The government likes to spin the numbers as does Wall Street. Politicians seek re-election and Wall Street seeks transactions. You will almost never hear a fee-based Advisor, insurance agent, or product selling financial planner (all distributors of Wall Street's products) tell you that now is NOT a good time to buy, because they make most of their money from the commissions they get when they sell you something. The positive spin coming from Wall Street economists is often nothing more than cover for their product selling compatriots.
But the data now strongly suggest that we are either already in or will soon be in another recession. The deterioration in financial and economic measures that provides a unique signature that always and only is observed during or immediately prior to U.S. recessions is in place. These include a widening of credit spreads on corporate debt versus six-months prior, the S&P 500 below its level of 6 months prior, the Treasury yield curve flatter than 2.5% (10-year minus 3-month), year-over-year GDP growth below 2%, ISM Purchasing Managers Index below 54, year-over-year growth in total non-farm payrolls below 1%, as well as important corroborating indicators such as plunging consumer confidence. The evidence has 100% sensitivity (these conditions have always been observed during or just prior to each U.S. recession) and 100% specificity (the only time we observe the full set of these conditions is during or just prior to U.S. recessions), according to Dr. John Hussman
We have been forecasting a bear market (20%-40% decline) since late last year with the most likely starting period the spring of 2012 and the second most likely starting period the fall of 2011. The S&P 500 is at 1137 as we write, having peaked in April at 1370.58. A 20% to 40% decline would put the S&P 500 in a range of 822 - 1096. We are mindful of the fact that average valuation for the S&P 500 over the very long term, based on average 10-year trailing earnings, replacement cost analysis, and the dividend growth model is in the 900 range. Our conclusion is that we will likely see 900 or thereabouts in the coming bear market if the European sovereign and banking situation is contained. We could quite possibly see 500 on the S&P 500 if it is not (although 500 might seem like a mind-boggling number to many investors, it should be remembered that we hit 666 intra-day in March of 2009). It's probably also worth pointing out the 500 on the S&P 500 would be about right as a starting point for the next great secular BULL market based on past valuations in 1919, 1946, and 1982. For the record, we are not anticipating a decline to 500, believing that 800-1000 is the more likely floor. But we do feel it's a number worth mentioning since the European banking and sovereign debt crisis could very easily spin out of control, sucking the U.S. (courtesy of our hyperactive Central Bank) into the maelstrom.
Biechele Royce Advisors is continuing to buy good companies when we can find them on sale. We are emphasizing dividend paying blue chip stocks with defensive characteristics. We are watching high-yield bonds with interest and believe a buying opportunity will present itself within the next year. We are still overweight non-dollar assets as we continue to believe that the wildly inappropriate monetary policy currently being conducted in the U.S. has a high probability of sparking strong inflationary pressures before all is said and done. Finally we are waiting to put excess cash to work should we be fortunate enough to experience a market cleansing decline into the 800-1000 area. We have a long and growing list of good companies that we'd love to own at the right price!
