Only two Wall Street investment strategists accurately predicted the bear market that began in 2007. One is Merrill Lynch’s David Rosenberg and the other, Joseph Battaglia at Stifel Nicolaus.
I’ve followed the careers of both market seers over the last 20 years and have a deep respect for their market views and prescient forecasts, usually right on the money.
Joseph Battaglia, chief investment strategist at Stifel Nicolaus, was the first Wall Street veteran who warned that subprime would morph into a full-blown credit crisis and advised investors to avoid stocks and bonds and head into cash. That warning was first issued in August 2007.
In an interview this morning on CNBC, Battaglia remains cautious and believes the consumer will remain challenged in 2009. He’s also unconvinced the housing market and the economy will form a bottom this year, a view widely embraced by investment strategists predicting the economy will rebound the second half of 2009.
The bulls point to massive government spending this year, including a $775 billion dollar spending plan supported by president-elect Obama. Combined with the Fed’s unprecedented efforts to stimulate credit growth and its plans to initiate quantitative easing (e.g. government monetization of Treasury debt), the economy will eventually respond to massive stimulus. That might be the case but stimulus will only buy the economy one or two quarters of growth, not more.
Battaglia, however, points to housing as the key driver influencing future domestic consumption; until residential housing prices stabilize – down over 23% year-over-year through October, according to the S&P/Case-Shiller Index of 40 cities, it’s premature to predict a market bottom at this juncture. Housing is the key to an economic recovery.
I’m in agreement with Battaglia. The bear market rally we’ve seen since the November 20th low remains another in a series of traps for investors. Every preceding rally since late 2007 has been met by a new wave of selling taking stocks to newer lows. On November 19th the S&P 500 Index crashed to an 11-year low or the same price level as 1997. Indeed, investors in U.S. and global stocks are sitting on losses over the last ten years.
Underlying economic data everywhere – including the United States, remains bearish. The market does act as a discount mechanism and historically has rallied in the face of bad economic news as investors begin to discount the worst. But again, this is not a normal bear market; it’s a credit-inflicted crisis that will take more time to heal.
My view since October is that investors should focus on high quality investment grade corporate debt, mortgage-backed securities (agency debt) and TIPS, or Treasury Inflation Protected Securities. Income will rule in 2009. Gold prices should also top $1,200 an ounce this year as more investors grow disenchanted with paper currencies – all subjected to competitive devaluations in the face of sharply contracting GDP growth and plunging exports.
Why take a shot at risky stocks that will succumb to another round of selling, including a deluge of dividend cuts when high grade bonds yield in excess of 7% and offer the scope for big capital gains? Gold looks especially attractive as well because the dollar now yields almost zero in interest while gold – also a non-yielding asset – harbors fundamental value that is no one else’s liability, unlike the dollar and other currencies.
Investors continue to underestimate a credit unwinding. This bear market is totally unprecedented because nobody alive has seen the devastation caused by the last credit bear market of the 1930s. It would be unwise to surmise a new bull market for stocks lies ahead with the consumer stuck in reverse, housing in a freefall, unemployment rising sharply and credit still largely unavailable even to the biggest companies. These are not the prerequisites for a secular bull market.
Finally, investors have not discounted how government intervention and regulation will affect capital markets. A whole new set of securities legislation lies ahead in 2009, not unlike what occurred in the 1930s. I’m not sure how investors can be bullish on stocks when the government owns a fair chunk of GDP (finance, housing, autos) and will introduce a new wave of securities laws restricting capital innovation, leverage and overall finance.
Call me bearish, but I see no other investment position in this environment of incredible uncertainty.
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