Jeremy Siegel: “The Market Will Stage a Comeback”

Tuesday, July 14th, 2009

Jeremy Siegel, Wharton School prof and Director of Wisdom Tree ETFs, says “Now that it’s clear the recession will not turn into a depression, stocks are poised for a recovery.” Siegel recently was the subject of an interview conducted by Knowledge@Wharton. You may listen by clicking the player below, or read the edited transcript of the interview below.

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Here is an excerpt:

Knowledge@Wharton: The market just had its first weekly [decline] in a number of weeks. What was driving that?

Siegel: I think there are two principal concerns in the market. One is the rising commodity prices — particularly energy prices and oil. And the other is the rising interest rates, which are in turn caused by fears of huge deficits, as well as rising commodity prices. My feeling is, the market would have been up last week, too, if it didn’t have to contend with those. And now, it’s concerned that those [factors] might push the economy down. Today [June 22], we had a decline in energy prices and in the market. But … energy prices and interest rates [are] our main concerns.

Knowledge@Wharton: Are the energy prices being driven by demand?

Siegel: Demand in China is rebounding very rapidly, although there are some experts who say that there’s still a lot of speculation in it, and that the price … has run a little bit ahead of itself. But China and India are recovering quickly. There are a record number of applications for new cars in China, and those generally use gasoline and oil. So, looking forward, over the next couple of years, those bulls in oil are saying there’s going to be a big increase in [consumption].

Knowledge@Wharton: Doesn’t the rise in demand [indicate] an improving economy overall?

Siegel: Certainly … a good part of the rebound in oil and in interest rates is because the depression scenario has basically been taken off the record. It’s now considered an extraordinarily low probability. So, we’re dealing with a severe recession, and [the question of] how fast we are going to improve from that. And once you’re into that mode, you don’t accept 2% to 3% bond rates any more, and oil won’t stay down at $35 a barrel. But I think some of [the movement has occurred] in anticipation of strong demand from China, particularly for oil, and, on the bond side, from the huge deficits, trillion-dollar-plus deficits that are going to cascade down on the market.

You may read the whole transcript here.

Source: Jeremy Siegel: ‘The Market Will Stage Another Recovery’, Knowledge@Wharton, June 24, 2009

Tags: Array, Bulls, Commodities, Commodity Prices, Consumption, Decline, Depression, Emerging Markets, Energy Prices, ETF, Excerpt, Fears, Gasoline, India, Jeremy Siegel, Kw, Little Bit, Mp3, New Cars, oil, Principal Concerns, Rebound, Recession, Rising Interest Rates, Speculation, Stocks, Upenn, Upenn Edu, Wharton School, Wisdom Tree Etfs
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Shiller: Stocks fairly valued but could “go down a lot”

Tuesday, July 14th, 2009

With the S&P 500 Index after yesterday’s surge again slightly above the “neckline” (of the head-and-shoulders formation referred in a post last week), I will be monitoring things very closely over the next day or two to see if the impressive bounce was just a one-day wonder or something more enduring.

Meanwhile, the S&P 500 is now fairly valued on a long-term cyclically adjusted P/E (CAPE) basis, according to Robert Shiller (as reported by Yahoo Finance, Tech Ticker). Shiller is economics professor at Yale and author of, among others, Animal Spirits, Subprime Solution and Irrational Exuberance.

In order not to work with notoriously unreliable forward-looking earnings estimates, I have always preferred using Shiller’s CAPE methodology, or normalised earnings, as they average ten years of earnings. This measure provides a good picture of the market’s value regardless of where we are in the business cycle. I have therefore been updating a CAPE chart for a number of years. On this basis, the multiple increased to 15.8 during the March-May rally, representing “neutral” value when compared to a long-term average of 16.3.

According to Yahoo Finance, Tech Ticker, Shiller is skeptical of the “green shoots” viewpoint and is of the opinion that it would take a considerable period of time for the economy to return to normal growth. Although the stock market’s neutral valuation implies a long-term average return of 7%, he is not forecasting that outcome due to the “precarious state” of the economy that could stumble anew and cause stocks to “go down a lot”.

