Farrell: I Don't Like What I See in the Future

What's Next?
What's Next?

The physicist Niels Bohr had it right when he said "prediction is very difficult, especially about the future." But that's part of the business I find myself in: making some predictions.

I continue to worry about the anemic volume. Monday saw barely 1 billion shares trade on the New York Stock Exchange. And I fear we are too excited about earnings which are not repeatable since they are coming largely from cost-cutting and onetime events. I am guessing — which is a half hearted prediction — that, after the bulk of the earnings season is behind us, we might sober up a bit and see that the news is less bad, but not really good, not yet.

If $55 is about the right number for earnings for the S&P for this year (as I have mentioned before), the market, currently at 982, is trading for 17.85 times, which strikes me as full, at least.


Some technician types I know and respect say 875 is the downside risk measurable on the charts, which would be just under 16 times. OK — but I like the idea that in the lower 800's the market would be closer to the 15 multiple that has been sort of a pivot point in the past.

So how's that for predictions?

The smart guys say 875 is your risk. I like the values at around 825. And I guess I should mention that the high hit last October is 1044, if you want to be bullish. Take your pick, but continue to color me cautious. The consumer is still too leveraged, unemployment is rising still, and commercial real estate is just starting to show the depth of its problems. All these problems are known and to some extent factored into prices, but maybe not all the way.

Existing home sales were a bit of a surprise, rising for the third month in a row, to 384,000 units. That's up 11% from last month, but still not 25% of the peak way back when real estate always made you money. Inventories declined to 8.8 months from 10.2 last month and 12.4 months at the highest. But since new-home sales are now only about 8% of all sales, I should not dwell too long on this one stat. However, it is a hot summer day with lousy volume, and I don't have anything else to do.

The auction for 20-year Treasury Inflation Protected Securities went well, with a bid-to-cover as good as it has ever been for this type of bond, at 2.27, versus 1.92 last auction. Indirect buyers (foreign) were a still healthy 48% even though down from last auction's 54%. But this was expected to do well, and we'll monitor the rest of the auctions (2-year, 5-year, 7-year) taking place during the rest of the week.

Mike Genovese of Soleil/Elevate Research just joined us, and his number-one pick is Ciena (CIEN: $11.74: 52-week range is $22 to $5). It is one of the dominant wireline equipment companies. Mike feels wireline capital spending bottomed in the first quarter as carriers underspent budgets. The company has some new-product offerings that should carry high gross margins. Mike's EPS forecasts are well above the Street, at $0.53 for calendar 2010 versus $0.23 consensus. He feels they could earn as much as $1.20 in calendar 2011 and has a $14.50 price target.

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