The number 666 has spooky connotations for fans of horror films.
It's also an ominous number that analysts at France-based Societe
Generale (SoGen) want you to think about. That's their target price
for the S&P 500.
The S&P 500's 120 point drop since late March to a recent
1,305 has been painful enough, but does it really have another 50%
to fall from here? Frankly, I think these analysts are being overly
, and I'll explain why in a few moments, but it's still worth
hearing why they are so frightfully bearish.
These folks say the
is telling equity investors something right now. Germany's 30-year
less than 2%, which is precisely what happened in Japan in the late
1990s before the Japanese
hit a wall. And for SoGen, that's a harbinger of more pain to come:
"We still see [U.S.] 10[year] yields -- even now making new
all-time lows -- falling below 1% as hard landings occur in China
and the U.S."
These analysts say a looming sell-off, if it happens, would
merely be the third phase of a three-stage
in stocks that began back in 2000. There is a logic in play behind
thatcall . Remember that stocks made a solid upward move from 1982
to 2000, in what many now
. Some now say that the recent rebound from the lows of early 2009
was just a head fake in a broader secular bear market.
And just as the final melt-up in stocks in 2000 created a
dramatic end to the secular bull market, SoGen's analysts say the
secular bear market will likely end in a similar fashion. They say
the events in Greece are just the tip of the iceberg. "The eurozone
crisis will be a sideshow when the main act appears on stage. As
well as a slide back into
in the United States, a
in China will crush any residual optimism of the equity bulls,
taking global equities below April 2009 lows."
These analysts spell out their case in emotionally-charged terms,
predicting that "investors will lose all hope, most particularly in
their belief that policymakers have any idea what they are doing."
This kind of mood brings to mind a market era that initially shaped
my exposure to stocks. The 1970s were also a time of hopelessness
and despair, when
surged and looked to hamper the economy for many years to come.
Many blue chip stocks looked awfully inexpensive early in the
decade, trading at six or seven times trailing profits, but the
grinding bear market pushed those multiples below five later in the
Why they're wrong
Even as it's helpful to look back at past market action for
insights, these analysts appear to get it wrong on some very
profound points. For starters, a comparison to the 1970s is simply
unfair. Back then, inflation was nearly ruinous and fed a vicious
cycle of underinvestment and weak profits. From auto makers to
steel makers to retailers, corporate America had seemingly lost its
way. Fast-forward to the current era, and Corporate America has
never been more competitive. The country's pace of innovation
remains robust, and in coming years as the global economy gets back
on its feet, U.S. companies will likely be well-positioned in a
number of growing global markets.
To suggest that we're headed even lower than the lows we saw in
2008 is also off-base. Back then, a number of companies carried too
much debt along with bloated workforces. As I recently noted, share
prices plunged for companies such as
Domino's Pizza (
as bankruptcy fears loomed. But corporate balance sheets have grown
remarkably stronger in the past few years. Major cost cuts fueled
, so once-troubled companies like Ford, for instance, now carry
more cash than debt for the first time in decades.
Moreover, many of these companies have taken great advantage of
the record low interest rates to shift into low-cost debt. Their
growing cash piles and lightened interest expense allows them to
make important investments in their products, even as global rivals
struggle while dealing with their more challenged domestic
Lastly, to suggest that the bond market is signaling trouble for
stocks, as the SoGen analysts do, also appears off the mark. Bonds
are rallying (and bond yields are falling) precisely because there
is a lot of excess liquidity in global markets that needs to be
parked somewhere. Bonds are the default
right now because of uncertainty out of Europe and China, but
represent little further upside from here and potentially huge
downside when the global economy regains its footing.
Frankly, it's hard to understand why these analysts are saying
the S&P 500 will likely fall to 666. At that price, the market
would trade for about six times projected 2012 profits -- assuming
these profits come to pass. This kind of multiple has happened
before, but only when inflation was much, much higher.
Can the stock market fall further in coming weeks and months?
Surely, but global investors are fully aware that U.S. companies,
many of which are already inexpensively-priced, represent some of
the most appealing assets in the world right now.
Risks to Consider:
My biggest concern involves Washington's decision to address
2013 budget and taxation questions AFTER the Presidential election.
That's a short window of time and could easily scare investors
later this summer as the issue starts to dominate the financial
Action to Take -->
You should prepare for further market weakness, but not by selling
all your stocks. Instead, it's wise to
your portfolio exposure with bearish ETFs (exchange-traded funds)
such as the
ProShares Ultra Short S&P 500 ETF (
Direxion Daily Small Cap Bear 3XShares (
, which I own in my
$100,000 Real-Money Portfolio
. Indeed, this is a great time to pounce on bargains that
this market uncovers, especially stocks that have clear value
support from their balance sheets and cash flow statements. Pair
them with the right bearish hedges, and there's no reason to avoid
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of TZA, F in one or more if its "real money" portfolios.
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