Farrell: Flight to Quality Shows Glimmers of Growth

Monday saw ten year government bond yields of "safe" nations fall yet again.

Switzerland's ten year yield is, unbelievably, below .95 percent. Japan is around 1 percent and the US, Sweden, and Germany are below 2 percent.

As an aside, Spain is around 5.2 percent and Italy 5.4 percent or so.

Not good, but far from disaster, and by no means indicating imminent collapse.
Oddly, last I checked gold was off about $45. Generally, if money is scared it will flow to gold as well. It could be a one day blip what with gold's recent huge price move. It could be profit taking. Or it could be that we are overestimating the amount of fear and trepidation we are factoring into the market.

That last one is really a hope against hope but sometimes the least obvious is the answer.

Oh, Greece's ten year yield is over 18 percent.


But what has shown some life lately is Ireland. I sort of dissed the "old sod" in an earlier missive lumping it together with Portugal in the critical ward. Irish ten year bonds are at a still indigestible 8.5 percent, but they were almost 14 percent as recently as July.

The current issue of Business Week (I guess it's now called Bloomberg Businessweek) details the reasons why the improvement. There has been, says the magazine, an "Export-fueled recovery led by pharmaceuticals, medical, and dairy products". Growth is showing its little head again and while marginal, best guess for GDP this year shows a slightly positive sign.

The Irish Prime Minister played a game of hardball with the EU and the IMF and got a reduction in the interest rate on their bailout loan. That should save about a cool billion a year. The thing I like is the Irish refused to bend on their low corporate tax rate of 12.5 percent and, lo and behold, the economy is improving via international trade.

Banking, housing and construction are still in the emergency ward, but there is some life in the country. And maybe low corporate tax rates have something to do with it.

I am still concerned that earnings estimates are too high. This year is flirting with $98-$99 but it is next year I am worried about. Barron's two weeks ago had a bunch of genuine heavy hitters opining on the subject. For those who were optimistic, the estimate averaged $106 for next year. The two more cautious guys were in the $80's. I am told the "bottom up" estimate for next year is $112. Well, analysts are always the last to know.

I have no clue, of course. (Yet another thing I have no clue about). I'll guess at $100 for next year and if we slip into a recession it could be in the $80's. But even in the $80's, unless we saw a long, protracted period of significant weakness, I would say the market at around 1150 gives us an attractive 13 times multiple to play with. I would put higher multiples on trough earnings.

There are a lot of very smart guys calling for recession next year. But there are always a lot of smart guys calling for something. I don't see there is any clarity what with the complexity of the European situation. I think my outlook covers the bases and I like the values in the market.

As to Monday's market: while volume was light (but when hasn't it been) we really avoided a bullet. The pre-opening futures were off 25 to 30 implying the S&Pcould have traded below my hoped for resistance at 1120. There was no reason for the market not to with all the bad news out of Europe.

But, as I said above, the most obvious is often the wrong guess. By the close of business, the S&P finished with a solid gain of 8 points. Wadda ya know! The futures tested 1120 and the cash market 1130, so let's declare this to be a successful test of the "around 1120 " mark. I'm hoping we can run this back up to 1200 plus, but I would be a scale short seller above 1200.

Vincent Farrell, Jr. is chief investment officer at Ticonderoga Securities and a regular contributor to CNBC.