Stocks struggled during the week with China’s disappointing GDP report, Apple’s earnings concerns, and worries rising from the Boston Marathon bombing.
Bank of America also reported disappointing earnings, however, earnings have generally been coming in healthy for the first quarter with 67.0 percent beating expectations. We look for an S&P 500 operating earnings level of 108.00 this year and 116.00 in 2014. We expect interest rates to stay low for a continuous period and the Fed will likely not change rates until 2015. Our P/E model, which incorporates interest rates, predicts the market is undervalued. It projects a 16 to 18 P/E, and combining that with our 2014 earnings forecast results in fair value for the S&P 500 of 1856 to 2088 (about a 20.0 to 35.0 percent gain). Based on our 2013 earnings forecast of 108.00, fair value is 1728 to 1944 (about a 11.0 to 25.0 percent gain).
Although there have been some poor economic stats recently, we do not
believe it is a new trend. The improvement is housing is significant and
boosts confidence and consumer net worth. We see continued evidence
supporting housing including record-low mortgage rates, lenders loosening
up on home loans, and Obama pushing banks to make more home loans
available to people with weaker credit. In addition, judging by the surge in a
homebuilders survey we monitor, housing starts are headed much higher
with our forecast of about 1.3 million by the end of this year. Starts rose 7.0
5 percent in March to a 1.036 million annual rate, better than expected and the best since 2008.
The American energy boom with the growth of oil and natural gas production from shale resources is a positive for domestic growth. It is estimated potential gas reserves will be lifted by 25.0 percent and the oil boom in North Dakota is spurring the first oil refineries to be built in the more than 30 years. In addition, with Congress cutting military budgets, it is important that the U.S. is not depended on Middle Eastern and Venezuelan oil which comes along with geopolitical liabilities and commitments.
Another huge positive is the stimulative policy initiatives announced around the world. Most recent, Turkey and Hungary cut rates and the BoJ doubled its purchases of Japanese government bonds by $75 billion a month. Domestically, QE will continue at the current pace for the next few meetings based on FOMC information. If weakness should develop and turn into a growth problem, similar to what happened over the last three years, the Fed will continue QE further than just this year. The scope and significance of the over 270 stimultiave programs is greater than what most observers realize. The combination of employment, house prices, and stock prices all rising simultaneously is a strong positive.
Inflation remains tame with the CPI down -0.2 percent in March, and the core rising only 0.1 percent. Commodity prices continue to decline and is a positive development - lowering inflation, lifting real consumer incomes, and allowing central banks to continue easing. Most recently, Starbucks lowered its coffee price along with Seattle’s Best and Kraft, as the price of coffee beans has plunged -50.0 percent over the past two years. The explanation for the drop in commodity prices can be attributed to the recent weak data globally
I don't know, the boys are running these junk VIX vehicles up for no apparent reason. Almost 50% gain for this turkey off the lows. Doubt we'll see the VIX much over 20 but the big question is will there be backwardation for a sustained period. VXX *should* be at 15 in 6 weeks and UVXY *should* be at 4 by then but they're pumping these hard right now.