-- Posted Sunday, 1 May 2011 | | Source: GoldSeek.com
What’s the best move to make right now?
Stocks are up 9% in four months.
The P/E ratio of the S&P 500 is just shy of 25. That’s right in between the 1929 and 1987 highs - both of which preceded crashes
Bonds, yielding anywhere from 1% to 10% depending on quality, offer have huge risks and not much reward.
Meanwhile, a recent Gallup survey revealed 55% of Americans felt the U.S. was in a recession. More than half of those felt we were in a depression.
The combination is inherently risky. The “easy” money has been made. But a one big signal this week is showing where one opportunity is likely hiding.
Permabear Throws in the Towel
We watch the leading the leading opinion-makers on Wall Street closely because they have a large impact on market sentiment. They can add fuel to a bullish or bearish fire with a few comments. Think Jim Cramer telling everyone to pull any money they’ll need in the next five years out of the market at height of the credit crunch in 2008.
David Rosenberg of Gluskin Sheff is one of those leading opinion-makers. This week he changed his long-standing bearish stance on stocks. Rosenberg, who publishes excellent fundamental analysis and has repeatedly called for a top in since the current rally began in March 2009, made a complete 180.
On Wednesday, Rosenberg wrote:
On a very near-term basis, and despite my long-standing macro concern list, which has not gone away, it does look like the market is set to rise further. The technicals are suggesting as much, though I do await what Walter Murphy may have to say on the matter. I had said before that a breakout to new highs led by higher volume would be an important technical signpost. Well, we achieved that Holy Grail yesterday – both in level terms and with respect to the change. This is not throwing in the towel, it is an acknowledgment of what the market internals are flashing at the current time from a purely tactical and technical standpoint.
The capitulation of Rosenberg is a very bullish signal. His comments are closely watched by the Big Money on Wall Street. And if he’s jumping into the rally now, money managers will certainly follow.
Margin of Safety
Now, we don’t foresee a huge market rally from here. Nor do we see a crash. But we do see a big new trend emerging – the flight to safety.
Most investors are in a bind right now. Most are deeply concerned about a sharp downturn. Yet they’re also worried about missing out if the markets continue higher.
As a result of this position, they’re turning to stocks they consider “safe.”
Most investors equate big with safe. Shares of big companies are liquid. They’re historically less volatile. Most of them pay healthy return-padding dividends too. And right now big, high quality stocks are emerging as one of the few remaining areas of strength left.
The image put together in December by Grantham, Mayo, Van Otterloo (GMO - a firm that relies almost completely on long-term historical trends) predicts this trend will likely continue:
(Click here for full-sized image)
Overall, the numbers are gloomy. Small caps, as a whole, aren’t looking good. Emerging markets look appealing, but the higher expected returns come with nearly twice as much expected volatility. Bonds…don’t even bother.
High-quality large cap stocks, however, are one of the few bright spots. Expected returns of 4.9% coupled with low volatility make it poised for steady returns.
The addition of the growing focus on “safety” of high-quality, large cap stocks makes for winning combination.
The Great Disconnection
Again, there is no real fundamental reason for any of this besides sentiment and market psychology.
The news this week proved the economy is in terrible shape. The most glaring example was first quarter GDP growth which came in at a 1.8% annual rate. That dreadful growth rate is made even worse by inflation. The official inflation rate of 2.5% hides the rate of real GDP growth. If we assume a much more accurate measure of inflation of between 5% and 10%, real GDP is actually shrinking.
But we’re living in the Great Disconnection. The markets have completed disconnected from reality and a different set of rules apply. In this case, the bubble rules need to be followed.
That means incorporating our long-held beliefs in what mix makes a bubble:
A generally out-of-favor investment class
Simple, widely believable story
Cheap money
The high-quality large cap bubble has all the essential elements.
Stocks, despite they’re incredible run, are still as not in favor. Yes, they’re valuations are high, but many potential investors don’t have the desire or capability to invest in stocks too heavily right now. As we looked at last week, the percentage of Americans that own stocks has declined sharply from 2007 highs and is still in decline.
The story is simple. Investors and analysts, just like Rosenberg, see the growing disconnect between stocks and the economy. Everyone sees it. And no one wants to take big risks right now and don’t want to risk missing out either. As a result, they’re turn to the “safety” of high-quality, large cap stocks.
Another part of the story is inflation. It’s becoming a bigger focus with each passing day. Most of the high-quality large cap stocks are widely expected to weather the inflationary storm better than many others. They often have dominant brands and are in better position to pass on increasing costs to customers.
Finally, the Fed’s cheap money policy isn’t likely to end anytime soon. This week we got more of the same from the Fed. The Fed’s policies are pushing investors to take more risks – whether they want to or not.
All of this is coming together to create a solid, low-risk opportunity in high-quality large cap stocks.
In a market like this, it’s one of the few remaining spots with investors looking for a decent, risk-adjusted return.
Good investing,
Andrew Mickey
Chief Investment Strategist, Q1 Publishing
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Disclaimer
The information contained on this e-mail and in other Q1 Publishing communications is intended for general information purposes only. Q1 Publishing has not taken into account the specific investment objectives of any particular investor. You should always seek the counsel of a professional financial advisor before purchasing or selling stock. Directors, employees and outside contributors to Q1 Publishing may hold substantial positions in the recommended securities and may increase or decrease such positions without notice. We believe the sources of information to be reliable but Q1 Publishing does not guarantee the accuracy or completeness of the information provided on this website or in other Q1 communications, and expressly disclaims liability for any errors or omissions that may be contained in the information.
-- Posted Sunday, 1 May 2011 | Digg This Article
| Source: GoldSeek.com
