Among other prognostics, the asset management firm Stifel Nicolaus also predicts S&P500 at 1,400 by year-end, QE3 mid-this year, strong dollar… and also blames German and Chinese surpluses for the financial crisis. Their view is detailed below:
1. S&P and QE3: “… S&P 500 ends 2012 at 1,400 and 1,600 by 2013/14, with commodity equities and small cap having a final seasonal beta rally Oct-11 to Apr-12. By mid-2012, we expect QE3 as fuel costs pinch GDP and weaken stocks. Beyond 1H12, we see large cap growth leading to ~2013/14, with Financials also participating. We believe the S&P 500 benefits from the U.S. head start rebalancing, deflation being averted, Fed laxity offsetting fiscal tightening, and foreign U.S. inflows as the EM & EU painfully rebalance.
2. Blaming China and Germany: “We believe the locus of the financial crisis was Chinese and German surpluses that created excess savings which served to cheapen money via the inducement of debt in the U.S. and EU periphery, respectively. That rates remained low despite rising demand for credit is evidence this was an excess savings “supply-side” issue. S&P 500 weakness (the S&P 500 is flat with the late 1990s) simply discounted ephemeral GDP derived from excess credit. As the 2000s drew to a close, and to escape debt deflation as housing failed, the U.S. inflated the eurozone and China via Quantitative Easing (Q.E., or Fed asset purchases with electronic money), driving food and energy prices up and forcing the surplus states to re-balance toward a greater domestic consumption profile.
3. US rules: We see no U.S. dollar weakness due to currency rivals, and thus we see no currency-related upward lift for what remain largely dollar-traded global commodities. Our opinion is the U.S. is three years ahead of the eurozone rebalancing and four years ahead of China, with a fairly well-defined playbook. Layering a competitive North/South eurozone unit labor cost disparity (labor cost per unit of output), we believe eurozone deficits can only be remedied by mild German inflation and peripheral wage stagnation, hardly a prescription for euro strength. Dollar stability followed by strength usually benefits Technology, Financial and Healthcare equities, just as dollar weakness benefits Materials, Energy, Industrials and Utility stocks. Hard asset industry stock valuation multiples usually compress at pricing turns despite strong investment spending on new extractive capacity.
4. Commodity exporters (CRABS) to take a hit: We think China faces peaking gross national savings and thus peaking investment before rising income per capita and consumption can take up the slack. In a sense, the future may be better for labor in China than for investors in China. Similarly, for what we term the “CRABS” (Canada-Russia-Australia-Brazil-S. Africa, traditional commodity exporters), heretofore hand maidens to China’s fixed investment boom, we see those currencies depreciating as China rebalances and they are exposed as one-trick ponies.
Full report below…
83063321 Stifel Market Strategy 2012-02-28 Boomerang