Top Gun FP Client Note: New Year Buzz About To Turn Into A Hangover

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NOTE: Every week or two I write a Client Note for my clients.  For a limited time, I am allowing non-clients to sign up and receive it at the same time as my clients.  You can sign up at the top right hand corner of the website.  I will also be posting the notes on my blog with a time delay from time to time.

Originally sent to clients Tuesday, January 10.


There is something psychological about starting the year afresh, but the truth is corporate profits and macroeconomics trends don’t turn with the calendar.
– Adam Parker, Chief US Equity Strategist, Morgan Stanley, quoted in “A New Year, But The Same Ol’ Pessimism”, The Wall Street Journal, January 9, C1 
After achieving very strong and better than expected sales and earnings growth in the first three quarters of 2011, sales weakened markedly in the United States and Europe during the holiday season.
– Michael Kowalski, CEO, Tiffany’s, Press Release, January 10
The US stock market is off to a good start in 2012, up about 3% and at 5-month highs.
However, more will be required than optimism at the start of a new year to continue moving higher.  Resistance at the October highs and 1300 suggest the S&P is at a decision point.  Either we blow through previous resistance setting up a test of the bull market highs or we fail here.  This should play out in the next few weeks.
One important clue to how it will be resolved is the divergence of risk assets and the euro since December.  As I have pointed out on a number of previous occasions, the euro tends to be a barometer of risk appetite.  When the euro rises, so do stocks, commodities and other risk assets; and vice versa (“Top Gun FP Client Note: Europe Leads”, originally sent December 2, 2010). 
However, since December US and European stocks have both risen while the euro has decline.  If the relationship holds as I suspect it will, either the euro will start rising to confirm the stock market rally or stocks won’t be long in following the euro south.
Wall Street strategists tend to be mindless cheerleaders but Adam Parker of Morgan Stanley is a refreshing exception.  The Wall Street Journal ran a nice profile of him in Monday’s paper.  Parker’s year end S&P target is 1167 which would represent a 7% decline for the year and he thinks it could go as low as 944 if earnings disappoint and macroeconomic conditions sour.
In a CNBC interview from the first trading day of the year, Parker cited three reasons for his pessimistic outlook.  First, December earnings reports and forecasts were notably weak.  This suggests 1st quarter guidance this earnings season could be as well.  (Indeed, Tiffany’s (TIF) this morning reported a disappointing holiday season, including -1% comparable sales for November and December at their flagship New York store, and the stock is down almost 12%).  Second, economies around the globe are slowing.  Third, the US $ is rising putting downward pressure on foreign earnings.
Anybody who has been reading my Client Notes knows that I agree with Parker.  I believe we have been in a bear market since last August (“Top Gun FP Client Note: The Bull Market Is Over – But S&P Downgrade Should Mark An Intermediate Bottom”, originally sent August 7, 2011) and 2012 will see the brunt of the selling (“Top Gun FP Client Note: The Bear Market Of 2012”, originally sent November 21, 2011).

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