While I personally would hate an insidious VAT tax, it would assuredly raise a lot of money very quickly. However, the real answer to our woes is economic growth. To that point there was an article in the WSJ on 8/10/11 titled, âA New Strategy for Economic Growth.â In the article quips like these appeared:
âPolicy makers should cease the barrage of ad hoc, short-term policy initiatives. Is increased federal spending across government agencies a grand strategy? ... The debt-limit debate caused policy makers to recognize what citizens already knew: We must put our fiscal house in order. Cutting spending is essential. But we will never cut our way to prosperity. So, what should be the economic grand strategy? In a word: growth. ... Absent strong growth, any projected improvements in the country's fiscal position won't materialize.â
Obviously, I urge you to read the entire article.
As for the stock market, at the beginning of last week investors felt the worst was over emboldened by the previous weekâs Thursday/Friday +550-point fling. By the end of last week, however, we saw the mirror image with Thursday and Fridayâs 592-point tumble. Yet, that action should come as no surprise to participants who have studied the declines of October 1978 and 1979. As described in these missives, those 1970s patterns saw a selling climax âlow,â like we just experienced on 8/8/11 (-635 DJIA) that was followed by a sharp âthrowbackâ rally. Subsequently, the rally peaked within a few sessions with a downside retest of the âselling climaxâ lows. In the 1970s sequence those lows were marginally broken, but that was THE bottom and was followed by roughly a 13% rally over the next three months. Hopefully, that is the pattern we will see here.
Despite my hope the current stock market action will follow the October 1978 and 1979 bottoming sequences, the Dow Theory âsell signalâ registered on August 4, 2011 worries me, which is why I am respecting it. Hence, I have not been aggressive with stock recommendations. Indeed, if I am to err I am going to err by being too conservative. That is why most of the stocks mentioned in these missives over the past three weeks have had outsized dividend yields and/or our fundamental analysts think they have already bottomed. Such names include: EV Energy Partners (EVEP/$62.89/Strong Buy); LINN Energy (LINE/$35.74/Strong Buy); Health Care REIT (HCN/$45.84/Outperform); Campus Crest Communities (CCG/$10.37/Strong Buy); Abbott Labs (ABT/$49.08/Outperform); and Centurylink (CTL/$33.70/Strong Buy), to name a few. Please see our fundamental research for the full story on these stocks.
The call for this week: Investorsâ worries have leaped to levels last seen in November 2008 as the stock marketâs bottoming process began when 92.6% of all the stocks traded on the NYSE made new annual price lows. Before that, the Global Risk Appetite Indicator I use shows âpanic levelsâ equal to their current reading occurred at the âlowsâ of October 2002 and August 1982. Surprisingly, I was actually bullish at those âlows!â Regrettably, I am not as unabashedly bullish here; I wish I was! I would, however, observe that with the trade-weighted dollar at a record âlowâ U.S. trade should provide a boost to export growth, crudeâs crash should also help, low interest rates are a plus, the yield curveâs shape is noticeably steep (read: bullish), inflation is low, auto production is slated to ramp in the months ahead, Japanâs economy has bounced back, emerging marketsâ economic growth is percolating, the inventory to sales resides at levels around the recession lows, suggesting a economic âliftâ from an inventory rebuild, capex projects are picking up, the global central bank interest rate âtighteningâ process is winding down, corporate profitability is exceptional, and banks/businesses have much larger cash buffers now than they have ever had. All of this leaves me in the NO recession camp and with the belief that select stocks are cheap. If that view is correct, we should see a âbottomâ this week ...
Copyright © Raymond James
