This week's prediction roundup
Here's what some people saw when they looked at their tea leaves.
Those seeing omens of good
Alan Blinder says the economy has hit bottom: "Furthermore, there is a reasonable chance -- not a certainty, mind you, but a reasonable chance -- that the second half of 2009 will surprise us on the upside. (Can anyone remember what an upside surprise feels like?) Three-percent growth is eminently doable. Four percent is even possible.... Remember the fiscal stimulus that everyone seems to be complaining about? One of the critics' complaints is that little of the stimulus money has been spent to date. OK. But that means that most of the spending is in our future."
Bloomberg and Chart of the Day say the Dow has flashed a "buy" signal: "The Dow Jones Industrial Average is sending a buy signal that has foreshadowed gains of 18 percent during the past nine decades. The 30-stock gauge climbed to more than 10 percent above its mean level from the previous 200 days, rebounding from 34 percent below the so-called 200-day moving average in November, according to data compiled by Bloomberg. Eighteen of the last 21 times the Dow rallied from at least 10 percent below the 200-day level to 10 percent above, it posted gains during the next 12 months, Bloomberg data since 1921 show."
According to Tim Bond, history shows that the deeper recession, the stronger the recovery: "[O]ver the rest of this year, the standard cyclical timing of a US economic turning point tells us pessimistic expectations are likely to collide with the economic reality of a strong recovery. The net result is almost inevitable, in the shape of an inexorable continuation of the equity rally."
James Paulsen (PDF) uses a whole lot of punctuation marks to convince you to "stay with stocks": "[W]hile the stock market will undoubtedly remain volatile and could certainly suffer another sizable setback, we think the economy and the financial markets have finally turned a corner and are probably 'very early' in a new recovery cycle. We caution investors against letting the horrors experienced during the last couple years overly color contemporary investment strategies lest it produces a portfolio well-positioned for the crisis now passed rather than the recovery rally just forming."
Jim Rogers isn't shorting anything: "I have no shorts right now for one of the few times in my life, partly because I cannot find anything to a great excess." (Actually, that's kind of a neutral stance.)
Those seeing omens of ill
Calculated Risk isn't buying the latest uptick in the Case-Shiller index, due to the seasonality of home sales: "Case-Shiller released the May house price index this morning, and most news reports focused on the small increase, not seasonally adjusted (NSA), from April to May. As I noted earlier, the seasonally adjusted (SA) data showed a small price decline from April to May.... The seasonal adjustment appears pretty good in the '90s, but it appears insufficient now. I expect that the index will show steeper declines, especially starting in October and November."
According to Mark Hulbert, Ned Davis looked at seven factors to determine whether the rally that began in March is the beginning of a long-term, secular bull market: "Only one of the seven foundations of a secular bull market is in place. Three more are neutral, and the remaining three are bearish. Davis therefore concludes that we are more likely to be in a cyclical rather than secular bull market. This doesn't have to mean that the stock market will immediately go down from here, by the way. Davis believes that the cyclical bull market that began on March 9 still has more upside potential. But he doesn't foresee that upside potential being anything like what existed at past major bear-market lows, such as in December 1974."
Another from Hulbert: "Corporate insiders have recently been selling their companies' shares at a greater pace than at any time since the top of the bull market in the fall of 2007."
Jeremy Grantham (PDF) thinks the market is fairly priced, if not a bit overpriced: " On its way up from 666, the S&P ﬂashed through its fair value of about 880 on our best estimates (our estimate of fair value has decreased slightly again due to write-downs of book value, among other factors). The market’s overshoot to 950 caused our seven-year forecast for the S&P to drop to 4.8% real compared with its 5.7% estimate at fair price."
Doug Kass, who called the bottom in March, is now increasing the cash level in his model portfolio from 29% to 43%: "In summary, my model portfolio's high cash position reflects a less optimistic view of the sustainability of corporate profit and economic growth as well as a renewal of excessive optimism in sentiment and a move toward more elevated valuation levels (which are not supported by the profit picture I foresee). "
William Dudley, while acknowledging that "contraction appears to be waning," the recovery won't be a humdinger: "[T]here are a number of factors which suggest that the pace of recovery will be considerably slower than usual. In particular, I expect that consumption—which accounts for about 70 percent of gross domestic product—is likely to grow slowly for three reasons."