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Credit Suisse on the Markets and Economy

Posted by Larry Doyle on June 3, 2009 4:10 PM |

Hat tip to my good friend TA for sharing insights from Credit Suisse. Having worked at Credit Suisse, albeit awhile ago, they have always had outstanding research and analysis. I am happy to share their macro view of the markets and economy.

I. More Cautious on Equities: Why?

-the recent rise in bond yields makes bonds look that much more attractive versus their equity counterparts.

-implied corporate default rates have declined. This decline implies that equities at current valuations are at best reasonably priced.

-equity issuance has picked up considerably. The recent net issuance equates to 2% of the total market capitalization. That figure is an all-time high!!

insider buying is extremely low.

market breadth is deteriorating.

-stocks with high beta are not attractively priced.

-concerns over the economic backdrop: fear of a double dip as green shoots fade or do not grow.

-downside and upside risks to equities are now evenly balanced.  Upside risk to equities is further aggressive quantitative easing

-Overall Assessment of Equity Market: a range trading market similar to the 1970s. 

II. More Values Appearing in Bonds: Why?

-with interest rates moving higher in the government space, bonds look increasingly attractive.

III. Federal Reserve Policy:  the Fed will risk a dollar crisis (declining value of greenback given excessive money supply) than a funding crisis due to insufficient capital and liquidity in the system.  

IV. Inflation Outlook: if anything inflation will surprise on the downside, especially in Continental Europe. 

Sense on Cents generally concurs with the Credit Suisse outlook, with the exception of their call on inflation. I believe we will experience an uptick in inflation.  As I had written in the May 2009 Market Review, I am looking for the following:

Add it all up and I think the following will occur:
   – equity markets will now move sideways in range bound fashion;
   – the bond market will move lower in price, higher in rates; 
   – the dollar will gradually decline;
   – our economy will be filled with more stops than starts.

Overall I believe I am much more in agreement than disagreement with both Scott Black and Credit Suisse. Please feel free to share your thoughts and assessments on the economy and markets.


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