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Market Insider: The Bear Equation

The more popular view on the street is that a selloff is coming, and that economic data and earnings will not support the market's gains.

Sharon Lorimer

Among those who see a pull back is Citigroup chief U.S. equities strategist Tobias Levkovich. Levkovich has been warning the market could sell off, and he warned again at a press briefing that the third quarter earnings season could be an opportunity for that to happen.

Levkovich was joined by Citigroup economist Steve Wieting and credit strategists Darrell Wheeler and John Fenn. Wieting said third quarter earnings will not show the types of upside surprises seen in the second quarter.

“Five-to-six percent is relatively easy," he said, but in the second quarter earnings registered a record 15 percent upward surprise.

Levkovich said he expects the S&P to hit 1,100 in 2010. "The ISM, credit data says we'll start off pretty strong, but it's the second half of the year that could pull us back," he said.

There is a chance the economy could have a "W" shaped recovery, where it dips down again after making stride, he said.. But that "W" would be on a plane, with the second half potentially shallower in terms of the dip.

Year Later


Fenn follows the high-yield bond market and he said it has returned to a level where it appears the Lehman bankruptcy never happened.

"There's no sense of a double dip in high-yield bond spreads," he said.

Some people believe the high-yield market has overshot, he said.

"Our three-year total return forecast is roughly at about 12 to 15 percent," he said.

A big area of concern for credit markets is what will happen when the Fed removes liquidity, he said.

Asked what he's worried about most, he said: "We're watching the banking system."

If the pace of tightening by lenders worsens, it would be "game over. You have the formula for a double dip," he said.

Pimco's Tony Crescenzi, in an interview Tuesday, described the fragile progress by the economy and credit markets a year after the government bailout of AIG and the failure of Lehman.

He says compare the gains made to a small camp fire on a windy night. Government officials are standing around the flame to keep it from blowing out.

"It's still very windy," he said, but there are signs of improvement in some measures such as equities prices, credit spreads and yields outright. He also points to improvement in ISM, the manufacturing survey which at a level above 50, now reflects positive growth. Crescenzi said he is watching weekly jobless claims Thursday to see if they continue to show progress seen last week.

"The three month change in equities has a good correlation to retail sales. It makes a difference when equity prices are higher," he said, pointing to the surprising jump in August retail sales.

Another sign of healing could be coming from the commercial paper market. In a sign that companies are looking to spend again could be the improvement in commercial paper demand in the past four weeks. In terms of bank lending, Fed data continues to show a sharp contraction and decline, but the pace of that decline has slowed.

"There's still tightening of standards but it's not as abruptly as previously," he said.

Borrowing activity is as expected at this point in the economic cycle.

"This is typical at the early stage of recoveries when companies don't have much need for working capital," he said. Commercial and industrial loans were at an all time high in October, 2008, at $1.654 trillion. They are now at $1.436 trillion.

On Wednesday, Crescenzi said he'll be interested to see how much foreign investors have been participating in the Treasury market. The Treasury's TIC data will show that, and it also comes a day before the Fed's flow of funds report. That data last quarter showed a huge jump of U.S. household investment in Treasurys.

Questions? Comments? marketinsider@cnbc.com

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