Earnings headwinds: Earnings are the mother’s milk for long term stock price i.e. the real weight when stock on the weighing machine (valuation)…if S&P500 earnings are zero or negative right now, it might trade at half or lesser value then getting weighed based on dividends of 3.5% (assuming current absolute dividends at rate of 1.75% at 1470 S&P will be maintained) vs 10 year T-bond.. But US corporate Gross Margins are two standard deviations away from the mean. The last two time this occurred was in year 2000 and again in 2007 both resulted in over 50% subsequent corrections. I don’t expect a 50% correction this time but considering that in Q2 we saw more than expected revenue slowdowns for the first time in a long time and Q3 is expected to be the first quarter of earnings slowdown.
International & US mainland Geo-Political risks:
• Iran – Gulf tensions: 26 countries are starting a 12 day
• Tensions in the middle east (Libya’s unrest spreading to other nations)
• Occupy Wall street starts again
• US starts investigation of several banks
Global economic Slowdown:
US has slowed down to 1.5% GDP growth and is at the verge of hitting a recession. Europe needs no explanation. Total European GDP is likely to contract 2%-4% this quarter. China GDP has slowed down to 8% growth. India has also slowed to 5.5%, Japan is sitting at 0.5% growth (if we can call that “growth”). In absolute terms the world economies are slowing down. Inflation adjusted the combined world economy is actually contracting. Latin America remains the only bright spot.
Consider taking profits while there is profit..Like to hear your thoughts