Only a couple of months ago there was near consensus in the US that the S&P 500 was heading for a double-dip (i.e. will fall to previous crisis lows). Government intervention and better earnings shattered the dream “shorts” had. Economic data was alarmingly weak and investors feared of the perfect destructive recipe: anemic macro data coupled with soft micro data (corporate earnings). However, earnings came in better than expected and no one talks about Greece anymore. Consequently, the S&P 500 rallied 10% from its recent July low of 1022 pts and is currently up 7% and is at a break-even level for 2010.
So, now what? Will the S&P 500 rally or double-dip? I personally advocate none of the above. One of the most significant intact recovery signs is the recent rise in M&A activity (mergers & acquisitions). This is a clear vote of confidence by corporates and an indicator of cheap valuations. There were around 5 M&A deals during the past week alone. The most critical M&A deal is the proposed acquisition of Potash by BHP Billiton for $40 Billion. Not only that, but an even more encouraging sign is that BHP’s proposed deal is an all-cash offer which suggest BHP sees its own shares undervalued and the return on their cash higher than issuing shares at what they consider depressed levels.
Couple these bullish M&A signs with governments willing and able to intervene and you minimize the chance of a double-dip. I say “minimize” because some idiosyncratic risks such as an air-strike on Iran can easily result in a double-dip. Also technically speaking, a horde of cash is sitting on the side-lines and many people missed the rally so any major pull-back will be bought. However, I don’t see the market surging higher. Big Ben (Fed Chairman Ben Bernanke) stated at the latest Fed meeting that we live at times of “unusual uncertainty.” The high unemployment levels seem to be staying for a while and I don’t see a catalyst for the market to go much higher. Further, I believe the S&P will close down around 5% in 2010.
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Well put Keynesian,
but you havent considered the chances of there being other toxic assets than MBS’s in wall street financials…
we are currently handling a ‘very’ fragile system that cannot withstand significant downturns and looming within corporate balance sheets are many sophisticated financial instruments that still havent been stress tested with time!
good examples are Alt+a’s and option arms’s, valued at around double that of MBS… both structures imply the holder to pay a variable rate that is expected to increase over time (near future), as interest increases so do default rate’s consequently ratings go down pulling value with it…
I think you guys get an idea of where im going!
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Keynesian Reply:
August 24th, 2010 at 4:22 pm
Yes there are toxic assets, but I believe Fed intervention will always provide a “catching-hand” for the markets. No matter the toxic assets, the Fed will come-up with exotic measures to address those issues. An example from the recent crisis is Quant easing. I guess my point is that the world will not end, but will not florish. The next 3-5 years will be boring (good time to go to school?).
Always great having discussions with u.
[Reply]
KuwaitQ Reply:
August 30th, 2010 at 3:46 am
“The next 3-5 years will be boring (good time to go to school?)”
Definitely… Thats why i and many close friends are currently drowning in Gmat books to get us out of the industry until things get better.
Would advise you guys to do the same!
[Reply]