I received this "informal note" from the Chief Economist of a mid-size, well known firm (it went out to institutional clients last week). Note that it is based purely on Fundamentals and Valuation — not quant, sentiment or technicals:
"Despite the negative mood hanging over the equity markets, it’s important to take a step back and look at the fundamentals. It seems to be that equities (and the bond market for that matter) have priced in a recession and isn’t likely to be forthcoming."
I emailed back asking these 3 questions:
1) The Dow is w/i 5% of its 5 year, 1 year and 1 month highs – how much of a recession is be priced in?
2) How likely — or unlikely — do you think a recession is?
3) What do the fundamentals have to do with anything?
The kicker came in the final recommendation: short the 10-year against a long position in the S&P 500.
Give the guy credit for having giant cohones to go against the grain — but its not a trade I would be willing to make right now — at least not based on market internals, sentiment or cyclical concerns.
Who knows, he may ultimately be proven correct, but I find valuation/fundamentals to be extremely difficult to use for timing purposes . . .
For today, let’s see how markets react to Amazon and GM . . .