Blogs & Comment

Dueling forecasts

Last night, 300 Chartered Financial Analystsgathered for dinner in an elegant ballroom at the local five-star Hilton. It was their annual forecast dinner. Two of the speakers gave forecasts that were persuasive — yet diametrically opposed.
Bob Gorman, chief portfolio strategist with TD Waterhouse, was the bullish one. Peter Hall, chief economist at Export Development Canada, was the bearish one. Before listing their main points, here a few highlights from their presentations:
Gorman: although he projects the S&P 500 will finish the year 6% higher, he expects a substantial pullback in the short term due to overbought conditions; over the year, there will be a reversal of the flight to quality, so corporate bonds will be better to own than government bonds.
Hall: says we are about 1/3 of the way through the downturn; a rumor (based on a leaked document) apparently shows the IMF is planning to revise upward its estimates of the financial sector’s toxic assets from $2.9 trillion to $4 trillion (US dollars).
Gormans points:
Financial fear indicators have subsided Libor rates are down to 1.5% and the TED spread is down to 1%
The yield curve is downward sloping, which helps banks boost earnings since they borrow short and lend long
Issuance in the corporate bond market is now at a high level, suggesting an increasing willingness to take on risk
Cash in US money market funds is nearly 50% of US stock-market capitalization, the highest percentage since the 1970s
The Fed model is quite bullish: 10-year US Treasuries yield 2.8% while the earnings yield on stocks is near 6%
U.S. 30-year mortgage rates aredown to 4.5%, encouraging homeowners to refinance and new buyers to enter the market (housing affordability at historic lows)
Inventories of base metals as a group have stopped rising and are now mixed; prices are starting to creep up
In agriculture, grain stocks were at one of their lowest levels ever overthe winter period
Crude oil prices may gave another leg down but OPEC production cuts should support the market; oil consumption has fallen only 2% during the recession, which bodes well for prices as economy recovers
Valuation is pretty low: with the S&P 500forward multiple is 13 to 14; insider purchases are significant and indicative of good value in stocks
Halls points:
The downturn will be substantial because the prior expansion period was twice as long as normal double the bubble
Forecasts of world economic growth for the year ahead have not been this dismal since the 1940s from the IMF (0.4%), World Bank (-2.8%), and OECD (-1.7%); IMF shows a positive figure but it’s historically associated with severe recession
Singapore exports are down 30% (a bellwether for the world economy)
Growth in emerging countries is not coming to the rescue just yet in recent quarters, Chinas growth rate has slowed to an annualized rate of 2.5%.
Excess inventories of houses for sale in US are not expected to be worked off untilQ1/2010 (and housing is a leading indicator)
Five waves to downturn: i) housing market collapse, ii) financial crisis, iii) slower demand, iv) job losses, and v) financial crisis the second round; we are in the third and fourth stages, headed for the fifth, i.e. the wave of writedowns, loan-loss provisions, etc to be triggered by the collapse in the real economy (when even good loans go sour)
Fortunately, the huge fiscal stimulus packages in the works from governments around the world should hit just as the fifth wave of the downturn gets underway in Q4 of 2009
Many thanks to the Ottawa Chapterof the CFA Association for the invitation to attend their Annual Forecast Dinner.