Behind the Money

Investors See Odds Stacked Against Bull Market Making 2012

Despite a bounce in the S&P 500 index this week, many investors see the odds stacked against the bull market making it into 2012. The fiscal and monetary reforms needed in the US and overseas to sustain this advance have little chance of happening, they said.

“Some grand deal on entitlements in the U.S., moves to bring the 17 countries now part of the EU either fiscally closer together or monetarily further apart, or a more rapid acceleration in the value of China’s currency would all be long-term positives for equities now trading at low levels of valuation despite low levels of inflation and long-term interest rates,” said Jason Trennert, investment strategist, in a note.

“In the absence of such important secular reforms, investors can only hope for quick liquidity fixes that may mask the global economy’s underlying injuries and become, as a result, good opportunities to de-risk their portfolios,” he added.

Trennert, founder of Strategas, made a list of the things that would turn him bullish again, along with the odds of those events happening. He and his team kept clients on the right side of the trade for two years by telling them to “stay bullish until the bill comes due.”

The bill came due this month when the Standard & Poor’s ratings agency downgraded U.S. sovereign debt following a vicious bipartisan battle over raising the debt ceiling. Greek bond yields blew out to new highs on concern that the European Union and private bondholders don’t have the will or money to keep bailing member states out.

The S&P 500 is down 11 percent from its bull market high reached in April, with more than half of the losses coming this month. If April 29 does end up being the end of the bull market, it will rank as the second shortest bull cycle since 1962, at 781 days.

Trennert gives the implementation of pro-growth tax policies a 10-to-one shot. President Obama is supposed to unveil a comprehensive jobs plan next week. The creation of a Eurobond or some sort of monetization of Euro-zone has an equally long shot chance of 10-to-one, the firm said.

“Give firms tax and investment incentives to create real jobs to train people and make them productive,” said Michael Block, chief equities strategist at Phoenix Partners Group. “Give especial consideration to entrepreneurs. I know this is very unlikely, but this would resolve issues at their root.”

A third round of quantitative easing has a five-to-one chance, according to Strategas. Federal Reserve Chairman Ben Bernanke disappointed many by failing to strongly hint at ‘QE3’ at the central bank’s Jackson Hole retreat last week. The Fed Chief instead extended the central bank’s Sept. 20 meeting to two days, giving it more time to figure out its monetary strategy. The August jobs report is out this Friday.

“There is nothing left on the monetary front that will have an impact especially relative to the size needed to change things at the margin,” said Doug Kass, president of Seabreeze Partners. “Pro-growth initiatives outside the envelope are probably over 10-one odds in this partisan backdrop, particularly as we approach the November elections.”

Entitlement reform by the so-called Super Committee appointed by Congress as part of the debt ceiling agreement was given three-to-one odds at being a success, by Strategas. The group must present their plan to cut $1.2 trillion from the deficit over the next decade to the rest of Congress by the end of November.

Policies aimed at dealing with the residential and commercial real estate overhang were given three-to-one odds, but many investors see with better odds of happening than Strategas.

“A massive mortgage modification program where everyone can refinance their loans to 4 percent fixed for 30 years, would lift the household debt burden,” said Alec Levine, an equity derivatives strategist at Newedge Group. “Until the weight of the cash outflow burden is somehow lifted, we have very little chance of turning this de-leveraging nightmare around.”

To be sure, not all investors are giving up on the bull market yet. After all, data from Birinyi Associates show that one or two pullbacks of this type are the norm.

“Our economy is weak, but yet when a gun is to my head, I would rather own shares of businesses doing well and some tech companies rather than gold, cash, bonds,” said Mike Khouw, senior Equity Derivatives trader at Cantor Fitzgerald.

And some believe we just need to stop looking to the government to solve all our ills, even if it ends the bull market. If we take our medicine now, a new stronger bull market will be born, they said.

“I want the government to do nothing,” said Peter Boockvar, equity strategist at Miller Tabak. “Let the market work. Let it wring out the excess. Let it move through the foreclosure process.”

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