All U.S. markets will be closed on Monday to observe Martin Luther King Jr. Day.
The rest of the week will be extremely light in terms of economic data. But this will also give folks time to think about their investments.
Last week, Goldman Sachs’ David Kostin managed to send chills through the markets with his warning about stocks.
From Kostin: “The current valuation of the S&P 500 is lofty by almost any measure, both for the aggregate market as well as the median stock: (1) The P/E ratio; (2) the current P/E expansion cycle; (3) EV/Sales; (4) EV/EBITDA; (5) Free Cash Flow yield; (6) Price/Book as well as the ROE and P/B relationship; and compared with the levels of (6) inflation; (7) nominal 10-year Treasury yields; and (8) real interest rates. Furthermore, the cyclically-adjusted P/E ratio suggests the S&P 500 is currently 30% overvalued in terms of (9) Operating EPS and (10) about 45% overvalued using As Reported earnings.”
Here’s your Monday Scouting Report:
Pump The Brakes: While most strategists remain bullish, some are becoming increasingly cautious. Deutsche Bank’s David Bianco, who was once Wall Street’s most controversial bull, thinks investors should wait for a stock market dip before thinking about buying again. Specifically, he’s concerned about high PEs, changing Fed monetary policy, and uncertainty surrounding mid-term elections.
“For the S&P 500, 2014 is likely a year of normal EPS growth, normal PEs, normal total returns and normal volatility,” wrote Bianco last week. “Normal volatility includes at least one 5.0-9.9% dip from the 6-month high. The only years without such a dip since 1960 are 1964, 1993 and 1995.”
Jeffrey Gundlach Goes Full Contrarian: Bond fund veteran Jeffrey Gundlach unveiled his 2014 market outlook on Tuesday, and he basically said the opposite of what the consensus has been telling us. Economists expect tapering to push the 10-year Treasury yield above 3.4% in the fourth quarter. Gundlach thinks the 10-year Treasury yield topped out at 3% and could go as low as 2.5%.
Everybody hates gold and the gold miners. But Gundlach thinks that’s where money can be made. The median forecaster sees the yellow metal falling to $US1,220/oz this year. He sees gold rallying to $US1,350/oz.
Gundlach also said that Chipotle should drop 30%, Apple could go to $US600, Bitcoin will fall further, and Puerto Rican and JC Penney debt are money-makers for anyone willing to stomach tons of volatility.
- Initial Jobless Claims (Thurs): Economists estimate weekly claims climbed to 330,000 from 326,000 a week ago. “While the DOL stated that there were no special factors during the bitterly cold “Polar Vortex” week, we posit that the extreme weather kept some filers indoors,” said Citi’s Peter D’Antonio. “Consequently, we anticipate an above-consensus rise during the reference week as claimants took advantage of warmer temperatures. Separately, beneficiaries fell back into their recent range after a surge that likely reflected seasonal adjustment difficulties”
- Markit US PMI Preliminary (Thurs): Economists estimate this economic activity index climbed to 55.0 in January from 54.4 a month ago. “The Markit PMI has been signaling slower growth than has been borne out in actual manufacturing output figures,” said UBS’s Kevin Cummins. “It contrasts with the greater strength of the manufacturing ISM.”
- Existing Home Sales (Thurs): Economists estimate sales climbed to 0.7% to an annualized pace of 4.94 million in December. “Pending home sales ticked higher in November, suggesting some improvement in closed contracts,” said the economists at Bank of America Merrill Lynch. “Since existing home sales track closed contracts, weather conditions are unlikely to have as big of an impact on activity (as compared to new or pending home sales which track signed contracts). That said, we would argue the risk is to the downside for this report.”
- Kansas City Fed Manufacturing Activity (Thurs): In December, this regional manufacturing index fell to -3 from +7 in November.
“We believe that we are now entering the global synchronous phase of a long but bumpy recovery process that started in 2009,” wrote Henry McVey, KKR’s Head of Global Macro & Asset Allocation.
“However, unlike many other synchronised global recoveries, developed market central banks are — in aggregate — likely to remain accommodative in an attempt to offset some of the inherent volatility that accompanies de-leveraging cycles. Against this macro backdrop, our asset allocation view for 2014 is that investors should “Stay the Course,” retaining key overweight positions in global equities and alternatives, including private credit, special situations and real assets.”
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