Rising Pessimism in Stocks Is Buy Signal for PNC, Raymond James
Barton Biggs said concerns the economy will contract spurred him to sell his U.S. technology holdings last week. Photographer: Kevin P. Coughlin/Bloomberg
July 8 (Bloomberg) -- Jim Bianco, president of Bianco Research LLC, talks with Bloomberg's Susan Li about the outlook for U.S. stocks. Bianco, speaking from Chicago, also discusses his investment strategy, stress tests for European banks, and the U.S. housing market. European Union regulators are carrying out stress tests on 91 banks, accounting for 65 percent of the area’s banking industry, to examine whether they can withstand a shrinking economy and a drop in government bond values. (Source: Bloomberg)
Warnings from securities firms that equity returns will slow and increasing bearishness among brokerage clients are signs to Raymond James & Associates and PNC Wealth Management that stocks may rally.
Investors who bought as skepticism climbed have been rewarded this week with a 3.7 percent advance in the Standard & Poor’s 500 Index after a two-week slump erased $2.7 trillion in global equity value. The gains show why buying when others are growing less optimistic may become a profitable strategy after bears change their minds, according to Jeff Saut, the chief investment strategist at Raymond James, which manages $230 billion in St. Petersburg, Florida.
“I can sit and watch order flows at a brokerage firm that has over 2 million retail accounts,” Saut said in a telephone interview. “A lot of them are almost as freaked as they were from January of ‘09 and March of ‘09, when the bottoming process was being completed. My hunch is we’re going to get a rally.’’
The S&P 500 surged 3.1 percent to 1,060.27 yesterday, completing its biggest two-day increase since May, while the MSCI World Index jumped 3.7 percent since July 5. The gains came as strategists around the world lowered forecasts and measures of market pessimism reached the highest levels in a year.
Global Gains
Shares rose after the MSCI World index fell to 15.4 times reported results on July 5, the lowest level since March 2009, according to data compiled by Bloomberg. Second-quarter results that topped analysts’ estimates at companies from Taoyuan, Taiwan-based mobile-phone maker HTC Corp. to U.S. custody bank State Street Corp. in Boston fueled speculation that earnings will climb even as governments around the world cut spending.
Retailers and banks advanced as the International Council of Shopping Centers said sales were growing at the fastest pace since 2006 and people with knowledge of the talks said European stress tests may assume a 17 percent loss on Greek bonds, half of the worst-case scenario estimated by New York-based JPMorgan Chase & Co.
Stocks increased even after UBS AG reduced its year-end forecast for the S&P 500 will to 1,150, citing slower profit growth and an unwillingness among investors to pay higher valuations for earnings. Jonathan Golub, the chief U.S. market strategist at UBS in New York, cut his forecast from 1,350, according to a note sent to clients.
Investors Intelligence
A separate report from Investors Intelligence showed 34.8 percent of newsletter writers surveyed described themselves as bearish, the highest level since July 2009.
Barton Biggs, whose stock investments in March 2009 gave New York-based Traxis Partners LLC a 38 percent gain last year, said concerns the economy will contract spurred him to sell his U.S. technology holdings last week. The Commerce Department said that purchases of new homes fell 33 percent in May to an annual rate of 300,000, the fewest on record. The Institute for Supply Management’s manufacturing gauge expanded in June at the slowest pace this year.
‘‘The psychology of the market has been particularly weak,” said James Dunigan, chief investment officer at PNC Wealth Management in Philadelphia, which oversees $104 billion. “There’s been a bit of piling on. Any shift in that pessimism or psychology could lead to a rally of some substance.”
Emerging-market equities will retreat as losses in commodity funds spur investor redemptions, pushing oil below $65 a barrel, JPMorgan’s chief Asia and emerging-market strategist Adrian Mowat in Hong Kong said in a July 4 research report. A selloff in crude prices and equities this quarter may create a buying opportunity, with markets rallying as much as 20 percent by year-end, he said in an interview with Bloomberg Television.
Russian Bank
Troika Dialog, Russia’s oldest investment bank, cut its year-end projection for the nation’s RTS Index to 1,600 from 2,000, according to a research report yesterday. Troika’s Kingsmill Bond, who was voted the top Russian strategist in last year’s Thomson Extel survey, cited rising taxes on oil companies and investor concern that global economic growth will slow for the reduced forecast.
The MSCI Emerging Markets Index rose 1.9 percent this week, while the RTS Index in Russia, the world’s largest energy exporter, has climbed 2.7 percent to 1,352.72.
Rydex Investments’ Rydex Asset Ratio, calculated by dividing assets in bear and money-market funds by those in bullish ones, surged to 1.25 on July 6, the highest level since July 2009. John Wilson, chief technical strategist at Morgan Keegan & Co., says a reading above 1 may signal gains because it shows a growing number of investors who may be persuaded to move money back into equities.
“Contrarian indicators are telling you the guys who get it wrong are very bearish,” said Wilson, whose firm manages about $120 billion in Memphis, Tennessee. “That’s making me want to be kind of edging into the market here. The initial part of the move will always be met by disbelief.”
To contact the reporters on this story: Kelly Bit in New York at kbit@bloomberg.net; Michael Patterson in London at mpatterson10@bloomberg.net.
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