Don't Count on a V-Shaped Recovery
Due to what I now call the Great Financial CrashWave of 2008-2009, I have lowered my 2009 earnings estimates to reflect the financial system cataclysm. Our current model suggests $52-$55 per share for S&P 500 (SPX) earnings.
What multiple should be applied?
Old schoolers say at the earnings trough you can pay a 15-17 multiple, because when earnings recover, you are really paying a 12-14 multiple.
My problem with this analysis is that it presumes a V-shaped recovery in late 2009-2010. A sharp recovery is simply not possible. Not when 2%-3% of nominal GDP in the United States between 2003 and 2006 came from mortgage equity withdrawals(MEW).
Take a look at the chart at the top of the page, courtesy of the Fed. For the economy to right itself, it needs oxygen to fuel the recovery. Without $500 billion of cash to spend, we will likely see an L-shaped market for a while, not a V-shaped one.
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Houghton and Atkeson
Looking into June, the market should begin refocusing on upcoming earnings reports for evidence the economy is gaining momentum.
Watching the Treasury's Actions
In the short-term, the government's bond auction is likely to be a key driver of stocks.
Treasury Auction Boosts Market
The Treasury's auction of two-year notes brought an upside surprise which should alleviate fears of a lack of demand for U.S. paper.
Credit Markets Point to Upturn
The credit market, a reliable indicator of equity direction, suggests we will break out of the SPX's trading range to the upside.
The market seems to be saying that a 30% move up from the lows is ahead of the real economy and the market needs to allow the economy to catch up.
