Leon Cooperman published an epic 48-page note to investors explaining why everything is fine

Leon Cooperman’s Omega Advisors released a 48-page investment outlook last week.

And for all the fiddling over post-Brexit markets and the risks of a Chinese currency devaluation, Omega doesn’t think there’s much to worry about, according to the note.

The bulk of Omega’s assets are invested in US equities. As of year-end 2015, the New York hedge fund managed about $6.7 billion, a decrease of about a quarter from the year before, according to the Hedge Fund Intelligence Billion Dollar Club ranking.

“Though a short-term correction in US shares would not be surprising, nor would a several month pause, we remain ok with US shares,” the letter said.

Omega has forecast that the S&P 500 will deliver a total return of 5% to 8% this year. The actual performance so far this year is a little over 6%. Still, Omega isn’t cutting its bets.

It added:

“Even though the year-to-date S&P 500 total return is within a few per cent of our expected return for this year, we continue to believe that the S&P 500 outlook will be a friendly one, even as US shares may pause for a while. Why? Because we expect that the in-place US equity market advance can last for quite a while longer than this year. Though we understand the difficulty in offering up a longer-term market outlook, particularly given the geo-political uncertainties and challenges surrounding the US and other regions, our assessment of fundamentals suggests that US shares should grind higher through 2017 and, perhaps, in the years thereafter.”

The letter then addressed multiple potential problems, ranging from inflation to exogenous shocks triggered by Brexit and China. In every case, the letter said the market would be just fine.

Here are some relevant excerpts from Omega’s note (emphasis ours).

No bear market in sight

“Critical to our view that US shares can grind higher for quite some time is our assessment of our US bear market checklist. We introduced this bear market checklist quite some time ago. The arrival of a bear market in US shares typically requires:

  • Accelerating and problematic inflation.
  • Very tight/hostile monetary policy.
  • The prospect of recession.
  • Investor exuberance.
  • Speculative equity market pricing relative to interest rates and inflation.

None of the items of this bear market checklist are with us currently nor do we expect their arrival anytime soon.”

Little inflation on the horizon

“The current inflation landscape in the US is benign and we expect inflation (core personal consumption deflator) to range between 1.5% – 2.5% over the coming year; we define this range of inflation as sweet-spot because it is sufficient to underpin moderate corporate revenue growth but not so rapid as to frighten the Federal Reserve or the bond market.

We do not expect a problematic rate of inflation nor any sharp acceleration in it.”

The strong dollar should help S&P500 revenue

“We entered 2016 believing that the dollar would be in a trading range and experience a flat-like trend for most of the coming year. So far, this has been a correct view. If sustained, this dollar outlook should benefit S&P 500 revenue and earnings growth, China/emerging market economies that have borrowed in dollars, oil and other commodity prices, and US GDP growth via better export growth.”

Brexit will have a limited impact

“We do not see Brexit impacting US/Euro area/global economic growth in an important way and regional financial conditions indices are supportive of this. We expect a forceful response of monetary policy in the U.K./Euro area/U.S. in response to the Brexit vote and some of this has been implemented already. …

The U.K. economy accounts for approximately 3% of global GDP. With respect to the US, the impact of Brexit on our GDP growth is minimal, estimated at just .1% – .2% over the coming four quarters. This should be of no relevance to our equity market. More importantly, the UK accounts for under 4% of S&P 500 earnings per share and we estimate that the Brexit dent to earnings growth over the coming year is a minor 1% – 2%. Brexit, in our view, is not an exogenous shock that is particularly relevant to US shares or the US economy.”

The threat from China has been exaggerated

“We are not all that concerned by yuan weakness to the dollar and do not think yuan devaluation is an exogenous shock that can derail the in-place advance in US share prices. First, countries experience currency depreciation and appreciation all the time. These currency fluctuations have not historically derailed developed-economy equity markets …

Even though a slowing in Chinese economic activity has been widely expected as this transition unfolded, the slowing, at times, has frightened global investors because of its supposed big impact on US economic activity. We believe this concern of global investors is exaggerated and unwarranted.

US earnings will improve

“We have the following observations with respect to earnings and profit margins. First, we believe that the growth in year-over-year S&P 500 earnings per share bottomed in the first quarter and year-over-year growth should accelerate over the next year aided by a developing recovery in the manufacturing sector, higher commodity prices, and less dollar headwind. We expect S&P 500 earnings per share growth this year of between 3% – 5%; second, the widespread commentary of an earnings recession in the US is an exaggeration.”

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