âMeanwhile, the modus operandi for most leaders is to try and maintain the status quo, and restore the âold orderâ that prevailed before the disruption. But if the problems are large enough, this does not work, and the same challenges reappear until either a solution is found (e.g., the European Union project as the solution to Franco-German rivalry), the elite is replaced by a new elite (i.e., revolution), or the country, system or civilization disappears (e.g., end of the Soviet Union). Now if one buys into Toynbeeâs grid of reference, then it is possible that welfare states everywhere around the world are entering revolutionary times....If todayâs elites cannot fathom confronting the imbedded benefits of civil servants and pensioners anymore than Louis XVI could take on the privileges of French aristocrats, then following Toynbeeâs grid, we have to fear that elites will be changed forcefully....Historically, foxes are replaced by lions in the US and the UK, [and] by demagogues elsewhere. We fully expect that coming elections across the Western world will produce some hair-raising outcomes.â
Hair-raising indeed, because this Toynbee sequence is becoming increasingly prevalent in places like Greece, Portugal, Spain, etc.; and most recently, in the United States vis-Ă -vis the Tea Party. Now while I donât embrace the Tea Party in its entirety, the change it is fostering is palpable. Nowhere is this more apparent than the current debt ceiling debate. The Tea Party seems to be surfacing our nationâs âpolitical corruptionâ that hinders the proliferation of prosperity. Interestingly, they are not the first, for similar thoughts were scribed by Adam Smith in the Wealth of Nations. Now whether you like, or hate, the Tea Party, there is definitely a change afoot that over the long-term could be extremely bullish for the economy, the stock market, and our country.
Last week, however, that was not the case as the S&P 500 (SPX/1292.28) shed 3.92%, and has now declined by an eye-popping 4.8% since Speaker Boehner walked out of negotiations with President Obama on 7/22/11. The Weekly Wilt (both the DJIA and SPX were down five straight days) caused the SPX to test, and hold, its 200-day moving average (DMA) at ~1285. Remember, it was the 200-DMA that contained the decline twice during the June Swoon and hopefully that will be the case here. Also of note is the McClellan Oscillatorâs oversold condition, which is almost where it was at the March âlows,â as can be seen in the chart on page 3. Meanwhile, we are wasting a great earnings season with 72.7% of the SPXâs reporting companies beating estimates and 64.2% of ALL reporting companies doing the same (69% beat revenue estimates) according to our friends at Bespoke. Such earnings reports have left the SPX consensus estimate around $100 for 2011 and $113.57 for 2012. That means, if those estimates are correct, at last weekâs âlowsâ the SPX was trading at 11.3x 2012âs earnings with an Equity Risk Premium of ~700 bp. Given those metrics, and the very steep yield curve, we remain selectively bullish on stocks. Yet, the investing environment is disparate. For example, two of the stocks often mentioned in these missives posted news last week. EV Energy Partners (EVEP/$70.49/Strong Buy) soared on its news, while IBERIABANK (IBKC/$50.97/Strong Buy) swooned. Nevertheless, our fundamental analysts reiterated their Strong Buy ratings and we urge you to read their reasons why.
The call for this week: We have many great campaigners inside the D.C. Beltway, but far too few have the ability to govern given that their main concern is to get reelected. Maybe Warren Buffet had the right idea when he said, âI could end the deficit in five minutes. You just pass a law that says that anytime there is a deficit of more than three percent of GDP all sitting members of congress are ineligible for reelection.â As for the Nationâs AAA rating status, I think we are in for a downgrade no matter what happens inside the âBeltwayâ as the pendulum always swings too far in each direction. Yet, other countries have lost their AAA ratings (Canada, Australia, and Japan) with only a marginal economic impact. Importantly, Canada and Australia regained their AAA status after a few years of fiscal discipline. All said, late last February we recommended rebalancing some positions (read: selling partial positions), thus allowing long-term capital gains to accrue to portfolios and to raise some cash. In retrospect we didnât raise enough cash, for despite the SPXâs headline decline of just 7.2% many stocks have lost 50% or more over the past four months. While last February felt like an upside crescendo, the current environment feels more like the end of a decline rather than the start of another leg down. And if this is the financial Armageddon many are suggesting, why isnât gold above $2,000/ounce?! This morning, however, answers that question.
Click here to enlarge
Source: Bloomberg.
Copyright Š Raymond James
