Diary of a Financier

Bull v. Bear

In Capital Markets, Economics, Politics on Thu 8 Aug 2013 at 12:23

The market has started tossing & turning here in the middle of earnings season, so I think it’s time for another edition of Bull v. Bear…



  1. State & local government spending– Municipalities’ austerity is ending and will no longer drag on GDP growthContribution to GDP growth- Residential, State & Local Governments
  2. Housing– Residential real estate is also no longer dragging on GDP; the pickup in home prices, new home sales, and building permits will particularly contribute to economic growth
    • Counterpoint: Headwinds include rising mortgage rates; lurking shadow inventory (e.g. bank REO); and waning, artificial real estate demand due to ZIRP/QE, which have encouraged excessive institutional CRE/RRE own-to-rent schemes
  3. Bank lending– Recent data show continued increases in credit demand and relaxed lending standards across the universe, from small businesses (C&I) to Commercial Real Estate (CRE), from prime to subprime residential mortgages, and even consumer credit
    • Counterpoint: There are both signs of froth (CRE) and signs of stress (subprime) within the Fed’s senior loan officer survey for June
  4. Sentiment– Howard Marks astutely points out that everyone’s pretty conscious of all the equity risks out there (i.e. Grey Swans) at this stage of the cycle, which suggests we’re still in a state of Thrill on the Investors Cycle of Psychology–having not yet brushed Euphoria
  5. Fundamentals– SPX earnings yield¹ (E/P) at 6.35% still exceeds corporate bond yields (Baa) at 5.33%SPX earnings yield v Baa bond yield
    • Counterpoint: Rising risk free rates should force compression in that spread between $SPX earnings yield and $LQD yields, so the real question is to what extent have multiples priced-in forward economic growth, because that will determine what how leveraged stock prices are to realized growth (multiple expansion/contraction)
  6. Technicals– The 2007 analogue remains in-tact and bullish for the intermediate term; SPX’s lagging MFI could provide the late-inning jolt necessary to push the market higher after a low-volume summer
    • Counterpoint: A primary, rising wedge pattern and 1x bear divergence are developing in the daily fractal, but the former was evident & thwarted in the 2007 analogue, and the latter is immature & unsupported by intraday fractals for the immediate term
  7. Inventories– Although rail traffic has maintained slow growth velocity, strong US/developed market PMIs suggest that inventories have remained low Inventories & Inventory/Sales Ratioenough for long enough that they’re ready to build–especially given historically low inventory/sales ratios
  8. Fiscal stimulus (bonus/wildcard)– Probability models should factor-in the odds of fiscal stimulus in the form of President Obama’s recent bipartisan proposal, a “pro-growth tax reform & jobs package”
    • Counterpoint: No way Rupublicans would allow anything from this democratic administration to pass (hence my use of “probability”)


  1. Private equity– The big boys like $APO $BX $CG $FIG are all selling-out [at the top?], and they all saying they’re having trouble finding value at these levels
    • Counterpoint: It’s transitioning from a value to a growth market, although that’s usually indicative of a cyclical bull market’s late-innings
  2. Earnings recession– Byron Wein nailed the chief concern about 2H13: SPX net margins have peaked, so with <2% GDP growth, it’s unlikely that revenue growth can maintain corporate EPS gains
    • Counterpoint: Aforementioned bull items like macro & fundamentals (inter-asset relative value) can contribute to higher earnings, but the question is whether or not (and to what extent) valuation multiples have already priced-in these forward expectations; I also have to consider that the past 2-1/2 years of margin-fueled EPS growth have been amidst a drag on sales growth from the Eurocrisis & Chinese slowdown
  3. Margin debt– June’s NYSE margin data showed credit and balances near alltime highs, but both were recedingNYSE real margin debt vs SPX (June 2013)
    • Counterpoint: Institutional “smart money” has lagged this entire rally, now severely underweight equity after being net-sellers throughout June; with margin balances receding (especially real/inflation adjusted), there’s an opportunity for buy volume to propel another leg higher, as manifest by the aforementioned MFI


Having weighed the bull case vs the bear case, I find the balance overwhelmingly biased toward the bull camp for the intermediate term.


¹SPX earnings yield = (SPX fwEPS) / (SPX price) = $108.00 / 1700

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