Summary – Sinai’s Equity Conference Call – Mar. 27, 2012

Posted March 27, 2012 by CLeahey

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The Stock Market: A Much, Much Better Year.  Can It Last?

Macro Fundamentals Suggest “Yes,” Still a Bull Market…

• U.S. economy is in a sustained and entrenched expansion — this year, next, and even beyond. In a “sweet spot” more robust to shocks, with many sectors in better shape. Here, stocks go up, and corrections are fewer and farther between.
• Yes, growth is sub-par – ‘L’ with an uptilt – but conditions in place for 2-3% expansion, on average. The U.S. economy is giving livelier signals than the GDP summary measure implies.
• After every recession – easy money from the Fed helps set in motion favorable processes, eventually boosting demand for bigger ticket items. Lags as long as 6-18 months traditionally, potentially two years based on previous DE research, but this time it has taken 4 years!

…As Does Supportive Fed Policy

• Low interest rates courtesy of a supportive Fed. No change in policy rate or size of balance sheet – up or down – but Fed may change composition of mortgage proceeds reinvestment, targeting housing sector.
• Late in 2013, we think Fed Funds rate will be 25-50 bps, and that the balance sheet will have been preannounced to soon be in a gradual taking-down process – though perhaps not until 2014.
• Majority of members are focused on labor market, underscored by Bernanke’s comments today. Situation does look “daunting” on standard macro paradigm – but not enough of constituency to support QE3.
• Long-term rates around 2 5/8% to 2 7/8% later this year. A harmless rise, still supportive of the equity bull market.

Risks? Fewer This Year

• Mild recession in Eurozone – started in Q4 2011, to last through 3^rd quarter 2012. Will be anemic recovery, but policy has eased credit problems.
• Geopolitics in Mideast – given the consumer is lynchpin of the U.S. outlook, spike in crude prices would hurt.
• U.S. deficits – quiet now in terms of long-term rates, as stronger economy and hints of softer Fed easing bias have been contributors to recent run-up in yields.
• China risks diminished – inflation is back to 3.2% y/y, growth on track for soft landing. Authorities acting on monetary and fiscal policy to stimulate, suggesting a pickup later this year, and a source of strength thereafter.

Investment Themes and Asset Allocation Highlights

• Earlier in Q1, equity allocation raised to 70%, solid overweight, from 65%.
  • Valuations: Operating earnings at $105 in 2012, $113 in 2013. Applying a PE multiple of 13 suggests the S&P 500 is fully valued, but that situation should not be worrying.
• Fixed income to 25%, from 30%, still underweight cash (5%) given low to no return.
• Across sectors, some distinct changes but maintaining other themes.
  • Still strongly overweight Info Tech.
  • Consumer Discretionary now second-largest overweight, previously slight underweight.
  • Financials slightly overweight, previously strong underweight.
  • Health Care now only somewhat overweight, given need for more aggressive positioning.
  • Housing, now overweight – market has priced some of it, but still early.
• Global lineup: Biggest change is country overweight on Japan, first time in years. View on yen is much weaker versus the dollar – target of 100.
• Other country overweights include China, Singapore, Hong Kong, Australia, Russia, and Canada. Beleaguered Eurozone countries, excluding Germany, the main underweights.
• Alternative assets: positive to neutral on commodities, neutral to positive on distressed, still positive on gold.
• Currencies: trading range for USD vs. EUR and GBP, much weaker JPY – to 100. USD stable-to-eroding against other currencies.

Equity Market Conference Call 3-27-12[/private]