As mentioned in my “Words from the Wise” post on Sunday, the stock market technicals undoubtedly look ugly and investors will now focus on the second-quarter earnings reports as a test of whether stock prices have run away from fundamental reality. While investors wait for Mr Market to show his hand, a cautious approach is warranted, but that should not preclude one from finding stocks that look cheap.

Click on the image below to view Aaron Task’s interview with the famed professor.

Source: Yahoo Finance, Tech Ticker, July 10, 2009.

Tags: Animal Spirits, Business Cycle, Cautious Approach, Earnings Estimates, Earnings Reports, Economics Professor, Fundamental Reality, Head And Shoulders, Irrational Exuberance, Methodology, Neckline, Normalised, Period Of Time, Precarious State, Robert Shiller, Second Quarter Earnings, Stock Market, Stock Prices, Viewpoint, Yahoo Finance
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Federal deficit crosses $1 trillion mark with a vengeance

Tuesday, July 14th, 2009

Both spending and tax receipts put in double-digit performances to produce a US ten-digit deficit (actually $1.1 trillion) for the first nine months of the fiscal year and broke a monthly record of $94 billion in June. Spending came in at +20% compared to over a year ago and receipts were down 18%. “No doubt where this train is going,” said John Sylvia, chief economist of Wells Fargo Securities. His additional comments follow below.

Spending: Entitlement spending leads the way

• Medicare, Social Security and Income Security all recorded double-digit gains in spending compared to a year ago. Such percentage increases are large even for a recession where these categories represent automatic stabilizers.

• Total outlays have soared as a percentage of nominal GDP. The government’s command of economic resources is at a new high.

Revenues: Weakness reflects recession pattern

• Both individual and corporate income tax revenues have fallen at double- digit rates compared to a year ago.

The Federal deficit is now at a post-WWII high and is likely to continue to rise in the near term as deficits rise and the economy remains weak. These deficits will influence the allocation of global savings for the foreseeable future.

Source: John Sylvia, Wells Fargo Securities, July 13, 2009.

The chart below comes courtesy of Jake of EconomPic Data, showing the rolling 12-month change in receipts, as well as outlays, and the variance between the two. “An inexact formula? Yes, but it puts this all in perspective. What this shows is a massive spike in spending AND a massive cliff dive in receipts,” said Jake.

Source: EconomPic Data, July 13, 2009.

Tags: Automatic Stabilizers, Chief Economist, Corporate Income Tax, Economic Resources, Federal Deficit, First Nine Months, Future Source, Global Savings, Income Security, Income Tax Revenues, No Doubt, Nominal Gdp, Outlays, Percentage Increases, Recession, Tax Receipts, Trillion, Variance, Vengeance, Wells Fargo
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Technical Talk: Make or break for bull argument

Tuesday, July 14th, 2009

The comments below were provided by Kevin Lane of Fusion IQ.

As seen on the daily chart of the S&P 500 below, the Index is at the lower end of its support zone (purple lines and arrows). Given that the Index is already qualified as oversold (i.e. down 8% from its peak), it is even more important that it should hold. If the rally off the bottom remains intact, an 8% sell-off to support should be met with enthusiasm by buyers.

If buying doesn’t materialise down here, it tells you a lot about the psychology of traders and we are likely to see the market continue to drift lower. It is really important for the bull argument that the market takes some type of stand here.

As this is peak vacation time (July to August) we would expect trading volumes to taper off slightly, making liquidity a bit of an issue.

Source: Kevin Lane, Fusion IQ, July 13, 2009.

Tags: Amp, Arrows, Break, Bull Argument, Cape Town, Fusion, Investment, Iq, Kevin Lane, liquidity, Postcards, Psychology, Purple Lines, Rally, Support Zone, Target, Vacation Time
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