CHICAGO, March 16, 2011 /PRNewswire/ -- Zacks.com Analyst Blog features: Vale (NYSE: VALE), Cliffs Natural Resources (NYSE: CLF), Petrobras (NYSE: PBR), Range Resources (NYSE: RRC) and Double Short Treasury ETF (NYSE: TBT).
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Here are highlights from Tuesday's Analyst Blog:
Understanding Japan's Disaster part 2
The immediate impact of the disaster is deflationary. The Bank of Japan has reacted by instituting its own version of QE2, and is buying about $180 billion of securities. Given that the Japanese economy is about one third the size of the U.S. economy, that means it is almost equivalent to the $600 billion Fed program, although the Japanese one is likely to be carried out much faster.
I think that this event insures that the full U.S. QE2 program will be carried out. The probability of QE3 has increased, but is still below 50%. A few weeks ago, the discussion was more about ending the program early than about extending it. The loose monetary policy on both sides of the Pacific will help support asset prices.
The U.S. Market, Going Forward
The U.S. market has had a remarkable run over the last several months, rising in nearly a straight line from under 1,100 on the S&P 500 in early September to over 1,340 in mid-February. It was probably due for a pullback in any case.
The upward move was not froth, but based on real economic fundamentals. The U.S. economy is showing very real signs of a real recovery, one big enough to bring unemployment down. Earnings, the mother's milk of the stock market, are simply doing great. The total net income for the S&P 500 was 45.1% higher in 2010 than it was in 2009. Fourth quarter total net income was 30.7% higher than the fourth quarter of 2009. At the start of earnings season, growth of less than 20% was expected.
While the comparisons get tougher as we move forward, strong earnings growth is expected to continue. Earnings are expected to grow 14.6% for all of 2011 and to rise 13.4% in 2012. That means that the total net income for the S&P 500 is expected to almost double between 2009 and 2012 -- growing from $5.45.3 billion in 2009 to $1.028 trillion expected for 2012.
Analysts have raised more than three estimates for S&P 500 firms over the last month for every two that they have cut. That means that the actual earnings will probably be higher than the current estimates. In "per share" terms, the S&P is expected to earn $95.58 in 2011 and $108.38 in 2012. Based on mid-day prices, that puts the P/E for the S&P 500 at 13.3x 2011 and just 11.8x 2012 earnings. That is extremely attractive relative to a ten-year T-note, which has a yield of less than 3.30%.
Where Will It Go from Here?
I can't say that today will be the bottom of the market. There is simply too much uncertainty about what comes next. The likely worldwide economic effect should be a slowing at first, but then in the second and third quarters an acceleration in growth as the rebuilding gets underway.
I do not think that this will push the U.S. back into recession. And if that is the case, then the earnings projections we have now are likely to hold if not increase further. And if that is true, then the valuations in the market are sliding, and this would be a good time to accumulate stocks. In particular, I would look at some of the natural resource stocks -- including energy -- that have sold off hard in response to the tragedy. Some names to consider would be Vale (NYSE: VALE), Cliffs Natural Resources (NYSE: CLF) Petrobras (NYSE: PBR) and Range Resources (NYSE: RRC).
Fed Keeps Fed Funds, QE2 Unchanged
The Fed sees the recovery as for real, and now self-sustaining. Finally we are starting to see significant job growth, but at the current rate it will still be a very long time before we return to anything approaching full employment.
The tone of the statement about consumer spending was also more upbeat as the Fed dropped the mention of the factors constraining consumers. They note that construction -- both residential and non-residential -- is still very depressed. Normally residential investment is the sector of the economy that leads us out of recessions, but it has been a persistent drag this time.
The members of the Fed Reserve note the rise in oil prices, but think that it will not flow through to cause generalized inflation. Given the huge amount of slack in the economy, I agree with them. Increasing relative prices for energy and other commodities are a good reason to overweight producers of them in your portfolio, but as long as they are not flowing through to core measures of inflation, they are not a good reason to tighten monetary policy.
The bond market is in full agreement with the Fed (and me). The ten-year T-note is yielding only 3.3%, which in any historical context is still extremely low. If the bond market expected inflation to become a serious issue, then it would sell of dramatically to raise rates that reflected the higher expected inflation.
If you do think inflation is a real problem, then you should borrow every nickel you can and buy the Double Short Treasury ETF (NYSE: TBT). If you are not willing to buy the TBT, stop worrying about inflation.
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