A few weeks ago, I summed the market up with one word: "
." After a nice little push to upside, I am returning to that
We have an extremely negative macro picture. Europe is a mess, and
China's economy isn't coming around yet. And, to be honest, there
isn't much reason to expect improvement.
The fundamental problem on both continents is demographic more than
financial, because their shrinking populations make it very hard to
grow out from under their debt loads.
Emerging markets apart from China aren't doing much better because
of their heavy reliance on materials and leveraged consumer growth.
Countries such as Brazil and India are half-finished stories, still
run by statists and burdened by complex taxes and regulations. It
increasingly looks like the 2002-2007 period of expansion was
unsustainable and more based in hope than reality.
Then we have a situation in the United States that is only
marginally better, with employment trends and most economic data
But all is not lost. As traders we make money from stocks going up
and down, not from pontificating about the state of the world, and
there are some real positives on this front.
The first is that stocks remain underowned. Consider that mutual
funds have grown 46 percent under management since 2007 but have
increased their investment in equities by only 20 percent during
that period. Private pension funds have been cutting exposure even
more, having trimmed their stock positions by 8 percent over the
same period despite their overall assets under management growing
more than 20 percent. Bond investments have soared at both.
The second positive is that companies are now better investments
than perhaps any other time in history.
I showed a chart with the financial cushion of U.S. companies, or
financial assets divided by liabilities. It's now sitting at the
highest levels in the post-World War II era. Their profit margins
are also at historic peaks, according to Standard & Poor's
index guru Howard Silverblatt. In some respects, they're safer than
Finally, the bearish trades are very crowded. Short interest is
near all-time highs on the euro, and it's not clear that Treasury
yields can go much lower. The Japanese yen also appears to be
reversing after a multi-year rally.
None of these considerations are a screaming reason to buy stocks
right now, but there aren't many good reasons to sell them either.
The upshot? It's going to be a muddle. I expect the S&P 500 to
trade in a range for months and plan to add to my longs when we hit
support. (Will nibble at 1320 and get more interested at 1300.) My
favorite sector remains the banks because they're trading below
book value and, in my view, have finally emerged from the mortgage
I hope everyone has a great summer. I'll still be here, but I don't
expect the tone to change much in coming weeks. (See
by Chris McKhann)
(A version of this article appeared in optionMONSTER's
What's the Trade?
newsletter of June 21.)