This Doesn't Feel Quite Right ....

Well after a "fun" week at work it is always therapeutic to come home and have your 4 year old utterly destroy you at Mario Kart. Keeps things in perspective. He's sleeping now so I get a chance to write.



The market still doesn't feel quite right in here. Hard to put much more than a gut feel on it at this time. Keeps my portfolio defensive. Very close to printing another good month (5 trading days to go). A couple points come to mind. First Merrill is at $58 for S&P earnings for 2009 (consensus is a bit higher) and I believe when we look back at 2009 $58 will be much higher than what actually happens. If we take a market multiple at stock market bottoms of 10 times (this is generous) then the S&P fair value would be at 580. This is a far cry from where we are now. Earnings are collapsing and I don't see this as ending anytime soon.



Secondly consensus for Chinese GDP in 2009 is around 8% (again a Merrill number). Note ... I am not picking on Merrill. Dave Rosenberg has been spot on with this mess. In my tired state I just happen to recall a couple of salient data points. Ok I really can't wrap my head around this one. The Chinese manufacturing was materially overbuilt and is now collapsing. Unemployment is creeping higher and political tension with the US appears to have begun (both Obama and Geithner are already complaining about renminbi manipulation). The reality is I have difficulty getting GDP at 7% this year.



What does this mean? Well since the market trades on expectations I think we are going lower before we go higher. The back half of the year looks on track to disappoint (growth expectations will not be met) and current valuations are not cheap by any standard (especially with global earnings collapsing). Hopes for the recovery revolve around massive global fiscal stimulus. While this is coming I don't see it as the savior for 2009. These projects take time to get moving. Ultimately fiscal stimulus will only replace a small percentage of the money that is leaving the system via lower private consumption and investment.



History tells us that when a credit bubble bursts there is only one thing that can fix it. TIME. While it is a nice story to believe that we can speed this process up, via government intervention. I am leery to subscribe to that theory. Hence the belief that Q3 and Q4 2009 will be worse than consensus and ultimately this market will go lower. Stay defensive.