500 Mid-2011 $1,250 target is unchanged from 3Q view. After ~$1,250 S&P 500 by mid-11, we see ~$1,350 by 2012. 2011 EPS views emerging from 3Q earnings reports are drawing attention to how inexpensive “risk” relative to “risk aversion” has become. We think the U.S.$ is bottoming, CRB is peaking, and EM is peaking as well. Buy mid/large cap U.S. growth stocks
  2. We feel QE2 talk is mostly just moral suasion, and the economy is recovering without Fed assistance. We do think investors are according a “peak earnings discount” to the S&P 500 since profit share of GDP is extended on the upside. In essence, the era of asset inflation via leverage is over, and what is coming may well be better for Main Street than Wall Street (in that sense, the ’10 election represented a climax).
  3. There are signs the secular bear market for large-cap equity is in its final innings. Market timing is losing its return premium to buy-and-hold, the gap between reported and operating EPS is set to close, and commodity outperformance vs. stocks (i.e., alternative investing popular in secular bear markets) is ending.
  4. Tail risks for the slowly dying secular bear market around 2013-15 are a 2nd oil shock as global spare capacity (6mb/d now) dissipates at the rate of 2mb/d per year, geopolitical unrest that typically occurs late in secular bear markets, and potential problems associated with the Fed exit strategy in 2012-13.
  5. 2013-14 tail risk may push the S&P 500 from ~$1,350 in 2012E back to ~$1,000 by 2013-14E, while T-bonds rally in a final flight to safety, ending the large capitalization U.S. equity index secular bear of 2000-2014E.
  6. In the very long-term, 2010 to 2020, we think it is reasonable to expect 3%/year average annual returns to commodity futures and an S&P 500 total return of +7%/year (2010-20 point-to-point CAGR for S&P 500).

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